Saudi bank credit to rise further as construction boom continues

The amount of money being invested into infrastructure projects will encourage banks to increase their lending to construction contractors

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Saudi bank credit for construction activities, which rebounded in 2010, will continue to grow into 2014, the National Commercial Bank said in its report on “Government and Private Financing Accelerate the Execution of Infrastructure Projects.”

The report noted that the amount of money being invested into infrastructure projects will encourage commercial banks to increase their lending to construction contractors. With many mega-projects in the pipeline, bank lending will play a critical role in the growth of the sector.

The financing landscape is witnessing the use of financing alternatives besides traditional bank lending. The emergence of sukuk and PPPs have given both, government and private entities, the ability to diversify their financial exposure, while still hedging against project risk.

These financing alternatives also give government entities, like SEC, the option to redirect available funds to transmission and distribution (T&D), while reallocating expenditures from capital expenses to operational expenses. This helps avoiding mismatches between medium-term financing and long life public-private projects.

The private sector is expected to take on a more significant role in the development of the Kingdom’s infrastructure to help ease the pressure on the government. The government’s desire to allow private entities to take on a larger share of partnerships reflects the size of the projects that are underway and signals that the government is overburdened with the pressure to meet its growing commitments.

Following the global economic crises the push for non-residential construction significantly grew from 5 percent of nominal GDP in 2006 to an estimated 6 percent in 2013. GFCF is expected to increase its share of GDP over the medium-term as the injection of SR250 billion into the housing market will have a lasting impact on the economy.

Another indicator of the growth of government spending into the infrastructure sector is the pace at which construction contracts have been awarded. The value of awarded contracts through Q3’13 indicates that this growth pattern is unlikely to relent as numerous mega-project are still taking place.

The infrastructure sector has been prioritized by the government as a focal area of investment. The budgetary allocations in the 9th nine-year plan and the 2013 budget signifies the need for improved and expanded infrastructure facilities. Furthermore, the King’s royal decrees announcements in 2011 provided additional injections of expenditures towards infrastructure projects.

From a social infrastructure standpoint, housing represents a major significance in the Saudi economy as the supply and demand imbalance has caused home owner-ship to decline.

High land prices coupled with limited financing schemes, and real estate developers’ focus on the affluent segment has left a gaping hole in the supply of affordable housing. Additionally, the much anticipated mortgage law along with its by-laws recently issued by SAMA and Ministry of Justice, which has been widely hailed as the savior to the housing problem, have been approved.

However, key by-laws related to the mortgage financing and enforcement laws raise some concerns and still need to be tested in practice, thus keeping commercial banks risk averse. The King’s royal decrees, as previously mentioned, was aimed at bringing the supply gap down to more reasonable levels. The SR250 billion is aimed toward providing more affordable housing options to the middle to low income segment.

While the massive injection into the housing market will stimulate the development of affordable housing units, we do not believe that supply will meet demand over the next 10 years. However, the injection will bring the imbalance much closer to equilibrium as more than SR1.3 trillion will be needed to construct the forecasted demand of 2.4 million housing units between 2010-2020.

Accounting for the royal decree’s additional spending on top of the historical pace of residential expenditures will yield SR900 billion. This leaves a windfall of SR400 billion in needed investments.

Over the last several years, the construction industry has witnessed a boom in contract awards and ongoing construction activities. As part of the Kingdom’s initiative to diversify its economy away from the oil and gas industry, the construction sector has benefited from heavy expenditures.

The value of awarded contracts in the construction sec-tor between 2008 and the third quarter of 2013 reached a staggering SR1.2 trillion, of which 68 percent or SR805 billion was spent on infrastructure related projects. The NCB Construction Contracts Index, which is measured on a six month moving average of awarded contracts, reflects the growth of the construction activities. Using January 2008 as its base, the Construction Contracts Index (CCI) reached 494.09 points as of September 2013.

The breakdown of the expenditure between 2008 and Q3’13 reveals that the power sector accounted for 29 percent of the total contract awards for infrastructure related projects. The transportation sector came in second with 22 percent followed by the residential real estate sector with 12 percent, Capital expenditures on infrastructure in the form of mega-projects over the past few years have been numerous. Most recently is the construction of the Riyadh Metro project in the amount of SR87 billion. The project is anticipated to serve 1,500 passengers per hour per track with capacity eventually increasing to 8,000 passengers per hour.

Another significant project is the SR12.6 billion contract awarded by the Ministry of Interior to ABV Rock Group for the development of the King Abdullah bin Abdulaziz security forces medical complex in Riyadh. The complex will have a total built-up area for the medical facilities of 400,000 sqm on 1.3 million sqm of land. There will be three hospital buildings, academic and clinical center, research center, office buildings, service stations, residential villas, apartments and car parking. The project is expected to be completed by the third quarter of 2017.

Between 2008 until the date of this report, the current value of projects being executed in the infrastructure sector represents 57 percent or SR597 billion of the overall project value.

The transportation sector is in the midst of an investment boom with particular concentration on railways. Between 2008 and Q3’13 the value of contract awards surpassed SR176 billion.

The Kingdom’s seaports have been invested into recently, as more than SR4 billion has been earmarked for the improvement of all its ports.

Between 2008 and Q3’13, the value of awarded con-tracts in the power sector exceeded SR233 billion.

Between 2008 and Q3’13, more than 62 billion Saudi riyals was awarded in construction contracts for water and sewage.

This article was first published in the Saudi Gazette.

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