Real Estate & Construction

Back on Track

Business as usual?

Massive construction growth in line with plans to transform Riyadh into a major global city has prompted a fresh take at the competitive environment in which to build.

In a recent interview on the sidelines of the Future Investment Initiative (FII) gathering in Riyadh, Crown Prince Mohammed bin Salman revealed ambitious plans for the capital. Starting with the truism that growth begins in cities—which account for 85% of global economic activity—he noted that Vision 2030 foresees the city ranking among the world’s 10 richest metropolises, a giant leap from 40th today. This entails a projected doubling of the city’s population to roughly 15-20 million and expanding home ownership from today’s 50% to 70% by 2030.

Getting the story across…

Today, Riyadh accounts for half of the Kingdom’s non-oil economy in a competitive commercial climate where, for one, job creation is 30% cheaper than in other cities. Among other advantages is the 30% lower cost of laying down infrastructure. All this has profound consequences for employment across the economic sectors besides construction, which, far from slacking, is set to accelerate further. Part of that story, inevitably, is the integrity of the construction sector itself, not least in light of COVID-19’s uncertainty.

…with a clearer landscape to build on

Now, the vertiginous—literally and figuratively—demand for the construction sector in accommodating the population, both at home and at work, and for the infrastructure springboard required by growth, has presaged stricter attention to the regulatory environment and project procurement process. The resulting legislative initiatives aim to both protect the customer and incentivize the private sector to shoulder some of the exorbitant costs of creating tomorrow’s Riyadh.
The Saudi Contracting Authority (SCA) has been tasked in part with showcasing most public-sector projects to contractors. In February of last year, “some 35 public and private entities presented 850 projects worth more than SAR600 billion during our event, the Future Projects Forum (FPF),” explained SCA Governor Thabet Mubarek Al-Sawyeed in a TBY interview, “the largest platform for projects in the region.”

SCA’s activities are divided into 34 initiatives “that target the sector’s problems and split them into three different groups: regulatory; value-added services, and internal priorities.” Sixteen regulatory initiatives create a rulebook for tomorrow to standardize contracting, including licensing contractors and standardizing contracts to curb incidents of legal action. This ensures greater contracting sector transparency, enabling the client to better know who they are inking contracts with.
Fuller details of the new strategy are explained elsewhere in this chapter, though in essence, they “uplift the contracting sector’s capabilities and foster innovation, as well as provide high-impact solutions to the contracting sector and build a financially sustainable foundation for future growth.”

Mitigating COVID-19’s economic drop kick

The pandemic is definitively one of those events the term force majeure was invented for. Indeed, the risk is of a buildup of disputes that not only clog up the pipeline but also dent investor sentiment. And with many contractors claiming force majeure to justify delays and cost increases, the Saudi government has taken steps to eliminate any gray areas. In February, the Supreme Court of Saudi Arabia issued a set of principles pertaining to contracts impacted by the pandemic. Among the resulting decisions is the liberty of Saudi courts to amend contract obligations by increasing the contract price where the pandemic increases the price of materials, labor, operating costs, and so on for contractors. Meanwhile, employers also have the option to seek suspension of performance or complete contract termination in light of a price increase.

To create an equitable working environment, the new stipulations depend upon clear criteria. They cover contracts where the pandemic has had a “direct and unavoidable impact,” whereby the pandemic alone factored in the contract dispute. Furthermore, according to the latest decision, the “evaluation of damage shall not exceed the period of the pandemic’s actual impact.” All else is naturally governed by the rules of shariah, the primary source of law under the Saudi constitution.
Safe as houses

The housing ministry recently took the construction sector to task, halting 61 projects that did not observe off-plan sales regulations. Such sales are licensed in order to protect buyers who make advance payments for units not yet built. With so much positive speculation surrounding the vast ambitions of Vision 2030, more and more people have become willing to buy property in this manner. Market specialist Knight Frank puts the figure at 60% of total future supply in Saudi Arabia.
Given the wide-ranging plans in store for the Kingdom, it is small wonder that over 20 multinationals across the industrial spectrum opted to open regional headquarters in Riyadh. Construction is clearly set to flourish in light of investor attention, real liquidity, and the legislative amendments seeking a win-win for client and contractor alike.