Staff Report
Dubai, UAE
The total value of announced infrastructure, housing, utility, transportation, and construction projects in Saudi Arabia has reached a whopping US$1.5 trillion (Dh5.5 trillion), which is way higher than the country’s economy, according to MEED Projects, a major construction project tracker. This accounts for 39 percent of the total project value in the Middle East and North Africa (MENA) region, worth US$3.9 trillion (Dh14.43 trillion).
Saudi Arabia’s nominal Gross Domestic Product (GDP) will reach US$1.1 trillion this year. The higher project pipeline reflects the country’s drive to grow the economy faster and diversify it by 2030 – as part of its Vision 2030 – that will transform the economy and reduce dependence on fossil fuel and make it more sustainable.
The giga projects and infrastructure developments will contribute towards fulfilling Saudi’s Vision 2030. According to the Q1 2024 report by Jones Lang LaSalle (JLL), the country’s construction sector represents 62 percent of the pipeline valued at US$950 billion (Dh3.49 trillion), signalling an economic boost that the country will experience in the coming years.
The strong pipeline of high-value opportunities has created a thriving projects market in the region with KSA’s economic diversification goals further strengthening its position as a frontrunner in the MENA region. As per the RICS Global Construction Monitor, the upward trajectory of the Construction Activity Index (CAI) in Q4 2023 denotes a strong expansion of the construction sector.
According to MEED Projects, the sector reported the highest value of awarded projects in 2023, reaching US$97 billion (Dh356 billion) compared to US$60 billion (Dh220 billion) in 2022. This value represents only 6 percent of the potential pipeline, highlighting substantial opportunities within the sector.
Laura Morgan, Market Intelligence Lead MEA, JLL, said, “Economic growth, burgeoning population, and modernisation have made Saudi Arabia the most active player in the Middle East construction market, with the real estate sector leading the Kingdom’s projects market in 2023. The impressive resilience of the sector in the face of global uncertainties points to the success of the Kingdom’s economic diversification strategies. As market dynamics continuously evolve, the impact of construction costs on the sector’s robust growth cannot be ruled out, and other market constraints such as shortage of skilled labour, resource availability, and an overheating market could place undue pressures on the Kingdom’s construction activity.”
In terms of economic assessment, a notable improvement in the non-oil economy resulted in growth in the first quarter of 2024. The Kingdom’s on-going drive for economic diversification reached a new milestone last year when non-oil activities accounted for 50 percent of the country’s GDP, surpassing the contribution of oil activities (33 percent). Tourism, which contributes seven percent to the non-oil GDP, showcased strong performance in 2023 with domestic and international tourists generating US$66 billion in expenditure while in construction, the leisure and hospitality sectors remained dominant, representing US$4 billion (Dh14.67 billion), or 23 percent, of the total value of projects awarded as of Q1 2024.
JLL anticipates that sustained performance will drive the GDP growth to 2.1 percent and 5.9 percent in 2024 and 2025, respectively, further cementing KSA’s position as a frontrunner in the MENA region.
However, the country’s Purchasing Managers’ Index (PMI), which measures the prevailing direction of economic trends in manufacturing and services, recorded a slight decline. Riyad Bank noted that the PMI dropped to 57.0 in March 2024 from 57.2 in the previous month. A decline in employment levels was also evident as construction companies sought to manage costs and cash flow in Q1 2024.
The lingering shortage of skilled professionals and general labour to keep up with the pace of construction poses a significant risk in Saudi Arabia. Meanwhile, the RICS report identifies an overheating market exerting pressure on supply chains, resource availability, and project timelines, leading to more price increases. The JLL report has identified several factors influencing volatile construction costs including global economic headwinds, capacity constraints in the local market, rising shipping costs, and the escalation of interest rates.
Despite recent disruptions and supply challenges, JLL’s analysis reveals stable material availability in Q1 2024. Although there is still significant reliance on imported materials like glazing, facade systems, and timber in the local and regional markets, the medium- to long-term outlook indicates improvements in local manufacturing capabilities, stemming from demand generated by major projects in Saudi Arabia.
Ends
Also read: IHG expands portfolio in KSA with Hotel Indigo Abha
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