The kingdom of new opportunity

Saudi Arabia is the region's biggest construction market, but it still represents a challenge for international companies

Companies interested in working in Saudi Arabia must have a local partner and be prepared to handle the kingdom's substantial layers of bureaucracy and delays.

Saudi Arabia is the new land of opportunity for the regional construction industry.

The kingdom has US$220 billion (Dh808.09bn) of projects in the development pipeline, representing 36 per cent of all the constructions deals in the Middle East and North Africa (Mena), according to data compiled by Citi Investment Research & Analysis.

Saudi Arabia awarded $11.4bn in construction contracts in the first six months of this year, Citi reported.

But the GCC's biggest market remains difficult to break into for international players. Opportunity does not always translate into profits for many companies hoping to grow a business in the kingdom.

"There are high barriers to entry," says Heidy Rehman, an analyst with Citi. "It's an attractive market, but that doesn't mean everybody can tap into it."

Companies interested in working in Saudi Arabia must have a local partner and be prepared to handle the kingdom's substantial layers of bureaucracy and delays, analysts warn.

And not every sector in Saudi Arabia is booming. The government is shifting its priorities and spending, leaving some projects in limbo.

"There is much less of an emphasis on the reformist agenda," says John Harris, the co-head of the Saudi Arabia office for Jones Lang LaSalle. "Now what they are doing is redistributing money into investments and social spending."

Five years ago the government was trumpeting the launch of six huge "economic cities", which would transform the landscape and diversify the kingdom's economy. Today work on most of those projects has slowed or stalled.

Instead the focus is on power and energy projects, infrastructure, tourism and affordable housing. Some of the developments moving forward in recent months include $2bn in oil and gas projects, two medical facilities priced at $850 million, a $10.5bn plan to develop the country's airports and the $6bn railway linking Makkah and Medina.

Earlier this year, the Saudi government announced plans for a 500m riyals (Dh489.7m) stimulus package, aimed primarily at developing affordable housing.

A new ministry of housing was launched and more money was funnelled into a fund for financing citizen's property purchases.

The ministry of economy and planning estimates 1.25 million new homes will be required by 2015 to meet the needs of the growing population.

But it may be difficult for the private sector to take advantage of the housing push.

Land prices continue to soar, making it a challenge for developers to find a profit in low-cost housing projects. Last year prices for undeveloped land rose an average of 20 to 30 per cent in sections of Jeddah and Riyadh.

In Jeddah, the most inexpensive villas are often priced at about 900,000 riyals, which is unaffordable to 70 per cent of the population, according to Jones Lang LaSalle estimates.

At the same time, the government has yet to approve long-awaited reforms to mortgage laws that make it difficult for many citizens to obtain financing to buy a home. And many builders are finding it a challenge to obtain construction financing for housing projects..

"International players need to partner with strong on-the-ground local players who have the right blend of developmental objectives and commercial objectives," says Wahid Sarij, the executive vice president of Capitas Group International, a consultancy.

"The real opportunity for international construction companies lies in enhancing the capacity and capabilities of the local market by bringing cost-saving methodologies and materials for sustainable housing that are in line with market needs."

The government is exploring public-private partnerships (PPP) for many of its construction initiatives.

To date the kingdom's record with PPP deals has been patchy. Long-standing plans to use PPP to expand the railway system with a "land bridge" project connecting Jeddah and Riyadh never materialised. But analysts still see alliances with government programmes offering the best option for international companies.

"Opportunity is much more with public agencies" than the private sector, Mr Harris says.

While the construction industry continues to grow and attract international interest, new policies are making it more challenging for international companies to operate in the kingdom.

The government wants companies to hire more Saudi Arabians and to limit the ability of contractors to easily move in and out of the country.

Drake & Scull International (DSI), the Dubai mechanical, electrical and plumbing specialist, has found success by developing separate companies in Saudi Arabia. About half of its Dh8bn worth of current projects is in Saudi Arabia.

When DSI acquired a 100 per cent stake in the International Centre for Contracting Company, one of its Saudi Arabia partners, for 128m riyals in April, one of the advantages was the "immediate assumption of human capital", Nomura Securities noted in a report. That included an estimated 7,000 workers to help on projects such as the 2bn riyal deal to help fit out the King Abdullah Petroleum Studies and Research Centre.

Other UAE companies have found Saudi Arabia a difficult market. Arabtec, a construction company based in the Emirates, has been slow to report big profits on its Saudi Arabian projects, some of which have been delayed, analysts note.

In the short term, companies focused on secondary work with specific expertise - fitting out, property management and development services - stand to benefit the most, Mr Harris says.

"I think there is more of a contracting opportunity [in Saudi Arabia] than a development opportunity."