SUMMARY OF RISK FACTORS
D- Risks Related to the Offer Shares
2. RISK FACTORS
2.1 Risks Related to the Company’s Activity and Operations
2.1.2 The impact of the demand for residential and commercial properties in the Kingdom of Saudi Arabia on the Company’s business
The entirety of the Company’s property portfolio is located in the Kingdom of Saudi Arabia. As an increasing number of real estate developments are launched and reach completion, the number of residential properties and commercial space available in the Kingdom may exceed the demand for such properties and space, leading to saturation. If the property market in the Kingdom were to become saturated, or demand for residential and commercial properties in the Kingdom were to decline or to be lower than expected, the Company could have to sell its residential units or lease its commercial units at reduced prices, or at a loss, or may not be able to sell them at all. Fluctuations in economic factors beyond the Company’s control, such as the availability of credit for housing, prevailing interest rates, unemployment rates, salary levels and tax rates, cost of utilities, or partial or full removal of subsidies provided by the Saudi Arabian government, may also affect demand for residential and commercial units sold by the Company.
In addition, a small portion of the Company’s customers purchase properties as investments, generally with a view to selling them for profit or leasing them for rental income. Any perceived or actual oversupply of residential properties in the Kingdom for sale may result in potential customers experiencing difficulty selling properties purchased from the Company, either for an expected profit or at all. This could result in a decrease in demand for the Company’s properties from customers who expect to receive revenue from the part- or full-time rental of their properties.
There can be no assurance that the Company’s sales backlog will be realized or that there is sufficient demand in the real estate market in Saudi Arabia to absorb all of the residential and commercial units that the Company will deliver at the prices anticipated by the Company or at all.
As the Company’s revenue is derived almost entirely from the sale of residential units and the leasing of commercial space in the Kingdom, any adverse change in the demand for the reasons set out above or otherwise could have a material adverse effect on the Company’s business, financial condition, results of operations, and prospects.
2.1.3 Risks associated with the development of the Company’s projects
There are a number of construction, financing, operating and other risks associated with property development. Due to their extensive nature, the Company’s projects require considerable capital expenditure during the initial phases of development. The Company recognizes revenue from its ongoing projects according to the percentage completion of the construction process. In turn, material delays in the construction process will delay the revenue the Company is able to recognize. Delays can have a significant impact on the associated timing of revenue recognition, which could lead to potentially significant fluctuations in financial results. This is particularly true with respect to high value projects where even a small delay in construction progress can result in delays in large amounts of revenue from being recognized.
The time taken and the costs involved to complete construction can be adversely affected by many factors, including:
■ delays in obtaining all, or refusals of any, necessary zoning, land use, building, development, occupancy and other required governmental permits, requisite licenses, permits, approvals and authorizations (including due to new regulatory frameworks);
■ unforeseen engineering, environmental or geological problems;
■ the Company’s inability to obtain necessary financing arrangements on acceptable terms, or at all, and otherwise fund construction and capital improvements and provide any necessary future performance guarantees that may be required during the construction process;
■ defaults by, or the bankruptcy or insolvency of, main contractors and other counterparties;
■ inadequate supporting infrastructure, including as a result of failure by third parties to provide utilities and transportation and other links that are necessary or desirable for the successful operation of a project;
■ design or construction defects and otherwise failing to complete projects according to design specification;
■ shortages of, or defective, materials and/or equipment, labor shortages, shortages of other necessary supplies and/or disputes with contractors or sub-contractors;
■ availability of suitable land for the Company’s projects;
■ increases in the cost of construction materials (for example, raw materials such as steel and other commodities common in the construction industry), energy, building equipment (including, in particular, cranes), labor and/
or other necessary supplies (due to rising commodity prices or inflation or otherwise);
■ shortages of project managers, contractors and construction specialists, both internally and externally, to ensure that planned projects are delivered both on time and on budget;
■ strikes and work stoppages or other labor disputes or disturbances affecting the Company’s projects, contractors, sub-contractors or suppliers;
■ the failure of contractors to meet agreed timetables, in particular with respect to more complex or technically challenging developments (for example, due to the scale, height or complex design of a development);
■ adverse weather conditions, natural disasters, accidents, force majeure events and/or changes in governmental priorities;
■ increases in the supply of properties from competitors during the construction of certain projects; and
■ changes in demand trends due to, among other things, a shift in buyer preferences, a downturn in the economy, a change in the surrounding environment of the project, including the location or operation of transportation hubs or population density or otherwise.
