Laborers’ exit dents Saudi construction sector

The growth of activities in the Saudi construction sector is expected to be subdued in the second half of 2013 at between 5 percent and 15 percent, recent industry reports said.

The Saudi government’s commitment to boost spending on social infrastructure and the construction industry’s low funding costs will likely be the major drivers of growth in the coming year.

Around $442 billion of projects are in the design, bidding or construction stage in Saudi Arabia, according to Zawya projects data compiled for the period ending July 2013.

The NCB Construction Contracts Index reached 250.53 points at the end of the second quarter of 2013, while the total value of awarded contracts reached SR 53.6 billion ($14.3 billion).

The projection proves smaller compared to a November 2012 Zawya poll, where industry players predicted a 20 percent to 30 percent growth in construction activities for 2013.

The lower growth rate has been attributed to delays in project implementation brought about by a recent labor market correction in the Kingdom.

“The corrective measures (being) undertaken by the Saudi Ministry of Labor to legalize the status of foreign workers is (understandably) a good and necessary initiative.”

“(However,) it led to a shortage of manpower and a 20 percent drop in construction activities.”

“While companies are trying to straighten the situation and comply with the law, bureaucracy has hampered decision making and led to long delays,” said George Berbari, CEO of DC Pro Engineering.

“Between March and May 2013, one could not see any cranes moving in Saudi Arabia. The labor correction has not just affected construction, but also the manufacturing and other industries as well,” he added.

The sub-contractor noted that current market conditions point to a robust construction market in Saudi Arabia.

“There is more work in terms of social infrastructure such as schools and housing. In terms of industrial growth, we are seeing growth on the West coast in Jeddah, Rabigh and east coast of Jubail. Saudi is the fastest growing market in the GCC.”

“Dubai’s activity is moving higher while Abu Dhabi is showing strong growth. But the growth rate in Saudi Arabia is not as high as in 2011 and 2012.”

“We see a possible growth rate of 5 percent to 15 percent in the coming year,” he said.

NCB reported earlier that the Saudi construction sector will further gather steam in the second half of 2012, noting that the value of awarded contracts through the first half of 2012 reached SR126.7 billion, eclipsing 2011’s “remarkable performance.”

Sixteen projects each worth SR1 billion were awarded in the period, the bulk of which came from the petrochemical sector alone.

“We expect this trend to continue into H2 ‘12 as the value of awarded contracts is anticipated to further increase during this period.”

“Additionally, non-anchor sectors are expected to take on a larger share of the overall value of awarded contracts as the government’s 2012 budget called for heavy investment in the social infrastructure sectors,” the NCB report said.

The UAE-based sub-contractor said while the government’s efforts may offer a stopgap fix to immediate workforce requirement, it could have negative long-term repercussion if left unregulated.

“On the one hand, they extended the deadline for compliance. On the other, companies worth SR50-100 billion are now being allowed to rent labor,” he said.

“If done the right way, it could work well, but we hope that private agenda does not hinder the situation in the long run and affect the construction sector. If not regulated, this solution could have new problems.”

Additionally, a wage protection program will become mandatory on Oct. 1 for companies employing 3,000 or more workers, according to the Saudi ministry of labor.

“On the same lines as the UAE, it will work well with companies that maintain best practice standards. It will ensure that salaries are paid to employees on time and will help regulate the rights of the labor sector.”

“But in the coming year, despite projects announcements, Saudi will not be able to catch up with the growth in the rest of the GCC construction sector due to the correction in labor laws. The tendering processes and the agendas of different stakeholders, along with the labor correction, will delay projects,” he said.

On the residential side, demand for housing is being supported by increased levels of credit, employment, assistance and confidence, said John Harris, co-head of Jones Lang LaSalle Saudi Arabia.

“Demand for expatriate compounds is being supported by big engineering, healthcare and defense programs with foreign technicians, but is also subject to uncertainty because of the Saudization initiatives.”

“We are seeing strong office demand from the public sector, engineering, and IT sectors. Massive investments are being made in Makkah to accommodate the growth of religious tourism, and the combination of business and personal travel continues to support high occupancy levels in the Jeddah market.”

“Double-digit growth in retail spending is encouraging a new wave of mall development in Riyadh and other cities, and we are seeing many new international brands coming to the Saudi market for the first time.”

“Demand for premises is strong across all sectors. But we do see some signs of capacity constraints in development and caution in the land market for the rest of 2013 and 2014,” said Harris.

He added that Saudi has the potential to overtake other GCC countries in terms of construction over the next year.

“Certainly, [that would be the case] if you include transportation infrastructure such as the Jeddah airport and Riyadh metro. But we might see investors pausing in some sectors and cities. In Riyadh, for example, the pipeline of new office space and hotel rooms will create risks for investors or developers of new projects.”

“In 2013, the challenge is all about execution. We understand that the contractors for some of our clients have recently lost part of their workforce so some projects may experience delays.”

Asked how recent trends will affect kingdom’s real estate supply over the next few years, Harris said “or commercial schemes, it may actually allow the demand to catch up with supply.”

“But in the housing sector, the need is now and may result in missed opportunities for some investors.”

This article was first published in the Saudi Gazette on August 11, 2013