Real Estate & Construction

Solid Steps

Construction

A symbol of Saudi Arabia’s soaring ambitions, the Kingdom Tower is currently under construction in Jeddah. With a projected height of 1,000 meters, it is set to become the world’s […]

A symbol of Saudi Arabia’s soaring ambitions, the Kingdom Tower is currently under construction in Jeddah. With a projected height of 1,000 meters, it is set to become the world’s tallest manmade structure by 2018. The mixed-use giant will be the main focal point of the future multi-billion dollar waterfront development known as Kingdom City.

The Citi Bank MENA Projects Tracker in April 2014 estimated that the value of construction projects across the Middle East amounted to some $2.5 trillion, 90% of which was situated in the GCC. Saudi Arabia was the region’s leading market with a total value of some $784 billion. Note, however, that many of the planned projects were still in the pipeline. Only some 56% ($1.4 trillion) was actually under construction. It should be remembered that not all of what is announced in the GCC region also materializes.

The Saudi government budget for 2014 foresees expenditures of $228 billion, up from nearly $219 billion in 2013, a large part of which goes to construction. “Budget appropriations will continue to focus on investment programs that enhance long-term, strong, and sustainable economic development and employment opportunities for Saudi nationals,” according to the Saudi Finance Ministry. “Specifically, the focus will be on infrastructure, education, health, social services, security services, municipal services, water and water treatment services, and roads and highways.”

Currently, some 25% of Saudis between 20 and 30 years of age are unemployed. The Labor Ministry estimated the country needs to generate some 5 million jobs by 2030 to offer the country’s young and growing population a solid future. In addition to creating jobs, the authorities, in 2013, started the implementation of the Nitaqat, or Saudization program, which requires companies to employ at least one Saudi national for every 10 foreigners.

HOMES & JOBS

With a population growth rate of some 2.7% in 2013 and some 40% of the Saudi population being under 14 years of age, there is a growing demand for housing in general, and affordable homes in particular. In 2011, King Abdullah announced a $67 billion social housing scheme, which aims to construct some 500,000 dwellings across the country. The program has met with some delays, but the Ministry of Housing, in April 2014, finally launched the online registration process.

Seeing the growing need for jobs, the Saudi authorities seek to strengthen and diversify the country’s industrial backbone. Founded in 2001, the Saudi Industrial Property Authority (MODON) is responsible for managing and developing a string of industrial cities, which offer integrated infrastructure and an attractive fiscal climate to attract private investors.

Currently, there are 32 of such cities, of which some are still under development, with 3,000 factories employing over 300,000 employees. The target is to reach 40 industrial cities over the next five years, offering a total of 160 million sqm of industrial terrain. Earlier this year, MODON launched the second construction phase of the $40 billion Sudair Industrial Park north of Riyadh and announced the upcoming Salwa Industrial City near the Qatari border, which eventually could accommodate up to 10,000 factories.

In February 2014, the Saudi Arabian Mining Company signed a multitude of contracts with a combined value of some $13 billion to build the mining and factory city of Waad Al Shammal to exploit the rich phosphate deposits near the Jordan border. Waad Al Shammal aims to become a global producer of fertilizers, ammonia, animal feedstock, and detergents.

Another flagship project is the mixed-use King Abdullah Economic City (KAEC) north of Jeddah. Currently under construction, the city includes a major port, educational, financial, and residential districts, as well as an industrial. Total investment may amount to $100 billion by 2030, when the KAEC is set to house and employ up to a million people. A similar $27 billion initiative, the Jazan Economic City, is underway on the southern coast.

COSTS & CHALLENGES

The Saudi construction boom has so far not led to a hike in construction prices, yet challenges remain. According to the 2013 EC Harris International Costs Construction report, Saudi Arabia ranks as the world’s 21st most expensive country, behind Qatar and the UAE. When the country was hit by cement shortages in 2012, the authorities reacted swiftly by introducing an export ban, followed by subsidized imports in April 2013. In addition, the government announced the construction of up to four new cement plants. In 1H2013, the cement price amounted to $63 per ton on average. Installed capacity was at some 56.2 million tons in 2012, according to a report released by AlJazira Capital in cooperation with Yamama Cements, while projected capacity was 63.1 million tons by YE2014, rising to 79.2 million tons by YE2015. Consumption over the 2007-2012 period showed a CAGR of 11.6%, growing to 53 million tons, almost meeting full national capacity, though regional pressures saw the need for subsidized imports. The central bank, SAMA, estimated that the domestic production of cement equaled 42.19 million tons in 2012 and 42.83 million tons in 2013, demonstrating the import gap.

The cement sector has faced one immediate hurdle in expanding capacity to meet growing demand, and that has been due to the inability of some plants to secure an adequate fuel or gas quota from the Ministry of Petroleum. In response to concerns over the size of domestic capacity, the government has sought to ensure that all companies maintain a two-month strategic reserve of cement and clinker, with any shortfall to be covered by imports to guarantee a steady supply of this essential building material. In addition, some SAR3 billion has been allocated by the government to increase total capacity by some 12 million tons, much of which will be arriving over 2015.

Saudi Arabia meets about half of its annual steel consumption needs. The Saudi Iron and Steel Company (Hadeed) announced, in April 2014, that it plans to expand its production capacity to reach an output of 10 million tons by 2025, up from 6 million tons in 2013. Over that year, it managed to increase its output of steel rebar to 4 million tons following the coming online of a 500,000-ton capacity extension at its Yanbu facilities. Similar to the cement sector, there has been an export ban on steel rebar products since 2008, though the ban does not extend to flat steel products. In order to reduce Saudi Arabia’s reliance on imports, the government has been encouraging either existing plants to expand, or new investors to enter the market. In response, the Kalliyath Group of India announced plans in early 2014 to establish a 750,000 ton/year rebar facility in the southern city of Jazan, joining Solb Steel, which is currently producing some 1 million tons of rebar annually, though has big expansion plans for the future.

While the rising level of construction costs does not pose an immediate threat, the Saudization program has proven a huge challenge for the sector. Saudi Arabia started implementing the program in 2013. According to the authorities, up to 1 million illegal foreign workers were expelled. Notwithstanding the scheme’s good intentions, it poses an obstacle for the construction sector in particular, as most laborers are foreign nationals, while most young Saudis are not willing to do just any job. Critics claim the workers issue is a major cause for the many delays that characterize the Saudi construction market.