Any of these factors could give rise to delays in the completion of construction and/or result in construction costs exceeding budgeted amounts. Projects subject to delays or cost overruns may take longer or fail to generate the revenue, cash flow and profit margins that were originally anticipated. In addition, the targeted return on the investment in the project may not be realized. There can be no assurance that the revenue that the Company is able to generate from its projects will be sufficient to cover the associated construction costs. The occurrence of any of the foregoing factors could have a material adverse effect on the Company’s business, results of operations, financial condition, and prospects.
2.1.4 Risks relating to the Company’s off-plan sales model
For FY2018G, FY2019G, FY2020G and the period ended 30 September 2021G, respectively, the Company’s business model resulted in sales equivalent to 29%, 53%, 65% and 91% of its residential units “off-plan” or in the early stages of construction. The completion of a given project is dependent on a number of factors, including macroeconomic conditions, timely delivery on the part of the Company’s contractors, sub-contractors and the absence of any force majeure. If a project with pre-sale commitments from customers is delayed or cancelled, customers may bring civil claims against the Company, even where customers have no contractual right to terminate their contract with the Company and/or to demand repayment of monies paid, if the Company fails to deliver a residential unit sold.
In addition, the partnership agreements entered into by the Company and MoMRAH for the Nesaj Town Al-Khobar project and the Ayala Al-Nakheel project provide that in the event the off-plan sale payments received are insufficient to enable the Company to complete the development of the relevant project, the Company would be obliged to take all necessary steps to complete the project before the Works Completion Date.
In addition, approximately 20 percent (20%) of the Company’s residential projects comprise integrated lifestyle master plan communities, which combine residential and commercial units with retail, hospitality and leisure attractions. If substantial parts of these amenities are delayed, cancelled or changed, customers who have acquired residential units may not be able to enjoy the services or the overall environment which they may have expected when the project was originally launched. Delays in completion or cancellation of all or a portion of a project could also adversely affect the Company’s reputation and ability to attract future customers.
Any of the foregoing factors could have a material adverse effect on the Company’s business, results of operations, financial condition, and prospects.
2.1.5 Risks related to the availability of financing to customers
The ability of customers to source financing for the purchase cost of residential units is contingent on numerous factors including general economic and market conditions, interest rates, inflation, credit availability from banks or other lenders and willingness of banks or other lenders to lend to particular customers. In particular, a significant portion of the financing of the purchase cost for the Company’s affordable residential units is subsidized by the MoMRAH, in which interest free mortgage loans are offered to help fund the purchase of residential units by customers. However, there can be no assurance that such financing will continue at such levels or at all in the future, whether in the short- term or over the longer-term. Any future inability by customers to obtain the requisite financing on terms favorable to help fund the purchase of the Company’s residential units would, in turn, lead to reduced demand for the Company’s residential units. This would, in turn, have a material adverse effect on the Company’s business, results of operations, financial position, and prospects.
2.1.6 The impact of the highly competitive industry in which the Company operates
The real estate industry in Saudi Arabia, and in particular the development of residential and commercial real estate projects in the Kingdom, is highly competitive, and the Company expects such competition to increase and intensify in the future. The Company faces competition from domestic developers of real estate projects, in the areas where the Company currently operates and where it may develop new projects in the future. Competition may affect the Company’s ability to sell its residential units at expected prices, if at all. The Company’s competitors may lower their pricing for comparable developments, which could result in downward pricing pressure. In addition, the Saudi government could decide to support new entrants or other property development companies to implement its general development strategy, which would further increase competition. The Company also faces the risk that competitors may anticipate and capitalize on certain potential investment opportunities in advance of the Company doing so. Increased competition may also increase the Company’s costs of financing, materials, and sub-contractors.
