Saudi Arabia

Optimistic outlook

A massive infrastructure programme initiated last year, supported by a string of social welfare initiatives announced recently, has placed Saudi Arabia as a firm favourite for construction firms looking to do business in the region, says DHUSHYANTHI RAVI.

May 2011

THERE is ample reason for optimism in Saudi Arabia, where an expansionary budget announced at the end of last year has been bolstered by the recent announcement of a stimulus package involving further major social infrastructure spending.

In light of the widespread social unrest in the Middle East, the Custodian of the Two Holy Mosques King Abdullah has committed to investing additional state cash estimated at SR485 billion ($131 billion) toward multiple initiatives geared toward tackling issues that have been plaguing the nation and meeting public demands for housing and jobs, among others.

The funds will be disbursed over the years with 38 per cent of the money (SR184.96 billion – $49.32 billion) expected to be spent within this year.

While the global economic downturn coupled with Dubai’s debt debacle cast clouds of gloom in the region during 2009 and most of 2010, Saudi Arabia took the initiative to spearhead growth in the country by launching major public sector projects. A five-year $400-billion infrastructure spending plan was announced, which has helped the nation steer clear of the recession and regain its status as the economic powerhouse of the region. This year too, the public sector will continue in the driving seat, by investing significant amounts on construction-intensive projects ranging from large-scale housing developments, schools and hospitals to ports, roads and rail networks.

As infrastructure remains central to the government’s expenditure plans, Saudi Arabia’s construction industry – one of the largest in the Middle East – will continue to present opportunities to investors. In addition, ambitions run high in the kingdom where Prince Alwaleed bin Talal bin Abdulaziz Al Saud’s Kingdom Holding Company is planning to build the mile-high tower – the Kingdom Tower – in Jeddah, major universities and research facilities are being set up, and investments are being made on renewable energy projects.

Saudi Arabia is currently developing the landmark King Abdullah Financial District (KAFD) in Riyadh, as well as various economic industrial cities throughout the kingdom, which in turn are fuelling the need for infrastructural development. Saudi Industrial Property Authority (Modon) is currently overseeing 20 industrial cities consisting of 3,000 industrial projects, representing 60 per cent of the factories in the kingdom, with total investments exceeding SR250 billion ($66 billion).

According to Jones Lang LaSalle (JLL), a global real estate investment and advisory firm, the kingdom’s announcement of the largest budget ever at SR580 billion ($154.66 billion) for 2011, will stimulate construction activity. Major long-term investments in infrastructure and transport will include six airport projects worth an estimated SR25 billion ($6.67 billion), two port developments (SR12 billion – $3.2 billion) and 23 railway schemes, it says.

Saudi Arabia is keen to press ahead with its plan to build 500,000 new homes by 2015, at an estimated price tag of $66.7 billion. Another key area of growth is educational and healthcare facilities and services, with government figures putting expenditure at a whopping $72 billion over the next decade.

The kingdom will pump monumental funds into road and rail projects, as well. In line with this, the transport ministry has allocated $3 billion in the current budget for 389 new road projects, covering a total length of 6,600 km across the country. Key rail projects are expected to receive $2.3 billion of the share of budget funds.

Some $53.33 billion will be spent on water projects over the next 15 years, with the lion’s share (70 per cent) going towards sewage and waste water, according to industry estimates.

The building of a strong infrastructure network will be supported by an economy that is in excellent shape, according to Saudi Finance Minister Ibrahim Al Assaf. “A rise in oil prices will boost the strong economic and financial position of the world’s top oil exporter,” he said.

A state-owned bank echoed this sentiment in a report, where it said the country will post a SR95-billion ($25 billion) surplus this year, despite its record spending plans, based on an average oil price of $95 per barrel.

“Our estimates for the surplus, despite the government’s increased spending plans, are expected to reach close to SR95 billion and government spending is expected to reach close to SR846 billion ($225 billion),” Said Al Shaikh, National Commercial Bank’s chief economist, said.

Al Shaikh expects that with higher oil production, Saudi Arabia will see a 5.8 per cent growth in GDP.

