Saudi Arabia’s construction industry continues to lead the Mena region despite the macroeconomic conditions hitting the sector globally, according to leading real estate expert JLL.
The kingdom has been maintaining its position as the strongest market across the region with the highest total value of project awards for four consecutive years.
As of October, KSA holds a 35% market share with a recorded $31 billion worth of contract awards against an overall Mena total of $87 billion as tracked by Meed Projects, stated JLL in its Q4 2022 KSA Construction Market Intelligence Report.
The kingdom witnessed the highest value of project awards in 2022, demonstrating its commitment to driving economic diversification and transforming the country in line with its Vision 2030.
Construction output growth in KSA is anticipated to rise by 3.2% in 2022, with a further annual average growth rate (AAGR) of 4% between 2023 to 2026 as indicated by Global Data.
JLL pointed out that Saudi Arabia's pipeline value of unawarded (pre-execution) projects is estimated at $1.1 trillion, which includes projects from the study stage through to the main contractor bid.
Approximately 70% comprise ‘construction’ sector projects with residential, cultural, leisure and hospitality as sub-sector leaders, which is the driving force behind the Vision 2030 strategy.
In the second half, 13,000 hotel keys are expected to be delivered in Riyadh, Jeddah, and Makkah, accentuating the continuation of the KSA's hospitality sector development.
As per JLL data, the top ten contractors in Saudi Arabia are responsible for $400 billion worth of projects that are currently in the execution stage, accounting for 40% of the total future pipeline value of $1.1 trillion.
The total value of projects awarded in KSA between 2021 and 2025 is set to hit $569 billion, with a total of $85 billion (15%) awarded to date across 2021 and 2022 (October end), said the property expert citing MEED Projects data.
This highlights the need for a greater supply of skilled contractors in the local market to meet the ambitious goals of Vision 2030 and the associated Giga project programme, it added.
JLL's market intelligence data further revealed that global economic volatility in the first two-quarters of 2022 created challenges in the local construction market in terms of delivery lead times and instant price increases, with suppliers reluctant to guarantee prices for extended periods of time.
In addition, it also indicated improvements from Q2 to Q3 2022, implying that price peaks have passed; however, price increases remain a significant risk due to the correlation to economic factors and observed trends since 2020.
Moreover, the report stresses that future construction costs must be balanced against the local market and global economic factors.
Though commodity prices are softening or have already flatlined, the Kingdom's construction sector is heating up, putting pressure on the existing supply chain, and highlighting the need for greater competition to complete the pipeline of projects, said JLL in its statement.
While inflation projections for the country are relatively soft in comparison to global averages, Saudi Arabia, as well as the wider Mena region, relies on importing construction materials from high inflationary countries, which affects construction material prices, it added.
"Given the volatile market conditions and rising construction material prices, which reached a significant peak during Q2 2022, there is a need for robust mitigation strategies, including a careful approach to contract execution and risk allocation," said Laura Morgan, the Market Intelligence Lead for MEA region at JLL.
“Moving forward, the construction sector will prioritize development needs that are aligned with evolving trends and demands, with an emphasis on innovation and digitization playing a significant role within the segment and in powering Vision 2030 projects," observed Morgan.
"That said, the importance and opportunities associated with traditional cost management mechanisms, which can assist developers in establishing budgets during the early stages of procurement in an effort to reduce program delays and support conflict avoidance, cannot be overlooked either,” she added.
From a construction cost perspective, JLL has estimated that the tender price inflation (TPI) has increased by an annual average percentage change of 5% in 2022.
The upswing is representative of market factors such as growing contractor and labor demand, commodity, and construction material price fluctuations, stated the expert.
Looking ahead, JLL’s midpoint TPI forecast represents a potential year-on-year growth of 6% in 2023 associated with the estimated project pipeline value correlated to future demand, according to its intelligence gathered from market sources.