Saudi property developer Dar Al Arkan said it had sold $1 billion of Islamic bonds, 25 per cent more than planned, due to stronger than expected demand from investors looking to tap into the kingdom's real estate market.

The five-year bonds were priced at 225 basis points over the three-month London Interbank Offered Rate, and were structured on an ijara, or lease, basis.

Sukuk are typically backed by physical assets from which bondholders are paid dividends rather than interest.

"There are not many Saudi real estate funds offered to international investors," Dar Al Arkan managing director Abdullatif Al Shalash said.

"By offering these sukuk we give them an opportunity to tap into a growing market of a young country."

The firm, which raised the money to finance residential construction projects in the world's largest oil exporter, estimates that about 65 percent of Saudi Arabia's indigenous population of 17 million is under the age of 35, generating a market in first-time buyers.

Joint lead arranger Unicorn Investment bank said demand for the bonds, which were marketed in the Middle East, Europe and Asia, had been "overwhelming".

Most of the bonds, however, went to investors in the Middle East.

"Demand was very strong. We had demand for almost $1.5bn," Unicorn's Ikbal Daredia said.

Dar Al Arkan's A- rating from Cyprus-based Capital Intelligence had spurred interest, Daredia said.

Middle East borrowers have increasingly sought ratings before going to market to drive down the cost of borrowing. Dar Al Arkan sold $600 million of sukuk in February.

Sales of Islamic bonds have surged as banks outside the Middle East buy the securities looking to tap the region's booming economies and as investors become more comfortable with what was once seen as an exotic instrument.

Dubai's Nakheel and Abu Dhabi's Aldar Properties are among other Gulf Arab property developers that have sold Islamic bonds this year.