Saudi Arabia's construction sector bounces back in 2019

The construction sector is expected to see significant growth over the next decade, led by Vision 2030 programmes. Construction activities gained pace during 2019, with a number of infrastructure plans either announced or initiated. In addition, some major projects are nearing completion, such as the Riyadh Metro, while the Kingdom’s emerging giga-projects are driving optimism in the sector and related industries. Although the longer-term outlook remains positive, the Covid-19 crisis is set to cause a slowdown across the economy in 2020.

Structure & Oversight

Formed in 2017, Saudi Contractors Authority is the primary institution responsible for regulating the Kingdom’s construction sector. Its remit includes drafting rules for the industry, addressing labour issues, increasing mergers and acquisitions activity, and publishing industry data and supply statistics on behalf of the government.

Large local conglomerates with a strong government shareholder presence have historically dominated the construction and real estate development sectors in Saudi Arabia. The country’s major developers include Saudi Binladin Group, Al Akaria, Dar Al Arkan, Jabal Omar, Makkah Construction and Development, and Kingdom Real Estate Development. However, the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, is the largest project developer in the country, with state-owned oil giant Saudi Aramco also initiating a large number of projects. In recent years Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud has moved to open the sector up to more competition, a welcome development in the eyes of many players. “Competition in the construction sector is very low due to the high influence of the public sector. The industry has to be liberalised to encourage the private sector,” Khalid Al Amoudi, CEO and chairman of Saudi Red Bricks Company, told OBG. As a sign of these changes, recent reforms to foreign ownership laws have meant that foreign companies are now allowed to own 100% of projects in most industries, including construction.

While the government is the main source of the vast majority of project tenders in the country, the private sector is playing an increasingly important role in construction activity. According to the most recent data, the private sector commissioned approximately half of the projects in the Kingdom in 2017 and spent over SR100bn ($26.7bn) on construction that year. Public sector contracts are typically governed by the Government Tenders and Procurement Law, while the content and quality of private sector construction contracts can vary widely due to a lack of standardisation.

Strategies

The government is prioritising construction of transport networks, hospitals, schools, affordable housing, hydrocarbons infrastructure, technology networks, entertainment facilities and hotels. Increasing the supply of housing is a major focus and will likely remain so over the next decade. The government is aiming to achieve 70% home ownership by 2030, up from 47% in 2016. This will require a consistent supply of housing, with millions of affordable new homes for young Saudis (see Real Estate overview).

Localisation of the sector is another theme the government is working towards. The Housing Vision Realisation Programme, launched in 2017, aims to boost the local content of housing materials and services to 63.5% by 2030, up from 54% in 2017. The push for localisation is already explicit in the country’s Government Tenders and Procurement Law, which states that priority will be given to locally manufactured goods, products and services. As with all major sectors, the government is seeking to create more jobs for citizens. Under its 2018-20 development programme, the PIF expected to create around 260,000 new construction jobs.

Economic Contribution

The construction sector contributed some SR163bn ($43.5bn) to the national economy in 2019, representing 5.5% of total GDP and 7.3% of non-oil GDP at current prices, according to data released by the General Authority for Statistics. The sector recorded growth of 4.6% in real terms in 2019, outperforming the overall non-oil GDP growth rate of 3.3%. This represented a substantial improvement from previous years, when the sector contracted by 3.2% in 2016, 3.3% in 2017 and 3.5% in 2018.

Performance

From 2015 to 2018 there were numerous material changes that brought disruption to the sector. These included reductions in government spending, the introduction of value-added tax, new expatriate taxes and an exodus of foreign workers. The year 2019 saw consolidation with no major changes in fiscal policy, providing a period of stability. However, while the sector broke the trend of negative growth in 2019, the impact of Covid-19 may see 2020 post another contraction. Some SR56bn ($14.9bn) was allocated to infrastructure and transport in the 2020 budget, representing 5.5% of the total, and private participation is expected to add to this investment.

In addition to the commencement of numerous mega-projects, growth in 2019 was assisted by the continued roll-out of large-scale residential housing projects by the Ministry of Housing and the Real Estate Development Fund, with more than 300,000 families benefitting from the programme that year. New infrastructure works, including road upgrades, landscaping and office buildings, were also launched in preparation for the Kingdom hosting the G20 Leaders’ Summit in Riyadh in November 2020. As of early April the summit was still scheduled to take place, although Covid-19 resulted in the delay or cancellations of numerous high-profile international events in the first half of 2020, thus the situation is being monitored closely by stakeholders. Prior to the outbreak, it was estimated that the sector would record a compound annual growth rate of 6% from 2019 to 2024.

New Contracts

A large number of construction projects are both under way and in the pipeline. The total value of construction contracts awarded in 2019 reached $52.6bn, the highest amount since 2015 and up 95% on the 2018 figure. This represented a substantial increase from the recent low of $20bn in contracts in 2016. However, 2019 figures were not as high as the record year of 2013, which saw $78.1bn worth of contracts awarded. Between the first and third quarters of 2019, the largest portion of projects were allocated to the oil and gas sector. In the last quarter of 2019 this was overtaken by the real estate sector, which received 34% of contracts ($3.2bn), leaving oil and gas with 22% ($2bn). Most of the new non-oil projects have been concentrated in Riyadh in recent years.

