The Jeddah-based Saudi Binladin Group (SBG) is considering plans to diversify its business away from contracting for state entities.

Establishing a new business for real estate development is an option for the biggest construction firm in the kingdom, according to a Riyadh-based banker and a Mecca-based construction industry sources familiar with the company’s discussions.

The company, which has primarily been focused on multi-billion dollar government infrastructure projects in the past, holds a large land bank in and around major cities including the commercial hub of Jeddah and the Kingdom’s Capital Riyadh. It is now mulling plans to build large-scale commercial and residential projects, not only on its own land but also for third parties.

“It the right move for the company. It has a substantial land bank that will now be taxed, and as government spending slows it can deploy its vast resources to develop real estate,’’ said another source.

The shift in strategy follows Riyadh’s decision to introduce an annual 2.5 per cent fee on undeveloped urban land designated for residential or commercial use. The housing ministry said the policy targets unused, privately-owned land across the country that can be better used to solve the housing problem.

“SBG is in continuous search to enhance its business value through multiple means including but not limited to vertical and horizontal expansions, wherever and whenever it makes rewarding business sense,’’ a SBG spokesman  said in an emailed statement. “However, any expansion or diversification programs are to be publicised only when they materialize and in their due times.’’

Revenue Lines

Finding new revenues lines are even more important as the company is barred from winning new contracts in the kingdom. It is unlikely that it will be able to work on any projects of significance until government clears it up in a crane accident in Mecca that claimed more than 100 lives.

In the aftermath of the disaster at the Grand Mosque in September, SBG has seen its top-boss, Bakr bin Ladin, handing over reins to Saleh Mohammed bin Ladin.

MEED on 12 January reported that Saudi Arabia’s Ministry of Finance has instructed SBG to also stop work on expansion of the Prophet’s Mosque in Medina, Islam’s second-holiest site. The move comes as the kingdom cuts down spending on multi-billion dollar projects amid falling revenues on the back of sliding oil prices.

The ministry, in a letter sent to the SBG’s general manager on 29 December, just a day after the kingdom announced a budget with sweeping economic reforms, has asked the contractor to finish some of the ongoing work on the site and stop execution of the project thereafter until further notice, without giving reasons for the move.

The letter, seen by MEED, was also sent to project consultant Dar al-Handasah.

It is not known if SBG will still be retained as main contractor on the project, if and when it comes back online. However, if the company is removed from the ongoing projects, such as the one in Medina, it will further compound the cash flow issues.

“The government move on Medina project is a clear signal the contractor is not in their good books,’’ according to the banker. It is unlikely that SBG will get the large infrastructure project in foreseeable future so moving into private and the residential contracting market and develop their own lands makes sense for the company, the banker explained.

Progression into private sector contracting and property development is a natural fit for the SBG as all the company has to do is to shift resources to a new subsidiary. There is shortage of housing and commercial developments in the country and the size of the market is big enough for a player like SBG to enter, the banker added.

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 rising rental prices in cities such as Riyadh and Jeddah.

For the moment, the spotlight is on SBG as everyone awaits the next move from the government. In the meantime the company is trying to stay afloat and cutting costs through staff retrenchment. It plans to lay off 15,000 workers in the third batch of firings in its architecture and building construction division, according to an internal email seen by MEED in early December. It is not known how many the company had already laid off in previous phases. Construction Products Holding Company (CPC), Saudi Arabia’s largest manufacturer of building materials and a unit of SBG, was to see staff reduction as well, according to that email.