 

Oil & gas
With oil still accounting for close to 90 per cent of government revenues, it is obvious that the country – which sits on the world’s biggest oil reserves – will continue to invest substantial amounts in its hydrocarbons sector.

Saudi Arabia plans to spend $170 billion over the next five years on energy and oil refining projects, $90 billion of which is to come directly from Saudi Aramco, while current and future capital investment will add the remaining $80 billion of joint refining and marketing projects to the total.

Saudi Aramco has spent over $62 billion over the past five years on increasing production capacity to reach 12 million barrels per day.

The kingdom, which ranks fourth in the world in terms natural gas reserves, is working also to expand investment in natural gas. Its energy strategy includes a focus on spending on capital projects in electricity, as well as solar and other renewable energy research and environmental programmes and using oil revenues to promote sustainable development and the provision of suitable investment for industrial projects, especially in the economic cities.

 

Housing & real estate
A recent report by Banque Saudi Fransi said developers need to build 270,000 housing units per year until 2015 to meet demand which is estimated at 1.65 million. Going forward, the focus will increasingly be on housing for middle-income families in the kingdom’s smaller towns which are experiencing high population growth.

The newly-established Ministry of Housing, taking the place of the General Housing Authority, is expected to tackle the growing housing crisis and spearhead the plan to build 500,000 new homes over the next five years.

The private sector is also being encouraged to meet the urgent demand for housing with several massive developments under way primarily in Riyadh, Dammam and Jeddah.

According to a Global Research report, despite the strong fundamentals due to attractive demographics coupled with a large undersupply of residential units, sluggish project financing is straining real estate developments in Saudi Arabia.
The report by the Global Investment House, a Kuwaiti investment company, says the Saudi residential market suffers from a large supply shortage, especially in the low-and mid-income segment, and estimates a current shortage of 0.7 million units with an additional 1.2 million new units needed by 2014.

Off-plan sales are largely restricted leading to financing bottlenecks for developers who are forced to fully finance projects prior to realising cash inflows from unit sales. Moreover, the dry credit market for real estate developers in 2009-10 exacerbated the funding quandary and led to execution delays.

A proposed mortgage law is an initial step in the right direction, but not the sole solution, according to the report. It is critical to unlock part of the pent-up demand for real estate in Saudi Arabia, but its capacity to deliver an efficient solution to the sector vulnerabilities remains feeble, it adds.

According to Jones Lang LaSalle, investment in world-class transport infrastructure underpins investment in and demand for real estate. In its report ‘Top Trends for 2011’ that will shape Saudi Arabia’s real estate in the coming year and future, JLL emphasises that government leadership is a catalyst for real estate. The stimulus package and leadership initiatives provided by the government will have a direct and indirect impact across real estate sectors. Directly stimulus will be provided to the residential sector through large-scale residential plans from initiatives like the Ministry of Housing (500,000 units), National Guard (17,000 units), and General Organisation for Social Insurance (691 units).

Developing new residential communities creates opportunities for retail, the report states, adding that government is keen to develop new civic facilities with plans for 610 new schools and 12 new hospitals and health-related facilities.

In addition, local and regional developers are pressing ahead with several massive residential developments. Alargan Projects, for instance, is currently developing the Manazel Qortuba in Riyadh and the Murjana in Dammam, and has ambitious plans to develop Al Sohoul and Murouj – two housing developments each comprising 1,200 houses in Jubail and Yanbu, respectively – and Green Oasis, a virtual mini-city comprising 12,000 units as well as a host of commercial facilities to come up in Al Khobar (see separate report).

Dubai-based developer Damac Properties is developing the iconic Al Jawharah Tower in Jeddah, a 48-storey residential luxury development (see separate report).

Meanwhile, real estate development continues to boom in Makkah and Madinah, where numerous projects such as the Abraj Al Bait Complex and the Jabal Omar are well under way, increasing the residential accommodation for the millions of pilgrims that visit the holy cities during the Hajj and Umra seasons. The Grand Mosque itself is in the midst of an expansion on the eastern Shamiya side, which will increase its capacity to 1.6 million.

