Amlak IPO a vote of con­fi­dence in long-term fun­da­men­tals

Prop­erty fi­nance CEO ex­plains how stock ex­change list­ing will ben­e­fit the mort­gage mar­ket

Arab News - - Interview - Frank Kane Illustrati­on by Luis Grañena

Amlak In­ter­na­tional, the Saudi Ara­bian real es­tate fi­nance com­pany, sur­prised mar­kets with the an­nounce­ment that it was press­ing ahead with an ini­tial pub­lic of­fer­ing (IPO) on the Tadawul that could value it at around SR1.5 bil­lion ($400 mil­lion).

For one thing, the King­dom’s econ­omy, sim­i­lar to the rest of the world, has been rocked by the rav­ages of the coro­n­avirus dis­ease (COVID-19) pan­demic; for an­other, global fi­nan­cial mar­kets are in a state of un­cer­tainty as the world econ­omy teeters on the brink of the worst re­ces­sion since the 1930s.

Ab­dul­lah Al-Sudairy, Amlak’s CEO, is de­ter­mined to over­come those chal­lenges with the King­dom’s first IPO since the virus out­break.

“We be­lieve the long-term fun­da­men­tals have not changed. Yes, there has been a tem­po­rary dis­rup­tion, not just in Saudi

Ara­bia but glob­ally, but we be­lieve this will pass,” he told Arab News.

The In­ter­na­tional Mone­tary Fund said re­cently that the

Saudi econ­omy would shrink by 6.9 per­cent this year, and the gov­ern­ment has brought in a se­ries of mea­sures to deal with the down­turn and the hole in pub­lic fi­nances caused by the fall in oil prices.

Some an­a­lysts have talked about a re­turn to the “aus­ter­ity” regime that the King­dom used to deal with the last down­turn in oil prices that lasted for two years from 2014.

Value added tax has been hiked to 15 per­cent, gov­ern­ment-funded cost of liv­ing al­lowances have been scrapped, and some big projects — de­signed to di­ver­sify the econ­omy away from oil de­pen­dency — have been slowed. None of that would seem to be an eco­nomic en­vi­ron­ment de­signed to en­cour­age home own­er­ship, as the gov­ern­ment has pledged. But

Al-Sudairy is adamant that the long-term out­look is good and be­lieves the mea­sures taken by the gov­ern­ment will not have a sig­nif­i­cant ef­fect on Amlak’s busi­ness.

“Quite frankly, I am not an econ­o­mist, but I can see in our re­tail busi­ness most of the houses we fi­nance are for first-time buy­ers, and most are below SR850,000. The gov­ern­ment has been lift­ing all VAT on such prop­er­ties. If you are a first­time buyer below that level, the gov­ern­ment will shoul­der the VAT on your be­half,” he said.

Amlak does not just fund res­i­den­tial prop­erty, but is also big in the com­mer­cial space, build­ing the of­fice com­plexes, re­tail de­vel­op­ments and other busi­ness projects. Again, some ex­perts be­lieve that the COVID-19 pan­demic will have an ir­re­versible ef­fect on this sec­tor, as peo­ple get used to work­ing from home and do­ing much of their busi­ness in the dig­i­tal, rather than phys­i­cal, space.

The VAT in­crease did not ap­ply to much of Amlak’s com­mer­cial projects, Al-Sudairy pointed out, but he agreed there would be some per­ma­nent changes to the com­mer­cial sec­tor as a re­sult of chang­ing post-pan­demic work pat­terns. “The de­mand on com­mer­cial prop­erty will shift. We saw what hap­pened in the US and Europe in re­tail com­mer­cial prop­erty, and they have an is­sue. But let us see what hap­pens with lo­gis­ti­cal prop­erty.

