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Saudi is ‘leading light’ as construction sector booms

The Line aims to eventually accommodate 9 million people on a footprint of 34 square kilometers Neom media gallery
The Line in Neom aims to eventually accommodate 9 million people on a footprint of 34 sq km
  • Kingdom scored +62% in latest Construction Activity Index
  • Jeddah planning $90 billion worth of development projects
  • Robust momentum could mean labour shortage and hyper inflation

Construction activity in Saudi Arabia was the highest in the world in the final quarter of 2022, with the kingdom described as a “leading light in the Mena region and globally”.

A new report by the Construction Activity Index of the Royal Institution of Chartered Surveyors (Rics) revealed that the 12-month projected profit margins of Saudi firms were a “clear standout metric” with a +62 percent reading.

This was the second highest reported since the survey began in Q3 2018 and up from the +49 percent reported in Q3 2022.

Construction company executives working in the kingdom told the survey that they continue to anticipate “robust” employment growth over the year ahead. Last week 64 companies sent expressions of interest in a project to build the new Justice Ministry courthouse complex in the holy city of Mecca.

However, construction bosses highlighted a potential labour and skill shortage as more workers are needed to help build multi-billion dollar giga-projects such as Neom, Diriyah, Amaala and the Red Sea Project.

They also voiced concerns that the sector’s strong growth could trigger the possibility of hyper inflation in the next 12 months due to the high volume of contract tendering across the country.

A combined $110 billion worth of project contracts are expected to be awarded in the GCC this year, with Saudi Arabia accounting for more than half of the total. The kingdom makes up $64 billion of the combined value, according to Middle East data provider Meed Projects’ 2023 outlook. 

Last year, Knight Frank described Saudi Arabia as the biggest construction site the world has ever seen as projects valued at over $1.1 trillion are under way in the kingdom.

It said the Red Sea city of Jeddah has $90 billion worth of development plans including 89,000 homes, more than 2,700 hotel rooms, 1.4 million sq m of retail space and 250,000 sq m of new offices. 

Major infrastructure projects in the city include the expansion of Jeddah Islamic Port and the Saudi Land Bridge Project.

When disaggregated at the country level, Saudi Arabia displayed the strongest Construction Activity Index (CAI) readings relative to all other countries covered in the index during Q4.

How the scores are calculated
The CAI is created by taking an average of current and 12-month expectations of four series: residential workloads, non-residential workloads, infrastructure workloads and profit margins.

The net balance score is reached by the proportion of respondents reporting a rise in a variable minus those reporting a drop. Net balance data can range from -100 to +100. A positive net balance reading indicates an overall increase while a negative reading indicates an overall decline.

A total of nearly 3,800 company responses were received globally.

“Overall construction activity continues to rise firmly across the Middle East and Africa in aggregate, with the latest reading within the region surpassing all others on a global comparison during Q4,” Tarrant Parsons, senior economist at Rics, said.

“In particular, the construction industry in both Saudi Arabia and the UAE shows robust momentum at present, with the former being supported by Vision 2030 and the associated giga projects in development.” 

He added: “Forward-looking indicators from the survey point to activity continuing to expand at a solid pace across the region over the coming 12 months, led by especially strong growth within the infrastructure sector.”

Construction professionals in the wider Middle East and Africa was generally more positive than other regions around the world. The headline CAI reading for the region in Q4 was +25 percent, an increase on the +20 percent recorded in Q3. 

While the CAI remained robust for Saudi Arabia (+65 percent) and the UAE (+39 percent), Qatar was in negative territory with a reading of -5 percent, a reflection that Fifa World Cup-related construction was completed earlier last year.

Firms in Doha said they expected a fall in activity during the first nine months of this year, before rising again in Q4.

Rics said the coming 12 months is perceived to be more positive across the region and workloads are expected to gain momentum across infrastructure, private residential and non-private residential. 

Although the tone from regional respondents was generally upbeat, financial constraints and the cost of materials remain at the forefront of the issues identified, especially in Oman. 

Companies in Muscat said competition and the price of materials are increasing while delays in receipt of payment was also cited as a “critical issue”.

buildings, constructionUnsplash/Kate Trysh
Building firms in the Emirates saw an improvement in profit margins. Picture: Unsplash/Kate Trysh

In the UAE, construction companies reported a rebound in profit margins (+6 percent) in Q4 after negative views in the preceding six months, as the overall CAI score rose from +37 percent in Q3 to +49 percent.

This is the first positive profit score, and the highest reading since the UAE construction monitor was established in Q3 2018.

The 12-month expectations for profit margins are also strongly positive, with a net balance of +46 percent, up from +23 percent in the previous quarter.

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