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Saudi market forecast 2015

What's in store for the GCC's biggest construction market?

ANALYSIS, Business, Construction market, Gcc

For years, Saudi Arabia has been the Gulf’s biggest construction market, and as the Kingdom attempts to welcome in more firms to help it meet construction targets, Hadi Khatib looks at what’s in store for 2015.

There is no question that the Kingdom of Saudi Arabia’s (KSA) changing demographics are prompting a dramatic change in its construction market.

The 28mn-strong country with a 2014 annual GDP estimated at nearly $750bn has nearly 40% of its population under the age of 14. Highly connected. Highly mobile.

When it comes to new real estate, young, affluent, western educated Saudis have acquired a taste for modernity and style, looking to merge their rich heritage with contemporary trends.

“Many have studied or travelled overseas, witnessed or been part of other models of living, including smaller units and apartment living, which offer close proximity to essential services and provide greater levels of accessibility,” said Donald Bordui, Principal at leading building consultancy Saudi Diyar.

Officials in the Saudi government are also under scrutiny to facilitate, expedite and better regulate the sector. Ahmad Al Hatti, chairman and president of developer Cayan, hailed the appointment of new minister of commerce and industry, Tawfeeq bin Fouzan Al Rabea, as part of “a new spirit” within the Kingdom, taking charge of initiatives and driving change.

He said other ministries are under pressure to deliver, especially with social media becoming a more important factor in guiding public opinion.

“We are not used to ministers tweeting but now even the Crown Prince has his own account,” said al Hatti
It’s with this perspective that the Kingdom prepares for a blistering year in 2015, when sector expenditures are projected to match or exceed the $70bn+ spent in 2014. It does so with the knowledge that projects cater to demand that’s over 90% domestic.

More than $3tn worth of development projects are expected to start on site in the Kingdom by 2020. Underway are already an impressive mix of mega-cities, public transport projects (over 4000km of roads as well as a national railway), social infrastructure such as healthcare and education, road infrastructure, public housing and mega towers.

“There is a boom in KSA involving every aspect of the economy,” said Mostafa Adel, business development executive of Khobar-based contracting firm Nesma & Partners.

“We see growth in transport, healthcare, power and desalination projects – not forgetting housing, of course, which is a major issue.”

In addition to building housing projects in Dammam and the western region, Nesma is part of a consortium bidding for the Makkah Metro on two projects worth approximately $2.1bn (SR8bn). This follows on from the firm’s win in 2013 as part of the Arriyadh New Mobility Consortium delivering a $6bn contract for Riyadh Metro.

Al Hatti believes that education is going through a revolution with the building of up to 28 new universities and Tatweer Building Co’s programme that is likely to see 10,000 new-generation schools built over the next decade.

“We’ve been trying to close gaps accumulated over the past 30 years.” Al Hatti said. “The change in every Saudi sector is from outdated to modern, from rent to own, from low quality to advanced, from risky to safe.”

The Kingdom has boasted the fastest growing market for building construction in the region through 2014, with King Abdullah Economic City, King Abdulaziz International Airport, Haramain High Speed Rail and the Riyadh Metro being just a few of the mega-projects taking place.

There are, in fact, six new “smart” economic cities planned at a cost of over $110bn to support facilities for 4.5mn people.

Moreover, the government has also increased its focus on religious tourism in Makkah and Madinah, extending development to regions surrounding the area.

Makkah Gate, for instance, is a new city development aimed at housing 600,000 people and comprising 45 districts including educational institutions, government offices, shopping centres, housing units and a national park.

Plans are underway for a 1.6mn m2 "Pilgrim City" in Madinah with a capacity for 200,000 pilgrims during Hajj and Umrah seasons that will include hotels, apartments, railway, government offices and hospitals. Shortages in the affordable housing sector have also become acute.

According to Ventures Middle East (ME), the Kingdom needs nearly 5.5mn new homes by 2015.

“The utility sector will have significant growth to cope with demand, and the need for effective and affordable housing has become essential within integrated communities,” Bordui said.

Saudi Diyar expects more developers to get involved with the affordable housing sector, and/or expand on smaller developments to offer more affordable homes that will provide a more financially stable alternative to the mid-income market.

“The government used to give money for people to develop their own homes or provide small plots in the middle of nowhere without any infrastructure. This is no longer the case,” Al Hatti said.

Now loans and homes target developed areas and there is a good amount of urban planning taking place. “The Ministry of Housing did a smart thing lately, assigning developers the task of building to modern specifications a 5mn m2 area in Riyadh. It’s sizable and in the past unheard of.”

Building awards for the construction sector reached $27bn in 2014.

In terms of infrastructure, the Kingdom continues to assign billions of dollars towards development of transport and utilities networks, including new roads, railways, and sea ports, as well as for the rollout of infrastructure at new industrial cities such as Ras Al-Khair.

Airport infrastructure works include expanding capacity in Riyadh's King Khaled International Airport, Jeddah's King Abdulaziz International Airport and the construction of a new airport in the holy city of Madinah.

The upgrading of social infrastructure includes educational infrastructure investment and the development of
healthcare systems. This will create a lot of pressure on suppliers of steel, cement and labour, but will it lead to inflation? Not according to Al Hatti.

“The Commerce Ministry is very strict, but well-liked. If any of the big players started to manipulate prices, the minister will issue a decision that will embarrass any supplier and publish it in newspapers and then later in tweets. It’ll all be monitored,” said Al Hatti.

So far, spending on these massive projects has not translated into higher inflation, which was contained at 3.35% in 2013 and 2.8% in 2014. Contracts awarded for infrastructure in 2014 reached $17.8bn.

