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Giga-projects are driving Saudi Arabia’s construction boom amid global interest, study says

RIYADH: Saudi Arabia’s state-backed initiatives, including NEOM and Vision 2030, are driving growth in the construction sector and attracting significant domestic and international investment, an analysis has shown.

Global consulting firm Turner & Townsend highlighted in its latest report that construction activity is also being driven by the kingdom’s preparations for EXPO 2030 and the 2034 FIFA World Cup.

It comes as Saudi Arabia led global construction activity in the first quarter, with the kingdom planning $1.5 trillion in projects, according to a report released earlier this month by real estate firm JLL.

JLL’s analysis further highlighted that the kingdom accounted for a 39 percent share of total construction projects in the Middle East and North Africa region worth $3.9 trillion.

“An exceptional story is the accelerated development of Saudi Arabia, where huge ambitions are being realized through projects such as The Line, King Salman Park and Diriyah Gate,” said Mark Hamill, director and head of real estate and major programs in the Middle East. in Turner & Townsend.

Line is a linear smart city currently under construction in Saudi Arabia’s $500 billion megacity NEOM, while King Salman Park is a sprawling 4,102-acre public park and urban district under construction in Riyadh.

The report highlighted that despite political uncertainty, significant investment is driving growth in the Gulf region as countries seek to diversify away from traditional energy sources.

This comes on the back of Turner & Townsend ranking the Kingdom as the 19th most expensive country to build in globally, in stark contrast to the US, which dominated the top 10.

The report further said that construction cost inflation in Riyadh is moderating from a peak of 7.0 percent recorded in 2023, but is expected to remain high at 5.0 percent through 2024.

The analysis also highlighted Saudi Arabia’s efforts to attract global corporate occupiers through its regional headquarters program.

He added: “This scheme encourages companies to open offices in Saudi Arabia, and the office investment has cost benefits as the average high-rise headquarters in Riyadh costs a relatively low $2,266 per sq m.”

The UK-based company also pointed out that Saudi Arabia is also facing a shortage of skilled labor, which is crucial for the implementation and execution of construction activities as planned.

“Skilled labor shortages also keep costs up, as Saudi Arabia suffers from a severe shortage of skilled labor vital to the implementation of its most ambitious programs. The talent and resources required for giga-projects in the country are also stretching the overall capacity of the Middle East supply chain,” the report said.

Regional view

Qatar’s capital Doha is the second most expensive market in the region at $2,096 per square meter, according to the report.

However, construction cost inflation is expected to drop from 3.5 percent in 2023 to 2.5 percent in 2024, following high output ahead of the 2022 World Cup, the study said.

On the other hand, Dubai has an average construction cost of USD 1,874 per m2, which is supported by high tourism activity and the development of the residential sector.

“The UAE has been a tourism hotspot in the region in recent years, and its relatively low construction costs compared to Western markets continue to make it an attractive location to build centers and facilities for international visitors,” the report said.

He added: “In Dubai, residential development is reviving the local market as the city aims to support its growing population. Its attractiveness as a market is enhanced by its comparatively low construction costs.”

On the other hand, Abu Dhabi is the fourth most expensive market in the Middle East at $1,844.2 per m2.

Hamill noted that there are significant real estate opportunities in the UAE and Qatar as inflation cools.

He added: “However, as labor capacity is stretched across the region, clients will need to rethink their procurement and contracting models to help mitigate supply chain disruption and maximize the potential opportunities on offer.”

Global outlook

Construction pipelines around the world are set to grow this year, but skills shortages may remain a major problem, the report revealed.

“The global real estate market is emerging from a challenging period of inflationary pressures, volatility and disruption. Our sector has proven resilient and the focus on building new approaches to procurement and supply chain development to increase efficiency and productivity is opening up new opportunities in many markets,” said Neil Bullen, managing director of global real estate at Turner & Townsend.

He added: “Clients need to understand where labor constraints may limit their capital investment programs and work with the supply chain to understand how best to mitigate supply risk.”

The US dominated the list of the most expensive places to build, with six cities from the country making the top 10 list.

New York maintained its position as the most expensive market to build for the second year in a row with an average cost of $5,723 per square meter, closely followed by San Francisco at $5,489.

Zurich came in third, beating Geneva in the ranking with an average cost of USD 5,035 per m2. Geneva, which ranked fourth, averaged $5,022 per m2.

The American cities of Los Angeles, Boston, Seattle and Chicago ranked fifth, sixth, seventh and eighth in the list.

From Asia, Hong Kong ranked ninth with an average cost of $4,500, followed by London at $4,473.

The report also highlighted that the implementation of technology in the construction sector could help overcome various challenges faced by the industry.

“The acceleration of digitization also represents a huge opportunity, but this requires us to keep up with the demand for skilled labor and the ongoing shortage may limit potential growth,” Bullen said.

He added: “As interest rate cuts become more of a possibility for many markets and pent-up investor appetite may be released, capacity could be tested further.

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