Since 2010 the volume of awarded contracts has tended to fluctuate in line with changes in state spending. In previous years several planned construction projects were generally cancelled or postponed when the government experienced significant fiscal pressure. With early 2020 seeing the global spread of Covid-19, construction firms reported that new contracts had ground to a halt – a situation that can be expected to continue during the course of the crisis.

However, despite recent developments, in a March 2020 briefing note, local company Jadwa Investment said that it anticipates continued growth in the construction sector in 2020 as a result of progress on mega-projects and housing development goals. Looking further ahead, project management firm Linesight noted in its “2020 Middle East Market Review” that Saudi Arabia plans to spend $1.1trn on infrastructure projects alone in the next 20 years.

Ongoing Projects

Jabal Omar in Makkah is one of the country’s largest construction projects. It is being undertaken by Jabal Omar Development Company, which is among the biggest publicly listed real estate companies in Saudi Arabia. As a multi-use property covering a total built up area of 2m sq metres near Makkah’s Grand Mosque, the development is set to transform Makkah’s city centre. Due for completion in 2022, it will expand capacity for the anticipated growth in demand from pilgrimage visitors, which the government aims to increase from 8m to 30m per year by 2030. It will consist of 40 towers situated on 16 structural bases, and luxury hotel, residential and retail developments. The project’s architectural style is inspired by traditional Arab and Islamic design.

A major 7m-sq-metre smart city development on the outskirts of Riyadh, known as Al Widyan, is also under way. The project, which was unveiled in August 2018, aims to create a new mixed-use district comprising leisure, retail, education, health care, office and residential spaces. Located in the north-west corner of the city, the site is 15 minutes away from King Khalid International Airport. It will be developed over a period of seven years by Al Widyan Company, held by the Al Akaria Saudi Real Estate Company. Binyah Constructions was awarded a $292m infrastructure contract for the project in September 2018, while Orange was awarded the master plan design contract in February 2019.

Gas

As the Kingdom seeks to diversify its energy mix and free up more oil for export, the government is investing in natural gas projects, such as the new $590m gas pipeline. In February 2020 Saudi Aramco stated that it planned to double the number of projects that it is managing, including gas processing facilities, from some 200 to 418 by 2022 (see Energy chapter).

Transport

Saudi Arabia has been expanding transport infrastructure in recent years in line with growing urbanisation, with metro, bus and rapid transport projects under way, in addition to road upgrades.

Prior to the Covid-19 pandemic, Riyadh’s new six-line metro as well as the city’s 22-line Rapid Bus Transit System were expected to open in the second half of 2020. This follows the $6.7bn high-speed rail link that opened between Makkah and Medina in 2018, which was built by two consortiums involving Saudi, French, Chinese and Spanish companies (see Transport chapter).

Despite fluctuations in public revenue and budgeted government spending, infrastructure development has remained robust. Road development projects are the primary recipients of infrastructure funding across the broader GCC region, with Saudi Arabia ranking among the top-12 global markets for infrastructure investment, according to a report by Orient Planet.

The Makkah-Taif tunnel is one major transport project in the pipeline. Upon completion, it will include an 11-km tunnel consisting of two parallel tunnels, each with three lanes. ILF Consulting Engineers has conducted a feasibility study and a decision is expected by the end of 2020 on whether the project will be developed as a PPP or by the Ministry of Transport. It is expected to be a toll project. A number of important cross-country connectivity works are also under way. This includes expansion of the King Fahd Causeway connecting Bahrain and Saudi Arabia, and a 680-km road linking Oman and Saudi Arabia, which is set to significantly reduce the distance needed to travel between the countries.

Sector Trends

A notable trend emerging across the sector and the wider economy is a preference for PPP developments. As identified in Vision 2030, the government has been pushing for PPPs and learning from successful models adopted elsewhere, particularly in the UAE. Accessing funding through PPPs to address state budget concerns is proving a successful approach. The National Centre for Privatisation, established in 2017, is responsible for privatising certain government assets and services. For infrastructure projects, it reviews the feasibility of every project as a PPP first.

Sustainable development is another growing theme in the sector, and is at the core of the Kingdom’s giga-projects and the renovation of its historical districts and regions, both during construction and in end-use designs. While not yet centralised or led by a state entity, sustainable urban development is a theme that is increasingly appearing at a local level across the sector. Al Widyan, for example, aims to become a walkable city through its sustainable urban design, while King Salman Park – which is scheduled for completion in the capital in 2024 or 2025 – and the planned 135-km Riyadh Sports Boulevard, which is scheduled for phase 1 completion in 2027, place sustainability at the core of their designs. Sustainability was a theme of the Saudi Build 2018 exhibition, and in January 2020 leaders from the sector highlighted the need for sustainable building designs and construction materials. This trend will also help meet Vision 2030 targets to reduce energy use.

