Saudi construction sector continues strong growth in third quarter

Contract awards for the first nine months of 2019 up 117 per cent to 87.2 billion riyals

Foreign labourers work on the construction of a house in the Saudi capital Riyadh on April 13, 2019. - Housing is a potential lightning rod for public discontent in a country where affordable dwellings are beyond the reach of many, posing a key challenge for Crown Prince Mohammed bin Salman as he seeks to overhaul the oil-reliant economy. (Photo by FAYEZ NURELDINE / AFP)
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The revival in Saudi Arabia’s construction sector continued in the third quarter of 2019, with the level of contract awards in the third quarter of 2019 increasing by 164 per cent year-on-year, according to a new report.

The value of contracts awarded in the three months to September 30 in the kingdom rose to 47.8 billion Saudi riyals (Dh46.6bn), bringing the total awards for the first nine months to 87.2 billion riyals, up 117 per cent year-on-year, the report from the US-Saudi Arabian Business Council shows.

“The 47.8bn riyals in awarded contracts during the third quarter continued the trend seen thus far in 2019 as the oil & gas sector led … followed by the real estate sector. This quarter witnessed the industrial sector amass the third -highest value of awarded contracts after a relatively slow pace during the two previous quarters. These three sectors accounted for 80 per cent of all contract awards during the quarter,” the report said.

This is the second strong quarter of contract award data following a difficult period after the 2014 oil price collapse which led to the government halting payments to contractors, and the pausing or cancelling of scores of major projects as spending priorities were reassessed before the kingdom created its Vision 2030 plan. Contract awards hit a record 290 billion riyals in 2013 — the year in which more than 86bn riyals worth of contracts related to the Riyadh Metro were awarded — but slumped 108m riyals in 2016, bottoming out at 100.9m riyals last year.

“One of the key regulatory changes that affected projects in the kingdom was the creation of the Bureau of Capital and Operational Spending Rationalisation. The Bureau halted, suspended, and cancelled numerous infrastructure projects that were deemed not to be in line with its economic objectives,” the report’s author, economist Albara’a Alwazir, told The National.

“Fast forward to 2019, we are witnessing a return to heavy spending on mega-projects in Saudi Arabia as Vision 2030 developments like Vision Realisation Plans (VRPs) begin to take shape."

He added that the kingdom has also upped spending on infrastructure-related projects as part of its overall spending plans.

“Capex as a percentage of the total budget has risen from 19.9 per cent in 2018 to 22.2 per cent in 2019. Furthermore the (kingdom’s fiscal balance programme) plans for capex to climb to 23.7 per cent by 2021,” Mr Alwazir said.

Contract awards are likely to top the 200 billion riyal mark this year for the first time in four years. He argued the outlook for the sector in 2020 looks healthy as a result of the continued increase in capex planned, as well as the fact that the amount dedicated to megaprojects such as Neom and the Red Sea tourism development is set to double under proposals set out in the kingdom’s preliminary budget.

“This positive announcement places the construction sector at the top of the list of being a leader in driving non-oil growth over the medium-term,” Mr Alwazir said.

The biggest contracts awarded during the quarter include the award of a 6.2 billion riyal contract by Shomoul Holding to Nesma & Partners for a new mall to be built as part of The Avenues Riyadh development, a 5.6bn award by Saudi Aramco for package nine of a new gas plant at Tanajib to Tecnicas Reunidas, and a 4.8bn deal to Samsung Engineering to build a new tyre plant in Jubail from the kingdom’s National Tire Corporation.

The increase in construction activity in the kingdom is also driving up sales volumes and pricing of cement. Cement sales in the kingdom rose in October for the fifth consecutive month and were up 17.5 per cent year-on-year, Jadwa Investment said in a note published last week.