Labour challenge as Saudi’s mega projects gather pace

• Residential and hospitality projects in line with Vision 2030 strategy
• Hard to find construction workers, especially skilled personnel
• Construction material costs peaked after Russia’s invasion of Ukraine

The transformation of Saudi Arabia shows no signs of slowing down, with the world’s first 2km tall tower reportedly the next mega project in the works.

Neom, the Red Sea Project, Amaala and Diriyah Gate are under way and the kingdom’s construction market is heating up, with $31 billion worth of contract awards in the first 10 months of this year.

The kingdom currently holds a 35 percent market share of the $87 billion awarded across the Middle East and North Africa.

• Saudi giga-projects: ‘enough work for every sector of the industry’
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Among the plans is the world’s tallest tower, twice the height of Dubai’s 828m Burj Khalifa, proposed for a 18sq km master-planned area in the capital city of Riyadh, according to a Middle East business intelligence report.

Experts say the mega-project boom demonstrates the country’s commitment to driving economic diversification in line with its Vision 2030 strategy, but they also caution that a lack of skilled workers could lead to some project delays.

According to JLL’s Q4 Saudi Construction Market Intelligence Report, construction output growth in the kingdom is anticipated to rise by 3.2 percent in 2022, with a further annual average growth rate of 4 percent between 2023 and 2026.

The growth forecast aligns with Saudi Arabia’s housing demand which is expected to increase by more than 50 percent to reach 153,000 houses a year by 2030 as the kingdom aims to raise home ownership to 70 percent by the end of the decade.

In 2017, more than 1.6 million Saudi nationals were on waiting lists for government housing programmes.

JLL said that Saudi Arabia’s pipeline value of unawarded projects is estimated at $1.1 trillion, which includes projects from the study stage through to the main contractor bid. 

Approximately 70 percent comprise construction sector projects with residential, cultural, leisure and hospitality as sub-sector leaders, which is the driving force behind the Vision 2030 strategy. 

In September Knight Frank described Saudi Arabia as the biggest construction site the world has ever seen on the back of the number of real estate and infrastructure projects underway since the launch of Saudi Arabia’s National Transformation Plan in 2016.

But Nicholas Maclean, managing director of real estate consultancy firm CBRE Mena, said the kingdom could run into challenges.

“The depth of the labour pool is a fundamental issue and I think some companies may be held back by this,” Maclean said.

“The problem is that in the region more generally, not just Saudi Arabia, all the teams are fully deployed on ongoing projects and are at capacity.

“Many companies overseas are also already busy with projects that were delayed during Covid.” 

Neo Joseph Sibiya, economist for global construction at S&P Market Intelligence, said: “The challenge for the construction outlook in the kingdom is the availability of construction workers, especially skilled personnel, and rising construction material prices. 

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“Both factors are likely to be mitigated by further inflows of construction workers, predominantly from countries in south Asia and east Africa, and by the current fall in construction material costs following a commodity price peak in the aftermath of Russia’s invasion of Ukraine.

“The sheer demand could still lead to shortages for both materials and workers in the kingdom in the near term.”

JLL noted that global economic volatility in the first two quarters of 2022 also created challenges in the Saudi construction market in terms of delivery lead times and instant price increases, with suppliers reluctant to guarantee prices for extended periods of time.

It also indicated improvements during Q3, implying that price peaks have passed but cost increases remain a “significant risk”, it added.

Although commodity prices are softening or have already flatlined, the kingdom’s construction sector is heating up, putting pressure on the existing supply chain, and highlighting the need for greater competition to complete the pipeline of projects, JLL said.

While inflation projections for the country are relatively soft in comparison to global averages, Saudi Arabia and the wider Mena region rely on importing construction materials from high inflationary countries, which affects construction material prices.

Last month analysts at the Economist Intelligence Unit (EIU) forecast a period of strong growth in the short to medium term for the GCC construction sector, outperforming the wider economy with expansion in the region of 3.5 to 4 percent a year on average in 2023‑24. 

They said in a report that the upbeat outlook reflects the “boost to available project finance from record high energy export revenue and the ongoing pursuit across the GCC of long-term energy and non-energy sector development plans”. 

The EIU said total contract awards for projects across the GCC rose back above $100 billion last year following a pandemic-induced dip in 2020 when the value of total awards slipped below $70 billion.

It added that GCC states awarded about $40 billion worth of contracts in the first half of 2022.

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However, analysts cautioned that the ripple effects of Russia’s invasion of Ukraine, global monetary tightening and an economic slowdown in China could create strong headwinds in the region. 

“Looking ahead, construction companies operating in the GCC will need to account for potential risks associated with further Covid‑19 outbreaks, additional supply-chain disruption and the prospect of rapidly rising input and investment costs,” they added.