The Kingdom is reportedly planning to spend more than $100bn by 2020 on nuclear plants, with 16 nuclear reactors being built at a projected cost of $7bn each.

The energy programme is geared towards supplying much-needed water and power resources. KSA has a large agricultural and industrial base, and faces growing demands for water due to increasing industrialisation and urbanisation.

Power production capacity is set to increase to more than 120 gigawatts (GW) by 2030, as new mega-cities will require massive energy resources. New projects will drive up electricity demand to an estimated 67GW by 2020, Ventures ME reports.

The large-scale investments across the power transmission and distribution segments by the Kingdom from 2010 to 2018 will run at a cost of around $80bn, making it the most attractive segment for investors. Saudi Arabia also consumes nearly 7mn m3 of water per day, of which 60% is desalinated.

Saudi Arabia's National Water Company plans to spend $66.4bn in water and wastewater projects over the next seven years as water consumption grows faster. Awarded contracts for the sector has reached $12.5bn so far in 2014, according to Ventures ME.

Saudi Arabia’s industrial sector is dominated by petrochemicals.

The government will continue lending support in 2015 to industrial development, including implementation of required infrastructure, the continued build-out of Jubail and Yanbu industrial cities (with the $20bn Sadara complex in the former now 75% complete) and the development of other regions through the Saudi Industrial Development Fund (SIDF). Awarded contracts in 2014 reached $7.9bn.

A note of concern has been expressed in recent weeks about the recent sharp drop in oil prices and the impact this could have on government spending. Oil prices have dropped to their lowest levels in three years, having dipped to below $70 per barrel.

However, Al Hatti believes cpncerns have been overplayed.

“Knowing that the cost of production per barrel is around $5, there is plenty of revenue room to spare to have any large effect on construction spending,” he said.

Sustained investment in Saudi non-oil sectors has also begun to account for up to 14% of government revenue, according to Ventures ME.

Saudi Arabia is reported to have exported close to 1.84bn barrels in the first eight months of 2014, or 7.5mn barrels per day, generating nearly $200bn.

Ventures ME reports that as of January 2014, Saudi Arabia had proven oil reserves of 263bn barrels, 1/5 of the world’s total, and the world’s fifth-largest gas reserves at 8,235bn m3. Plenty in the tank.

“Government spending on infrastructure, health, education, housing, transportation, energy and alternative energy in 2015 will keep most construction companies busy for the next five years,” said Saudi Oger vice-chairman Ouday Al Shaikh. “There are opportunities in every sector but we believe health, infrastructure, and transportation will capture the most attention.”

As for contractor awards for the oil & gas sector, they have reached around $6bn - a substantial decline from the $22.3bnn spent in 2012, but Saudi Aramco’s CEO Khalid Al-Falih recently announced plans to invest $40bn over the next 10 years to maintain stability in oil and to double gas production.

A recent law permitting international contractors to compete with little restrictions in the Saudi market promises positive change for the sector.

“Internationals coming to the KSA market is a good thing as we will benefit from their expertise in R&D, process engineering and IT and put together resources to win complex bids,” said Nesma’s Adel.

Foreign contractors cannot be totally autonomous because they still need a local partner, local manpower and logistical know-how – not to mention strong government relations.

“I love the decision to open up the market. In terms of Class A contractors, their numbers counted no more than one hand’s fingers, but now we have a situation that will create competition , enhance services and create better quality products,” said Al Hatti.

He added visas are still slow going but that there were new commitments to issue them within 16 days from application.

“Beyond that period, you would still need a couple more signoffs, but it’s coming together especially with a new contingent of Saudis proactively participating in governance,” assured Al Hatti.

“If anything, the action helped clean up for good black market visa traders.”

More delays are expected as a result of the recent crackdown on illegal labour, coupled with strict Saudization procedures, which in 2014 encumbered companies with unplanned costs.

Allan El Damen, vice-president responsible for supply chain at El Seif Engineering Contracting Company, said: “I think 2015 will see construction peaking and spilling over into 2016 and this will create big demand for materials and labour.”

This will put pressures on the workforce as hundreds of thousands more will be needed for both skilled and unskilled categories.

“When someone’s business goes from taking SR1bn ($266mn) to SR5bn ($1.33bn), finding staff is an issue and there is big demand on middle management where the shortage will be heavily felt,” said El Damen. El Seif is looking for new recruitment sources in places like Vietnam and Nepal, as improving conditions in India and Pakistan are keeping some workers there.

“We always face the challenge of hiring skilled and qualified staff for our mega projects, especially in boom times, however good planning and open communication channels between the contractors and the clients tend to close these gaps and reduce the impact on the projects’ progress,” said Al Shaikh.

Saudi Oger is compliant with Saudisation thanks to investing in a “Training Institute” in 2007, providing the company with a steady flow of skilled Saudi construction and maintenance staff.

Nesma believes labour issues might have an increase on overall project costs but not on delivery of projects – at least not for larger market players who benfit from economies of scale in machinery, manpower, and financial resources.

“These companies carry the load of big projects in the country, but delays can arise when the government issues decrees asking to complete a project in a fraction of the time it takes in other countries, which often happens,” said Adel. This opinion was echoed by El Damen.

“The government is on the fast track as the country tries to catch up on some sectors not progressing at the right pace or suffering project delays.”

He said a company needs to have proper resources, planning and equipment to survive the onslaught and create trust and credibility with authorities.

With Saudisation and the crackdown on illegal labour settling down and construction winds picking up, it will be fun to see how foreign competition, and shortage of manpower play out in the 2015 construction scene. We’ll keep an eye on inflation.

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