“Peo­ple are buy­ing on­line so you don’t need re­tail shops as much as be­fore, but you will need the ware­houses to ship the goods. We will see shifts in de­mand, but the de­mand is still there in a dif­fer­ent way. Maybe de­mand for of­fices will not be strong, but hos­pi­tals are strong, schools are strong, and lo­gis­tic prop­erty will con­tinue to be strong as de­mand goes on­line,” he added. He takes a re­laxed at­ti­tude to the volatil­ity of fi­nan­cial mar­kets. The Tadawul in­dex, which fell along with all global mar­kets when the pan­demic first hit, has been quite re­silient since then. But many fi­nan­cial ex­perts are pre­dict­ing a “bear run” in global eq­ui­ties later this year. “What I fo­cus on is the fun­da­men­tals of our busi­ness. We know the stock mar­kets are a lead­ing indi­ca­tor of things that are go­ing to hap­pen.

They sum up fu­ture ex­pec­ta­tions. So, I would rather fo­cus on what is the fun­da­men­tals of our busi­ness, the long-term strength of our busi­ness.

“I don’t worry much about where the stock mar­kets will go, but it is good that we are ap­proach­ing an all-time high in some ar­eas. I be­lieve the mar­kets reached a high point three weeks ago, but the fo­cus is long-term fun­da­men­tals for us,” Al-Sudairy said. The twin aims of the IPO, he added, was to give Amlak more vis­i­bil­ity and ac­cess to bet­ter ways of rais­ing fi­nance.

“We are in the mort­gage busi­ness, and we deal with a large part of so­ci­ety, and we be­lieve an IPO will give us more vis­i­bil­ity. This is im­por­tant for us.

“All pub­licly listed com­pa­nies would nor­mally have fa­vor­able treat­ment to­ward the cost of their cap­i­tal by a re­duc­tion in the cost of their debt. You can see from our in­come state­ment that the big­gest cost item we have is cost of debt,” he said.

The suc­cess­ful IPO of Saudi Aramco last year — the big­gest stock mar­ket flota­tion the world has ever seen — has en­cour­aged in­vestors in the King­dom to look more fa­vor­ably on equity mar­kets, and in­tro­duced a whole new group of re­tail in­vestors to the cul­ture of share own­er­ship. Amlak shares are be­ing of­fered ini­tially to in­sti­tu­tional in­vestors via a book-build­ing process, but there is a mech­a­nism in the IPO by which, if de­mand is good, re­tail in­vestors will be of­fered up to 10 per­cent of the shares. There could be ben­e­fits from hav­ing the in­ter­ests of Amlak in­vestors and mort­gage hold­ers align via share own­er­ship.

“It’s al­ways healthy to have in­vestors that chal­lenge the board and chal­lenge the man­age­ment. We hope that with more di­ver­si­fied in­vestors we will be chal­lenged more, be­cause chal­lenge is good, it brings up ideas and more mo­ti­va­tion.

But I do know that when you have a greater pro­por­tion of so­phis­ti­cated in­vestors own­ing part of the com­pany the chal­lenge tends to be more el­e­vated and health­ier,” Al-Sudairy said.

But he does not ex­pect a sig­nif­i­cant shift in the com­pany’s be­hav­ior when it gets pub­lic com­pany sta­tus. It is al­ready run ac­cord­ing to the strict reg­u­la­tions of the Saudi au­thor­i­ties, and those will be main­tained, even strength­ened. “We don’t be­lieve there will be much change in that re­spect, be­cause as you know the cen­tral bank is very pre­cise and strict in how they gov­ern the in­dus­try,” he added.

His fo­cus, even as a pub­lic listed com­pany, will con­tinue to be on the long-term health of Amlak. “We will al­ways fo­cus on the long-term com­pet­i­tive ad­van­tage and the core com­pe­tency of the com­pany. We are a long-term player rather than a short-term tac­ti­cal player.

“We have to en­sure Amlak in the long term is ex­tremely com­pet­i­tive and has a sus­tain­able com­pet­i­tive ad­van­tage,” he said.

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We will see shifts in de­mand, but the de­mand is still there in a dif­fer­ent way. Ab­dul­lah Al-Sudairy Amlak CEO

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