The market is seeing a shift to bundled utilities as part of the construction process, whereby one provider supplies all services such as water, power, waste, cooling and ICT. This is being pursued within new developments such as Qiddiya and the Red Sea Project. Utility tender bids for the latter were expected to be submitted in the first half of 2020, and ILF, EY and Clifford Chance have been tasked with evaluating the tenders.

Contractors

The sector’s contraction over recent years brought mixed results for contractors and some businesses were forced to close, with 2015-16 marking a particularly rough patch. Martin Erath, managing director of ILF Consulting Engineers, noted that while cash flow remains an issue for some firms, improvements are being seen. “During the down period, banks and corporate finance were reluctant to provide loans. However, a royal decree was passed in 2019 to enforce government payments to the private sector, with mid-2019 seeing improvements to cash flow,” he told OBG. In 2019, 193 new licences were awarded to construction firms to operate in the Saudi market, an increase of 74% over 2018, according to public agency Invest Saudi.

Labour

The sector has witnessed a steep drop in employment figures since 2017 and increased labour costs. Between the first quarter of 2017 and the third quarter of 2019, 1.98m expatriate workers left the country, with the total number declining from 8.5m to 6.6m. The vast majority of these labourers worked in the construction sector. The sector employed 3.8m expatriates and 437,470 Saudis in the first quarter of 2017, compared to 2m expatriates and 285,833 Saudis as of end-2019. While the sector employed 44% of the expatriate workforce and 14% of the Saudi workforce in the first quarter of 2017, this dropped to 31% and 9%, respectively, by the end of 2019. This meant an overall decline in workers in the sector from 4.2m to 2.3m. While expatriate numbers have continued to decline, the overall number of departures has slowed on a quarterly basis since the second quarter of 2018.

The market is seeing a trend of construction workers moving from Dubai to Saudi Arabia, particularly as Dubai Expo projects come to a close, and infrastructure and giga-projects in Saudi Arabia grow. However, recent regulations have made it difficult for contractors to hire the labour they need, with increased residence permit fees meaning construction labour now comes at a higher cost. For government projects, the higher cost of labour will be priced into the capital expenditure by the awarding public body.

Building Materials

According to Riyadh Capital, cement sales rose by 35% year-on-year (y-o-y) in February 2020, from 3.5m tonnes to 4.8m tonnes. This is thought to have been driven by the increase in housing builds, with all major companies in the sector reporting a y-o-y increase in sales. Southern Cement maintained a 15% market share, followed by Saudi Cement and Yamamah Cement, each with a 10% market share.

Property and construction firm Colliers International noted that prices for key construction materials remained relatively stable between the third quarter of 2018 and the third quarter of 2019. Timber costs dropped by 0.7% and aluminium dropped by 3%, while the price of concrete rose by 3%, and cement and sand both rose by 4%. A 10% increase in steel prices was reported in early 2020, driven by Vision 2030 projects and a surge in housing activity, although building may slow as the battle against Covid-19 continues, thus impacting materials prices. Steel prices rose from SR2280 ($608) per tonne at the start of 2020 to nearly SR2480 ($661) in February that year.

In terms of exports, Riyadh Capital reported that cement export sales increased by 40% y-o-y in February 2020, from 165,000 tonnes to 231,000 tonnes. Saudi Cement represented a large portion of this, exporting 117,000 tonnes, which was up by 34% y-o-y.

Innovation

In recent years the sector has witnessed the introduction of a greater number of innovative projects and designs. The 500-seat Maraya Concert Hall was completed in early 2020 and declared as the world’s largest mirror-clad building by Guinness World Records. It is located in the Al Ula region, 22 km from the Kingdom’s Al Hijr archeological site, a UNESCO World Heritage site commonly known as Mada’in Salih. The concert hall will become a key part of Al Ula’s Winter at Tantora Festival. The building provides a mirage effect of its surrounding environment and is able to withstand challenging desert weather conditions. Its exterior was manufactured by local Guardian Glass using the company’s UltraMirror technology.

3D Printing

3D printing, for its part, is emerging as a potentially transformative technology in the construction sector. In 2018 Saudi Arabia built its first house using 3D printing technology, and in 2019 the country inaugurated a 4775-unit housing development that used 3D technology. The process involved building modular concrete elements in factories or on-site using moulds. This comes as the Building Technology Stimulus Initiative seeks to raise the production capacity of the Kingdom’s construction factories. While the technology has not yet been rolled out at commercial scale, it will likely impact the residential segment in coming years, given the Kingdom’s desire to rapidly develop housing units and reduce costs per sq metre. However, quality needs to be tested further and the logistical challenges of delivering the printing machines will have to be considered. Further innovation over the short to medium term could help position 3D printing as an important element of residential builds.

Outlook

Overall, the construction pipeline for upcoming years looks positive. While the sector is well placed to grow, Covid-19 is bringing disruption to projects and new contracts, which is expected to continue throughout 2020. Beyond this, various mega- and giga-projects and large residential housing schemes will drive sector activity. The growing tourism industry is also expected to be a driver. As Saudi Arabia prepares for an influx of visitors due to the new tourist visa, there will be greater scope to revisit infrastructure requirements, including accommodation and urban transport.