Riyadh – Decypha: The Saudi Arabian government has been taking several initiatives over the past months to transform the country's economy from being oil-based to one that is more dependent on manufacturing and services, hence, the government has been trying to expand industries, and this resulted in significant investment increases. Given the population growth, an increased demand for residential, commercial and institutional buildings is taking place, inevitably shifting attention to the construction sector in the kingdom and creating a rise in the number of housing construction.
The construction sector is one of the most important sectors for the industrial growth in Saudi Arabia, in fact, the kingdom is the largest construction market in the Gulf Cooperation Council (GCC) region, and it is estimated to have a robust growth due to more government spending on infrastructure and hospitality to promote tourism throughout the country. The tourism sector is estimated to grow at a compound annual growth rate (CAGR) of 7.05% until 2020; additionally, the growth in the construction sector can be attributed to an increase of 23% expected to take place in the Saudi Arabian population in the next 10 years, according to a report issued by Jeddah Chamber of Commerce and Industry (JCCI) in 2016. As a core component, the sub-sector that is mostly benefiting from a growth in construction is the cement sector, which is estimated to grow at a CAGR of 5.14% until 2020.
Construction Market & Government Policies
Saudi Arabia’s construction industry suffered a sharp decline in 2016, and according to a report by Construction Intelligence Center (CIC), the industry will remain sluggish in 2017 before picking up in the following few years.
The slowdown in the industry was the result of the sharp decline in oil prices and the country’s high fiscal deficits; both of which reduced the government’s spending power. Since mid-2014, oil prices have decreased by more than 50%, limiting government spending. To adapt to the falling oil prices, the government cut subsidies and public spending, privatized economic activities and increased local fuel prices and taxes. Falling oil prices forced the government to reduce its budget by 2.3%, from SAR 859.3 billion ($229.1 billion) in 2015 to SAR 840.0 billion ($224.0 billion) in 2016, according to CIC's report.
The construction sector is currently valued at $600 billion and is expected to remain at that size until 2020, with the infrastructure projects alone amounting to $350 billion. It is expected to grow by 7.8% by 2019, based on JCCI's report. There have been efforts to enhance Saudi tourism; these efforts have resulted in an improvement in the field of construction, especially in the infrastructure, hospitality, and retail. The construction activities to take place in the future are expected to focus specifically on these sectors, and the government has already made large budget allocations for infrastructure in the KSA.
For example, the hospitality construction sector is expected to witness the implementation of several projects over the upcoming years. Some of these projects include Abraj Kudai, under the sponsorship of the Saudi Arabian Ministry of Finance for a cost of $3,500. This project is expected to be finished by 2018. Another project to be finished in the same year in the hospitality sector is the Ramada Plaza, under the sponsorship of Tadawul Al Jazeera Real-estate Company.
As for the infrastructure construction sector, the government has plans to expand it as well over the few upcoming years through several projects that are underway, including Riyadh metro which is sponsored by Arriyadh Development Authority with a value of $23,000 million and expected to be completed in 2018, in addition to Jeddah Metro under the sponsorship of Jeddah Metro Company with a value of $9,500 million, and expected to be finished by 2020. Other projects infrastructure projects include Dammam metro, Mecca metro: lines B and C and Saudi land bridge. The infrastructure construction in the KSA is expected to grow at a Year-on-Year (YoY) rate of 7.8% from 2016 to 2020.
Regarding the retail construction sector, in 2015 Saudi Arabia has recorded one of the highest growth rates in the retail sector across the world with an 11% growth per annum and an 18% growth in consumer spending year-on-year. This year, contract awarding of tender offers is expected to take place for the value of nearly $2100 million in the city of Riyadh, and $1,249 million in Jeddah, so further expansions are expected to be seen throughout the upcoming years.
Key Players
The Saudi construction market is mainly dominated by family-owned firms, who have the majority of the market share and have undertaken the largest projects in the market. These 10 key players and companies in the Saudi Arabian construction sector include Saudi Binladin Group, Al Rashid Trading & Contracting Co., Arabian Bemco Contracting Co., Al Ayuni Investment & Contracting Co., Al Harbi Trading & Contracting Co. Ltd., Al Shoula Group Al Fouzan Trading & General Construction Company, Almabani General Contractors ABV Rock Group, and El Seif Engineering & Contracting.
Saudi Binladin Group (SBG) is considered the largest contractor in the kingdom. Having been founded in 1931 as a family-owned firm, it has participated in many of the Kingdom’s largest civil projects. It has handled the expansion project of the Grand Mosque in Mecca of a value of $21 billion. However, on 11 September 2015, during the construction works in the Grand Mosque, one of the Group's cranes fell down, resulting in 118 deaths and nearly 400 injuries, so the Saudi king banned the firm from taking new projects until all its projects are reviewed. The Saudi government removed the ban on SBG in May 2016, allowing them to bid on new projects.
