Real estate: NTP positive but not enough The Saudi residential sector is suffering an acute housing shortage which we estimate at c1.2mn homes. Key reasons are: e 1) Land is expensive: land constitutes as much as 50% of the cost of a housing unit which is more than double the typical 20-25% in more affordable areas globally. e 2) Affordability issue: banks are reluctant to provide mortgages to workers from the private sector. e 3) Limited financing: the Real Estate Development Fund (REDF) which used to provide interest-free loans to eligible Saudis for home purchase or construction, has been unable to cope with the demand for new loans and has a backlog of about 450,000 applicants. The housing ministry is looking to issue Islamic bonds to help fund the country’s REDF at the end of 2017. e 4) Overrun development costs: Long delays for construction approval and permits translate to overrun costs which create obstacles for developers to launch economically feasible projects. A persisting shortage of affordable residential supply The shortage of housing is not a new phenomenon - it has been ongoing for decades. The demand outlook from end-users is solid. Domestic household formation (marriages) is a large component: newly married Saudi couples need an affordable place to live. With market demand growing by 105K units pa (BofAMLe), we believe the shortage of supply will persist for the following reasons: e The limited scalability of residential projects — Dar Al Arkan is the largest residential developer with only a 1% potential market share (delivery capability of 1,100 units pa). e The capital-intensive Saudi financing model — without funding support from the government and a virtually non-existent off-plan sales market, Saudi developers have to secure funding to undertake larger residential projects. Dar Al Arkan is having to lever up, as land sales, which were once the primary source of funding, are no longer enough to enable it to scale up. - A lack of