Certain of the Company’s competitors may have greater financial, technical, marketing or other resources, including with respect to the size and quality of their land, and, therefore, may be able to withstand increased costs, price competition and volatility more successfully. Any oversupply or competition in the Company’s market could have a material adverse impact on its business, results of operations and financial condition.
As the property development market in the Kingdom is currently fragmented, property developers may also consolidate to achieve economies of scale. If consolidation in the Saudi real estate market were to occur, there is a risk that the Company would have to operate in a more competitive market place and against larger competitors than it has had historically. The Company may not be able to effectively compete with present and future competitors.
Changes in the competitive environment could cause a reduction in its margins and cause the Company to lose or reduce market share, and this, in turn, would adversely and materially affect the Company’s business, results of operations, financial condition and prospects.
2.1.7 The impact of increasing operating expenses on the Company’s business
The Company’s operating expenditure could increase as a result of a number of factors (for more information about the financial and operational performance of the Company, see Section 6 (“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”)), including, but not limited to, an increase in the cost of contractors, the cost of raw materials used in the construction industry, commodity prices, the costs of outsourcing services to service providers, labor costs, fuel and utility costs, repair and maintenance costs, insurance premiums and costs related to the increase of rents of office space or showrooms leased by the Company. The price of fuel and utilities has increased significantly in recent years. In addition, any further increase in Saudization requirements of the Company’s workforce may lead to an increase in the Company’s operational expenditure (see Risk Factor 2.3.2 (“Compliance by the Company with Saudization and other Labor Law Requirements”)). The operating expenses of the Company amounted to 85.3%, 83.0%, 78.8% and 76.3% of the Company’s total revenues for the financial years ended 31 December 2018G, 31 December 2019G, 31 December 2020G, and the period ended 30 September 2021G, respectively. Any increases in the Company’s operating costs will also reduce its cash flow, profit margin and funds available for operation of the Company’s existing projects and for future expansion. In turn, the Company’s business, results of operations, financial condition and prospects would be adversely and materially affected.
2.1.8 Risks associated with the Company’s dependence upon Related Party Transactions
A central feature of the Company’s business model is its close ongoing business relationships with a variety of related parties, which are a key feature of the Company’s business model. In particular, the Company has entered into a number of contracts with related parties for the development of land and for the design and construction of its projects. All contracts entered into between the Company and related parties following the adoption of the Related Party Transactions Policy are subject to the parameters of such policy (For more information please see Section 5.6 (“Conflict of Interest”)). The Company’s future success is dependent upon a number of these related party contracts, the expiry or termination of which would adversely and materially affect the Company’s business, results of operations, financial condition and prospects.
2.1.9 Risks associated with the Company’s Related Party Transactions
The Company maintains ongoing business relationships with several Related Parties. As of the date of this Prospectus, the Company has seventeen (17) current transactions with Related Parties. All of the Company’s dealings with Related Parties were approved in the General Assembly meeting dated 22/12/1442H (corresponding to 01/08/2021G), the General Assembly meeting dated 22/03/1443H (corresponding to 28/10/2021G), the General Assembly meeting dated 04/04/1443H (corresponding to 09/11/2021G), and the General Assembly meeting dated 21/06/1443H (corresponding to 24/01/2022G). The amounts due from Related Parties totaled SAR 26,656,026, SAR 10,932,264, SAR 8,146,240, and SAR 5,622,266, representing 5%, 2%, 1%, and 0.35% of total assets the financial years ended 31 December 2018G, 31 December 2019G, 31 December 2020G, and the period ended 30 September 2021G, respectively. Related Party dues totaled SAR 185,510,228, SAR 98,756,661, SAR 123,959,734, and SAR 158,649,782, representing 48%, 30%, 19%, and 15.6% of total liabilities, for the financial years ended 31 December 2018G, 31 December 2019G, 31 December 2020G, and the period ended 30 September 2021G, respectively. For a summary of the Company’s transaction with Related Parties, see Section 12.8 (“Transactions and Contracts with Related Parties”).
