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Leaders KSA: Oil drop alters Saudi funding models

As oil prices falter and impact liquidity in Saudi Arabia, private sector developers will have to lead the charge in bringing a financial overhaul in the Kingdom’s construction sector

Left to right: Andrew body, Mouchel; Hani Tammimi, Colliers; Suhail Arfath, Autodesk; Simon Ingvartsen, Henning Larsen; and, Turki Alkhalaif, Cayan Group.
Left to right: Andrew body, Mouchel; Hani Tammimi, Colliers; Suhail Arfath, Autodesk; Simon Ingvartsen, Henning Larsen; and, Turki Alkhalaif, Cayan Group.

The time to cast wide nets in the hope of grabbing as many mega-projects as possible in the Saudi Arabian market appear to be over. The sanctity of everlasting funds being pumped into building the country’s infrastructure has been blemished by the mind-numbing economic realities affecting the Kingdom, and the GCC region as well.

The main culprit is low oil prices.

The good news is that tough times are associated with not only belt-tightening, disruption, and weakened confidence, but with resolute efforts to be more selective and effective in conducting business. In this regard, the Saudi market is no different.

Mouchel Consulting’s managing director, Andrew Body, has spent the last seven years in Saudi leading his company’s infrastructure engineering business. Body discussed Saudi’s project pipeline in light of dwindling oil prices at Leaders in Construction Summit KSA.

“Conversation about innovative financing and thinking how we can do more with construction in Saudi is what resonates with us,” Body said. The New Zealander added his is a country of four million people with a road network sized similarly to the UK‘s, but with 56 million less people to pay for it.

“So we didn’t have a lot of money to pay for our roads, and became very good at maintaining and getting the most out of them,” Body added. Speaking of Mouchel’s operations in the GCC, Body said: “We still believe there are opportunities here where two-thirds of our portfolio in the region exists, but we don’t want to bite off more than we can chew.”

He said that Mouchel Consulting has been selective of the clients it works with, given its understanding that they are mostly government agencies experiencing increased budgetary pressure.

“The next phase for us is about picking those clients you believe you can develop good relations with, and can create a good fit between the services you can provide and those they need,” Body added.

Hani Tammimi, the Riyadh Director of advisory practice at Colliers International covering central and eastern provinces, said that his company’s position on the Saudi market is neutral instead of being positive or negative.

“Liquidity is not the issue,” Tammimi said.

“The government has a debt-to-GDP ratio of 3% and there’s still a long way to go before talks of cash availability arise, but it’s difficult to predict the future,” he continued.

Tammimi added that the Kingdom’s government is incentivising the market with measures like land taxes, which could balance opportunities in certain real estate asset classes.

“The key point is that developers are becoming more mature, and sophisticated about their needs. They go for a differentiated concept, and target a niche area within each asset class. They look carefully to their segments, and are geared for price, and quality leadership in each development.”

Suhail Arfath, industry manager –consulting Autodesk’s Middle East and Africa operations, said his company is “positive” about the Saudi market headed for quality and efficiency.

“There are real targets to consider and technology will come into play to drive change, prevent financial losses, and scheduling delays as clients expect projects to be built on budget and on time,” Arfath added.

Simon Ingvartsen, design director at Henning Larsen, said there was once a tendency in the market to develop properties without sufficient studies.

“I think there should be growing concern or more caution in investing in real estate as clients are making sure that before they invest in anything, their assets will be worth something in 20 years’ time and that they have a full retorn on investment in five to seven years,” Ingvartsen said.

He added that conservative investors are keen on carrying out advance studies before moving ahead with investment. “This is better for us, because there is a difference between rushing to get all the tender documents on time and trying to achieve long-term investment targets backed by well-documented studies.”

Body said talking to GCC clients about road management and asset management wasn’t drawing interest even as early as two years ago.

“But they are definitely starting to get interested now, assuming more responsibility as public officials to build the best networks and environment for residents, and wanting to get more from their current assets.”

Ingvartsen added: “Instead of maximum allowable built up area on a site, we are discussing with clients ways to find the success criteria of the project. It’s a slow process that requires a cultural change.”

Turki Alkhlaif, director of business development at Cayan Group, said the drop in oil prices has had both a psychological effect – reflected when Saudi stock market Tadawul faltered – and an actual effect on the ground with a rethinking of priorities leaning towards projects’ functionality.

Tammimi believes there are lucrative segments in the Saudi construction market. He said that, in the retail sector, investors want to explore new products in the market such as super regional malls and community centres, and that the residential compound sector is solidly developing in modern cities.

Body added infrastructure clients say they will be financially-pressed in the near future.

“Even so, that’s the transparency we are looking for when it comes to cash flow. We have ways to deal with that in the short term, but for in the medium term, I believe there are opportunities to introduce different forms of financing,” he concluded.

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