 

Riyadh is witnessing the construction of several high-rises such as the Al Swailem Tower.

Education & health facilities

Over the next decade, some $37 billion is earmarked for the construction of schools and universities and $35 billion for the development of hospitals and other healthcare facilities, according to government figures.

About 3,200 new schools are currently under construction with 600 more planned for this year. Massive universities such as the Princess Nora Bint Abdulrahman University in Riyadh and the 480-hectare King Faisal University campus at Al Ahsa in the Eastern Province are under construction (see separate report).

Saudi Arabia also intends to remain at the forefront in research and development. Following the construction of the King Abdullah University of Science and Technology (Kaust) in Thuwal, near Jeddah, Riyadh has been chosen to host the stunning King Abdullah Petroleum Studies and Research Centre (Kapsarc), which is being developed by Saudi Aramco (see separate report).

Saudi Aramco is also developing the King Abdulaziz Centre for World Culture in Dhahran, another project that boasts innovative architecture.

Population growth is the primary driver, with Saudi Arabia being the most populous nation in the Gulf, having quadrupled in numbers over 40 years to reach 25.7 million people, 5.5 million of which are expatriate workers, according to figures from Credit Suisse Group.

 

Power & water

Saudi Arabia needs to invest SR300 billion ($80.2 billion) in the power sector over 10 years and requires an additional 30 GW over the next 20 years to meet its needs, according to Saleh Al Awaji, the country’s deputy minister for electricity. The current power capacity in Saudi Arabia is 50 GW compared with 23,800 MW in 2000, Awaji said, adding the average growth forecast was eight per cent annually. 

Independent power projects (IPP) from 2011 to 2020 will add 12,000 MW of capacity at an estimated cost of SR80 billion ($21 billion). The kingdom is planning to step up its use of crude oil for power generation in 2011.

Awaji also said the water sector had similar challenges. Ongoing projects in the water sector are valued at SR120 billion ($32 billion) currently. “There is still a huge market for investors in the water sector,” he said.

 

Road & rail projects

Saudi transport ministry has allocated SR11.3 billion ($3 billion) in the current budget for 389 new road projects covering a total length of 6,600 km across the country. The ministry has also allocated SR750 million ($199 million) for road maintenance and SR50 million ($13 million) for conducting studies on 2,762 km of new roads.

The Riyadh province will receive the lion’s share of the new projects that include the first phase of Alkharj-Quwaieya Road, the second phase of Afif-Dhalam Road and a road linking Riyadh-Qassim Road with Riyadh-Huraimala.

The Jeddah Municipality, meanwhile, has set aside $1.3 billion to improve the traffic and transport system in the city through the construction of bridges and tunnels in about 40 locations.

Meanwhile, work is due for completion next year on a 750-km road linking Saudi Arabia with Oman (see page 128).
Saudi Arabia has seen the completion of a major railway development, which has considerably eased travelling time for pilgrims. The SR6.5-billion ($1.73-billion) Mashair Railway, completed in time for the Hajj season last year, has a capacity to transport 72,000 pilgrims per hour and has reduced travelling time from Arafat to Muzdalifah and from Muzdalifah to Mina five minutes each way.

Another new project to facilitate pilgrims is Makkah Metro, a 180-km railway network that will cover all parts of the city. The metro, work on which is expected to start within a year, will be linked with the Haramain High-Speed Rail (HHSR) that connects the cities of Makkah, Madinah and Jeddah as well as the Mashair Railway.

Meanwhile, on the HHSR development, four contracts have been signed for the construction of stations with Saudi Binladin Group and Saudi Oger for a total value of SR9 billion ($2.3 billion). Under the contracts, representing Package Two of the Phase One of the project, four state-of-the-art passenger stations will be built in Jeddah, Makkah, Madinah and King Abdullah Economic City (KAEC) in Rabigh. A fifth station will be located within the King Abdul Aziz International Airport in Jeddah, and falls within the airport currently being implemented.




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