As of the date of this Prospectus, all Related Party Transactions were on arm’s length terms. However, the Company and the Related Parties had previously agreed to conclude a number of contractual conditions that are not on an arm’s length basis and without concluding formal contracts for these transactions. The Company had five (5) transactions that were not concluded on an arm’s length basis with the following Related Parties: Abdullah bin Faisal bin Abdulaziz Al- Braikan; Abdullatif bin Ali AlFozan; Wasm United Company; Arac and Partners Engineering Consultancy; and AlFozan Holding Company, whereby the Company paid expenses on behalf of Related Parties; provided contracting services; financed Related Parties; and obtained financing from Related Parties. It should also be noted that, the Company previously relied on a revolving credit facility provided by Al Fozan Holding Company for a maximum value of SAR 200,000,000 to finance the Company’s liquidity needs to meet the operational requirements and working capital. The Company took all measures to terminate, repay and collect all monies due thereto thereunder. To the extent that the Company enters into contracts with any Related Parties which are not on arm’s-length terms and/or in the event such transactions transfer undue benefits to Related Parties of the Company, this could negatively affect the Company’s costs and revenues which would, in turn, adversely and materially affect the Company’s business, results of operations, financial condition and prospects.
In addition, under Article 71 of the Companies Law those related party agreements in which any Director is deemed to have an interest will need to be approved by the General Assembly. It is also required that any Director and/or shareholder of the Company, who is deemed to have an interest (such as a shareholder who has a representative director on the board), cannot participate in the approval process for such Related Party Transaction(s). Given the scope of the voting restrictions applicable to the General Assembly approvals pursuant to Article 71 of the Companies Law as interpreted by the Company, no current Shareholder would be permitted to vote on the relevant resolutions at the General Assembly.
There is a risk that the Company’s Board or the General Assembly of the Company or any of its group companies may not agree on the approval of these contracts in which case the Director who is deemed to be interested in the transaction must resign, or take steps to ensure that he/she is no longer deemed to be interested (for example by terminating the relevant contract or disposing of the rights creating the interest). Due to the Company’s significant reliance on such contracts, their termination would have a negative and material impact on the profitability of the Company and consequently on its business, results of operations, financial condition and prospects.
2.1.10 Risks related to permits, licenses and approvals necessary for the Company’s business operations
The Company is required to obtain and maintain the necessary regulatory permits, licenses and approvals from relevant government authorities for its business operations and activities. These permits, licenses and approvals include, but are not limited to, MoMRAH licenses, commercial registration certificates for the Company and its Subsidiaries issued by MoC, trading licenses issued by various municipalities, Amana (building) Completion Certificate, civil defense permits, membership certificates with the relevant chambers of commerce, trademark registration certificates, Saudization and GOSI certificates in each case relating to the business operations of the Company and its Subsidiaries. Each approval is dependent on the satisfaction of certain conditions. In particular, Amana (Building) Completion Certificates are required in respect of new projects to indicate whether an asset has been built in accordance with the requirements set out in the relevant building permit. Assets constructed in violation of the conditions or parameters in a building permit may be subject to a range of penalties including fines or, in more extreme cases, closure or demolition. See Section 12.5 (“Government Consents, Licenses and Certificates”) for further information.
As of the date hereof, Tadbeir branches have not obtained three permits from MoMRAH and the Civil Defense.
Additionally, Remal Al Khobar Real Estate Company has not obtained a license from the Chamber of Commerce.
