Jabal Omar Development Company (JODC) is in financial trouble and that much is known from the company’s disclosures to the Saudi Stock Exchange earlier in 2016. It has swung to a loss and the company has been forced to negotiate debt payments with a state fund.

But how dire a state really, the company is in, was fully revealed when the developer on 11 February said it has laid out a new strategy radically transform its business. The firm plans to turn into a holding company, explore expansion into other geographies and pursue long-term-leasing strategy.

This points to only one thing – JODC’s very myopic core business of developing and managing projects in Mecca, is no longer sustaining the current business model. The model is not commercially viable for the developer to keep its head above the water in difficult market conditions.

Project acquisition

JODC is seeking shareholders’ and regulatory approval for the new strategy and by becoming a holding company it will be able to do “acquisitions outside of existing projects’’. This is a step needed for JODC to diversify its business and develop revenue streams beyond the limited scope of Jabal Omar district projects.

It is executing a number of residential and the mixed used projects catering to religious tourism, close to Grand Mosque in Mecca, Islam’s holiest site. Its track record, so far, should be able help it win business from third parties in and around larger metropolises such as Riyadh and the commercial hub of Jeddah. Saudi Arabia, the largest economy is region with a growing population, is facing housing shortage and the state is encouraging anyone and everyone to take interest in that segment of the market.

According to government statistics, there are currently 750,000 families eligible for public housing. Despite a $67bn plan in 2011 to build 500,000 homes over several years, Saudi Arabia’s poorer citizens have suffered from rental increases due to shortage of housing units. Under more recent plans, Saudi Arabia intends to spend SR1.5 trillion ($400bn) on building 1.5 million homes for Saudi nationals in the next seven to eight years, the kingdom’s Housing Minister Majed al-Hogail said on 26 January.

“Thinking small” should be buzz word in the board rooms instead of thinking mega schemes across the kingdom. Small projects, quick delivery and revenue realisation within months rather than years is a more practical approach for contractors.

If the opportunities are not abound in the domestic market, looking elsewhere should be the plan of action, which is what JODC seems to be doing.

Second pillar

The second key step under the new strategy is “geographic expansion”, according to the company’s latest statement, which did not elaborate the geographies it is targeting. Logically, shifting geographic focus within the kingdom won’t do much help. It has to look beyond Saudi Arabia’s borders to find a suitable market in order to develop alternative revenues source.

The only problem JODC may face is that there aren’t many markets within the region where it could establish its presence with ease. Economies across GCC are facing a slowdown and each of the six members of the economic bloc are running their own austerity campaigns, similar to Saudi Arabia. The belt-tightening means that there aren’t many state-sponsored projects where JODC can play a role in the Gulf and not much is expected to happen in private sector developments either as real estate markets are softening up further.

The obvious market where JODC could gain some traction is Egypt.

Egypt relies heavily on financial aid from the kingdom to press ahead with its development plans. In December 2015, Riyadh pledged to continue its investments in Egypt and, as such, setting up a base in Cairo seems like a logical move for JODC.

Recurring revenues

The third pillar of the JODC’s plans is the “long-term leasing and sales strategy to improve the company’s cash-flow.”

Building a portfolio of properties that yield recurring revenues over a longer period of time has saved Dubai government-owned Nakheel Properties and Abu Dhabi-controlled Aldar Properties. Both developers were hit hard in 2008 property meltdown in the UAE, which forced Nakheel to restructure $16bn debt and Aldar had to merge with competitor Sorouh in Abu Dhabi.

Both these developers are now profitable entities.

Aldar posted a 13 per cent increase in 2015 net income, helped by a 49 per cent jump in the gross profit from recurring revenue to AED1.505bn ($410m), the company said on 15 February.

Nakheel, which has paid its debt four years ahead of the schedule, is said to be talks with banks to raise $1.4bn in loans to fund construction of projects as it looks to build more properties yielding recurring revenues.

Developers’ predicament

JODC has swung to a SR75.5m loss in the fourth quarter of 2015 from a profit of SR145.2m reported in the same period a year earlier. The company had also reported a SR125.5m loss in the third quarter of the last year. It is currently in talks with lenders to raise funds after failing to make a $173m payment on $800m state loan at the beginning of this year, it said on the 1 February.

The company’s “sustainability depends on finding funds to repay short-term debts,” it said in a statement on Saudi Arabia’s stock exchange, without saying what the total load of its short-term debt is; how much of that is borrowed from the state and what is the chunk due for repayments to financial institutions?

On 18 February, the company said it has managed to sign an agreement with the Ministry of finance to extend payment deadlines on the state loan. The eight-year financing has been extended by three years and the first instalment is now due to be paid in January 2019, JODC said in a bourse filing. 

Being a listed developer, JODC had to announce its financial troubles to the market, but what about the other developers in the kingdom? How many of them are struggling in a situation where cash flows are strangled and banks are reluctant to open new lines of credit.

Companies focused on private sector would likely be doing better than JODC but the developers’ struggle comes at a time when the kingdom really wants its private sector to kick-off and help it boost the sagging economy.

JODC has termed its strategy a 10-year plan but for it to survive as a commercially viable company, it will need to turn the business around really quickly. It can ill-afford a decade-long wait for results.