Analysis: Dynamic duo

Saudi Arabia and UAE make up for 60% of the Mid East project pipeline

Dubai property prices increased by 20% last year, but growth is likely to slow.
Dubai property prices increased by 20% last year, but growth is likely to slow.

Some 60% of the $2.5tn of projects in the Middle East and North Africa region are taking place in the twin gulf powerhouses of Saudi Arabia and the United Arab Emirates, according to a new report.

The MENA Projects Tracker published by Citi states that GCC countries are responsible for almost 90% of the projects being built by value. It added that major construction and infrastructure projects made up a relatively smaller share of work in other countries, except in Jordan where a spate of building on utilities projects is underway that are equivalent in value to around 130% of its current gross domestic product (GDP).

The report classes $1.4tn of this $2.5tn as currently being built, while a further $600bn is at a “relatively advanced” stage of development and the remaining $500bn being early-stage projects.

The bulk of projects under development (just over $1tn) is being spent on real estate – be this office, residential or leisure. Infrastructure ($812bn), oil & gas ($376bn) and power & water ($298bn) make up the other main spending areas, although priorities vary from country to country, according to the report’s author, Citi Middle East chief economist Farek Soussa.

“For example, there is a heavy bias in the UAE towards real estate projects, while infrastructure projects dominate in Qatar. The oil & gas sector is of greatest significance in Algeria, while Jordan is spending most on power & water,” he said.

In terms of country spend, Saudi Arabia leads the way with $784bn worth of projects, followed by the UAE with $669mn.

Qatar is third with $273bn, Kuwait fourth with $249bn and Egypt fifth with $143bn of projects under development. It is also the only non-GCC country with more than $100bn of active projects.

For spending levels relative to GDP, Bahrain, the UAE, Oman, Jordan and Qatar are the highest-spending countries on new projects.

Projects underway in Bahrain, which has been given $10bn worth of funding from the five other GCC countries under a so-called “Marshall Plan” initiative to develop infrastructure and housing, is currently spending around 180% of GDP on construction projects, while the UAE and Oman are spending over 150% of GDP.

At the lower end of the scale, in Algeria, Tunisia and Morocco, construction projects represent just 20% of GDP.

Looking at the two major markets individually, Soussa said the Nitaqat programme of boosting Saudi employment, both through placing levies on firms hiring too many non-Saudi workers and by clamping down on the number of illegal expats in the Kingdom, has had an impact in several areas.

Firstly, it has led to the forced exit of more than one million foreign workers from the Kingdom, according to the Ministry of Labour. Since a visa amnesty ended last November, security forces have been rounding up suspected illegal workers, leading to clashes and to more workers without valid documents handing themselves in to the authorities, meaning there are thousands currently awaiting deportation.

However, the Ministry of Labour also said over 300,000 jobs have subsequently become available to Saudi nationals, which has led to improving employment rates among Saudi youth.

Soussa said the Nitaqat programme is needed to ensure sustainable long-term socio-economic growth in the Kingdom.

“Unemployment officially stands at under 12%, but the job participation rate is very low, at around 50% of the adult population.

“There are cultural reasons for this, including the question of women in the workplace, but Saudi Arabia, like other Gulf states, generally suffers from a skewed labour market where cheap, skilled foreign labour has taken precedence over the hiring of more expensive, less-skilled local labour.”

Although this has hit the construction sector hard, as it is difficult to hire builders on the wages that expats currently receive, the continued exclusion of Saudis from the workforce is “unsustainable”.

“The intention is to get Saudis into jobs, and failure to achieve this would have far greater negative consequences for socio-economic stability in the future, in our view.”

Talal Samarkandi, CEO of Architectural Lines and a board member of the Saudi Council of Engineers, recently told Construction Week’s Jeddah Infrastructure Conference that a side-effect of the crackdown on visas has been an expose of fake engineers.

He said the base of engineering in the Kingdom is not as solid as it should be, with the council announcing earlier this year that it had found more than 30,000 fake certificates from expats since a vetting and pre-qualifying process began a few years ago.

The council also received 15,000 requests from people who entered the Kingdom as engineers but wanted to change their status.

“Just imagine, those 15,000 persons were responsible for projects and they are not engineers. That caused the most problems,” he said, when discussing reasons for project disputes.

“Inshallah, over the next 2-3 years after a time this pre-qualification or classification (has been in place) you will find so many differences.”

He also argued that those who set up contracting companies, who currently just need a Saudi ID in the Kingdom, should also be registered engineers.

Meanwhile, in the UAE the project pipeline has been boosted by a revival in its property market, with prices in Dubai climbing by 30% year-on-year in Q1, according to research by Jones Lang LaSalle.

While the market remains shy of its peak in most locations, there are already some areas where prices have reached peak levels.

Soussa said that although it is concerned with the sustainability of asset price increases, Dubai’s economy is showing signs of a ‘balanced cyclical upswing’.

It is less reliant on debt or on construction activity than it had been during the previous boom, and this position is unlikely to hugely change in the run-up to Expo 2020. Citi estimates that infrastructure spending for the event will be around $7bn, which is only a tiny fraction of the UAE’s current $670bn pipeline.

“Moreover, we think the government expenditure directed towards the Expo will need to be diverted, at least in part, from other areas of spending to avoid an excessive build-up of debt.”

Masood Al Awar, CEO of Abu Dhabi-based property developer and fund manager Tasweek, said that prospects for the UAE’s property market remain fairly bullish, and are as much driven by government reforms and the economy than by the potential impact of Expo.

In Abu Dhabi, for instance, rents in some areas have increased by as much as 50% since the government removed a 5% rental cap in mid-2013.

“Abu Dhabi’s upbeat market, combined with Dubai’s re-emergence as a leading global realty hub, will sustain the momentum that began in Q3 2013,” he said.

He added that construction of new transport and infrastructure would be the “key drivers for enduring growth” in the property market, as well as an increased number of units changing hands.

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