There can be no assurance that the Company will not encounter problems in obtaining these licenses, permits or other government approvals, or in fulfilling the conditions required for obtaining these licenses, permits or other approvals, or that it will be able to comply with new laws, regulations or policies that may come into effect from time to time with respect to the real estate industry in general or the particular processes with respect to the granting of approvals.
Most of the Company’s existing licenses are subject to conditions under which they might be suspended or terminated if the Company fails to fulfil and abide by the underlying conditions. Moreover, when seeking to renew or amend the scope of a license, there is no guarantee that the concerned authority will renew or amend the license or that, if it does renew the license, no conditions will be imposed which might adversely affect the Company’s performance.
If the Company or any of its Subsidiaries do not obtain or renew a license necessary for its operations, or if any of its licenses expire or are suspended, renewed under unfavorable conditions to the Company, or if the Company is unable to obtain additional licenses required in the future, the Company will be required to cease carrying on its business totally or partially or will be subject to fines issued by the relevant governmental authorities. This would interrupt or delay the Company’s operations and cause the Company to incur additional costs, and would adversely and materially affect the Company’s business, results of operations, financial condition and prospects.
2.1.11 Risks associated with the Company’s joint ventures
The Company is subject to risks associated with its joint venture, with the Company, Mimar Engineering Group and Arac Engineering Consultancy Office previously establishing Mimar Emirates and Arac Engineering Consultancy on 11/09/1440H (corresponding to 16/04/2016G), to provide engineering design services in the Kingdom. The cooperation and agreement between joint venture partners is necessary to facilitate its operations and ensure the financial success of its business and projects. However, the economic and commercial interests and objectives of the partners in Mimar Emirates and Arac Engineering Consultancy may not be compatible with the objectives of the Company, they may be unable or may not be willing to fulfil their obligations under the relevant joint ventures or other agreements, and they may encounter financial or other difficulties. In the future, disputes may arise between the Company and other partners in the joint venture, which may have a negative impact on the project. Furthermore, the Company may not be able to control the decision-making process of the joint ventures without the cooperation of the Company’s joint venture partners, particularly when the Company does not have a majority control of the joint venture. If the joint venture fails or if the Company’s joint venture partners seek amendments to the joint venture arrangements, or otherwise pursue actions adverse to the Company’s interests, this could have a material adverse effect on the Company’s business, results of operations and financial condition.
In addition, the Company’s ability to expand in the future will continue to depend upon the availability of suitable and willing joint venture partners, including, in particular, those with high quality resources and expertise, the Company’s ability to complete the relevant transactions and the availability of financing on commercially acceptable terms.
There can be no assurance that the Company will be successful in establishing any future joint ventures or that, once established, a joint venture will be profitable. If a joint venture is unsuccessful, the Company may be unable to recoup its initial investment. In addition, the Company’s inability to realize joint venture opportunities may result in losing access to premium plots of and which might be developed by competitors of the Company and/or require significant capital expenditure to acquire land plots in the future. Any of these factors, alone or in combination, could lead to a decline in construction quality, delays in project delivery, reputational risks and higher capital expenditure and/or funding costs, which could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects.
2.1.12 Risks associated with the Company’s use of third party contractors and suppliers
The Company hires third party contractors and subcontractors to carry out some of the construction activities associated with its projects. While the Company has historically had access to experienced contractors, there can be no guarantee that it will continue to have such access in the future, or that the costs associated with hiring experienced contractors will not increase due to higher levels of competition for their services or otherwise. Furthermore, the Company’s property developments are complex, and in addition to the Company’ reliance on the main contractors who oversee their construction and assist in elements of the design and planning process, the Company is also dependent on access to numerous specialist sub-contractors to complete its projects in accordance with its high standards. Accordingly, there can be no assurance that the quality of construction of the Company’s completed and ongoing projects will be maintained on its future projects. Any difference in the quality of construction from project