Home construction lifts Saudi property sector in Q2
Home construction lifts Saudi property sector in Q2 Photo Credit:Reuters/FAISAL NASSER
Attention shifted to construction contracts in the real estate sector in the second quarter of this year after the Saudi authorities pushed ahead to meet their ambitious target of providing 500,000 affordable housing units to Saudis.
Real estate contracts accounted for 39% of all new construction deals in Saudi Arabia in the second quarter - a very high figure compared to previous quarter.
“Furthermore, the real estate sector accounted for 30% of the value of awarded contracts during the first half of 2013,” said NCB Capital in its latest report on construction activity in the kingdom.
The recent rush in real estate activity is also driven by a new royal decree that allows the Ministry of Housing to grant developed lands and interest-free home loans to Saudi nationals.
During the quarter, the ministry awarded at least five contracts as it worked its way through its target of 500,000 affordable housing units. All the projects commissioned in the quarter are set to be completed by 2015 as the ministry pushes the construction industry hard.
Some of the key real estate projects this month included a SAR 13 billion contract awarded by the Ministry of Finance to Saudi Binladen Group to build the Abraj Kudai mixed-use real estate development.
Another major residential tower project in Jeddah was awarded to Dubai-based Drake & Scull by Lamar Investment and Real Estate Development Company.
IT’S ALL RELATIVE
Despite the surge in real estate construction contracts, overall activity is lower compared to last year. Construction contracts in the first half of the year stood at SAR 102.7 billion (USD 27.38 billion) in the first half of the year, compared to SAR 126.7 billion (USD 33.8 billion) during the same period in 2012 - a 19% decline.
NCB’s Construction Contract Index shows activity has fallen since the index peaked at a five-year high of 450 points in January 2012. It currently trends at around 250.53 points, below its 12-month average of 284.32 points.
“Nonetheless, the second half of 2013 is likely to be infused with a high number of mega projects across numerous sectors, which in turn will lessen the difference in the value of awarded contracts with 2012,” the NCB said.
Indeed, this is not a slowdown. Saudi construction activity has been on the boil for the past few years, as SAR 270.3 billion (USD 72 billion) worth of contracts were awarded in 2011 and another SAR 235 billion (USD 62.7 billion) last year.
Construction companies need to digest the staggering USD 134.7 billion worth of construction activities before they can start bidding on new projects.
“The strength of the Saudi construction market is manifested by the exerted pressure borne by government and private sectors to diversify expenditures across all sectors,” said NCB.
NON-OIL ECONOMY SURGING
While these periodic ebbs and flows may continue from one quarter to the next, the trajectory is pointing in only one direction: north.
The country’s non-oil economy has risen 4.5% this year as business sentiment remains high.
“Very high government spending remains the main stimulus to the real economy,” said Fahad Al Turki, economist at Jadwa Investment Bank. “Also, we expect oil revenues to remain sufficiently high to maintain and support business and investor confidence. We believe that progress on awarding contracts and project implementation has been stepped up compared to last year.”
The construction sector itself has risen 6.6% in the first half of the year, which is a particularly strong signal as it comes on the back of two solid years.
Cement production has also risen 8% this year, as Saudi Arabia addressed a key material bottleneck to ensure construction activity does not subside.
Overall, some estimates show Saudi Arabia could see construction awards of as much as USD 70 billion by the end of the year.
Apart from actively awarding construction contracts, the government is also ironing out policy bottlenecks to maintain steady growth.
“The government has also recently approved a new mechanism to step up project monitoring process to ensure their completion on time which should provide another boost to the sector,” Al Turki said.
ENERGY SECTOR ALSO UPBEAT
While the real estate sector stole the limelight this quarter, the kingdom’s traditional powerhouse was also busy.
Saudi Aramco awarded two major contracts with a combined value of roughly SAR 3.75 billion (USD 1.1 billion). Samsung Engineering secured a contract to boost a refinery in Riyadh, while Larsen & Toubro was commissioned to build the Midyan gas processing plant.
Petrochemicals activity also picked up as two contracts with a combined value of SAR 1.2 billion were commissioned. Consolidate Contractors Company (CCC) secured a deal with Sadara Chemical Company to build a hydrogen peroxide facility by the end of 2016.
Meanwhile, Germany-based ThyssenKrupp won a contract to build a polybutylene terephthalate (PBT) unit at the Jubail Petrochemicals complex by the end of 2014.
Market observers believe the next few quarters will see more robust activity as Saudi Arabia starts through its laundry list of projects to raise the level of the non-oil economy.
“The magnitude of construction activities in the real estate sector in particular, reflects the need for continual large-scale projects to accommodate growing demand,” said NCB.
“Furthermore, sectors such as petrochemical and industrial have yet to take off in 2013 but are expected to account for a respectable share of the value of awarded contracts for the remainder of 2013.”
© alifarabia.com 2013