Construction in the Saudi Vision 2030
In June 2016, Saudi Arabia approved and finalized its National Transformation Program 2020 (NTP). It is an important component of Saudi Vision 2030, which was announced in April 2016. Vision 2030 aims to minimize the kingdom’s reliance on oil as a revenue source and promote for economic diversification. The Vision plans to increase non-oil revenue to $160 billion by 2020.
At the core of the Saudi government’s economic development plans and initiatives, six mega-economic cities are planned to be built across the Kingdom, near the areas of Tabouk, Medina, Rabigh, Ha’il, Jazan and the Eastern Province. These economic cities are expected to create 1.5 million jobs and accommodate a population of 5.8 million, contributing $250 billion to the gross domestic product (GDP) and raising Saudi Arabia’s per capita GDP from $15,000 in 2006 to $35,000 by 2020, according to a report by Export.gov.
There have been some plans and reforms expected to positively impact construction in KSA by year 2020, as announced by Crown Prince Mohammed Bin Salman. They include increasing ownership of Saudi citizens of their own homes from 47% to 52% by 2020. The government also plans to allow non-Saudis to own real estate in certain areas, which would boost demand in those areas. Saudi Arabia also plans to use its geographical advantage by turning itself as a key hub connecting the three continents of Asia, Europe and Africa. The kingdom has made huge investments in the construction of ports, railways, roads and airports. To take full advantage of these investments, the kingdom plans to work with the private sector and enter into a new series of international partnerships. Moreover, by 2020, the government plans to increase the private sector’s contribution from 40% to 65% of the GDP, according to IFP Info.
Opportunities and Challenges
Saudi Arabia has the largest construction market in the GCC and scores highly for the amount of investment made in the economy, but however promising the construction sector in Saudi Arabia seems, there still may be risks involved. The labour market, for instance, is the biggest risk in the construction sector, according to the Saudi Arabia Infrastructure Report Q1 2017. The report, on the other hand, stated that Vision 2030 may be key to opening up the infrastructure market, with the potential of private investment in transport sectors to energise the sector.
Even though the Saudi Arabian construction industry has been relatively expanding since 2016 and is expected to continue expanding until 2020 with lots of possible investments in transport infrastructure, healthcare, manufacturing plants, education facilities, energy and housing projects, the group of challenges expected to make this more difficult include the a slowdown in economic growth, and the low oil prices. In fact, falling oil prices are expected to affect the growth prospects of the Saudi Arabian construction industry, as the country generates 73% of its total revenue from the oil sector
Capital Economics stated in 2016 that the Saudi construction sector seems as if it might have some financial health concerns. A September 2015 report from the International Monetary Fund found that "balance sheets in the Saudi construction sector were weaker than in other sectors" and that it was the "only major sector with a debt service coverage ratio below 1. The National reported in June 2016 that the construction market in KSA shrunk by as much as 80%.
Despite the challenges, possible investments and opportunities available in the KSA construction market include investing in machinery and equipment; construction tools; excavation and earth drilling equipment; construction chemicals; safety & security equipment; tools & hardware equipment; rock tools and systems; drill rigs and rock drills; in addition to training services for skilled workers such as electrical and mechanical engineers, according to an Export.gov report.
What to expect in 2017?
Saudi Arabia is expected to witness an overall growth in the sector of construction of 1.9% year-on-year in 2017, according to a report titled Saudi Arabia 2016 Construction Outlook: Compare Rising Infrastructure Megaprojects Opportunities with Increasing Project Risk.
This year is forecasted to be a better year than 2016 as the industry recovers from the government failing to pay contractors, and benefits from slightly improved liquidity and more efficient project implementation. However, the outlook for growth in the Saudi Arabian construction sector over 2017 is considered relatively poor as liquidity remains tight. A CIC report predicted that the Saudi Arabian construction industry is actually expected to contract further in 2017 by 0.2% before regaining the potential growth momentum. The growth over the forecast period (2017–2021) is expected to be supported by the government’s focus on developing transport infrastructure, energy and utilities facilities, and affordable housing across the country. As a whole, the Saudi construction industry is expected to rise from $103.1 billion in 2016 to $105.4 billion in 2021, measured at constant prices and 2010 US dollar exchange rates.
There are key policies and investment programs that should help boost construction. Under the National Transformation Program (NTP) 2020 and the Saudi Arabia Vision 2030, the government plans to develop sea ports, railway lines, airports and manufacturing facilities, with an aim to reduce the country’s dependency on the oil sector and reduce unemployment. Under the NTP 2020, the government plans to invest SAR 268.0 billion ($71.5 billion) to develop the country’s transport and tourism infrastructure, and this is expected to help the growth increase or at least remain stable.
By Reem Hosam El Dein
