Saudi Arabia’s economic rebound following the Covid-19 pandemic and the progress made on Vision 2030 projects have created a favourable set of conditions for real estate and construction activity. In September 2023 the Riyadh International Convention and Exhibition Centre is set to host the Saudi Infrastructure Expo, an event at which an estimated $1trn worth of smart city, tourism and clean energy projects will be presented to investors and local stakeholders. Although some projects are still in the concept stage, as of June 2023 the US-based Project Management Institute estimated that 5200 projects worth $819bn were already under way, attracting a global supply of construction talent and equipment.
Construction Oversight
The Saudi Contractors Authority (SCA) is the primary regulator for the construction sector, with its responsibilities ranging from licensing and labour standards, to the provision of industry services, among other functions. The SCA also drives sector development and operates Muqawil, a projects platform that serves as a point of contact between Saudi and foreign contractors, as well as provides a range of e-services, such as contractor rates and indicators for prices of building materials. Public sector construction contracts are allocated under the Government Tenders and Procurements Law, which came into effect in December 2019, with any disputes the remit of local courts.
The Ministry of Municipal and Rural Affairs and Housing (MOMRAH) issues guidelines that cover the construction process. In March 2023 MOMRAH issued new regulations covering buildings under construction, with a focus on those located along commercial roads. Building sites must be covered and sealed off from passers-by, so as to improve health and safety, and create a uniform aesthetic. In addition to providing interactive housing services, MOMRAH’s Balady platform allows building companies to apply for and obtain permits digitally.
In terms of the industry’s structure, construction in Saudi Arabia is fuelled largely by government initiatives, particularly large-scale infrastructure projects that are part of the Vision 2030 national development plan, as well some private sector participation. Public sector participation is led by the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, in partnership with the National Development Fund, which works with various lending partners to coordinate financing.
Major Players
According to Construction Week, the top-10 Saudi construction firms in 2023 were Nesma & Partners, AlBawani, ElSeif Engineering Contracting, Almabani General Contractors, IHCC, Shahm Contracting Company, Construction and Planning Company, Al-Ayuni Investment and Contracting Company, Contracting and Construction Enterprises, and Kabbani Construction Group. The list was compiled by assessing the companies’ responses to questionnaires on key criteria, including their major achievements over the past 12 months; the number and type of projects completed; current backlogs; and revenue generated in 2022. The publication notes that Nesma & Partners rose to the top of the ranking after forming a joint venture with multidisciplinary firm Kent to enter the local oil and gas engineering, procurement and construction (EPC) market. In February 2023 Nesma was one of four companies to receive a combined $1.3bn from the PIF to invest in national infrastructure projects.
However, few foreign firms have been able to establish a foothold in the Kingdom’s construction industry, as Saudi companies are responsible for the vast majority of activity in the sector. Due to concerns about the inefficient allocation of public funds to construction projects, in February 2023 the government instructed the General Authority for Competition, the chief market watchdog, to look into competition in the market, address monopolistic practices, improve transparency and come up with a mechanism to ensure fair practices in the industry.
Real Estate Oversight
MOMRAH oversees real estate, primarily through the Real Estate General Authority (REGA), which proposes policy, monitors the sector, issues licences, administers training courses and works to improve the industry’s skills base. The State Properties General Authority – established in September 2018 to transform the State Property Department into an independent entity – is responsible for managing the government’s real estate portfolio, with an eye to optimising its use and governance. The National Housing Company (NHC), founded in May 2016 as MOMRAH’s investment arm, steers the Kingdom’s housing strategy and develops sector-specific solutions.
In terms of legislation, regulations for a new real estate law came into force in January 2023, leading to tighter rules on the activities that brokers can undertake. For example, permission must be obtained from REGA before any property listing is advertised. In addition, the scope of services that brokers can offer concurrently without permission has been narrowed, as they are now required to receive an approval from REGA for each activity they conduct. The law divides the sector into seven licensed activities that fall under the purview of REGA: brokerage, real estate marketing, property management and facilities management, real estate auction, advertising, consultancy and analysis. The new legislation also attempts to centralise contracts in one database under a single transaction format, with fines ranging from SR1000 ($270) for failing to register a contract, to SR2000 ($530) for not using the standard form provided on the platform. According to the authority, over 89,000 requests for real estate licences were filed in the first two days after the new law took effect.
In another notable development, in September 2022 the PIF announced the launch of the National Real Estate Registration Services Company (RER), an online property platform for handling registrations through a digital database comprising public, commercial, residential and agricultural units and their geolocation data. The RER, which is set to work in cooperation with REGA and government entities, hints at the inevitable digitalisation of the market, a trend exemplified in June 2023 when online auctioneer SoumTech closed the Kingdom’s largest-ever digital real estate sale, transacting nearly 1m sq metres of land for more than SR600m ($160m).
Lending
With the help of the Sakani online platform, which assists Saudi citizens throughout the home-buying process, MOMRAH and its Real Estate Development Fund (REDF) seek to reach 70% homeownership in the Kingdom by 2030, up from roughly 60% as of 2020 and 47% in 2017. These statistics illustrate the success of the programme, which has improved the availability of affordable homes and increased access to finance. Saudi Arabia’s 2023 budget notes that real estate loans extended by commercial banks to individuals and companies were up 27% at the end of the second quarter of 2022 to approximately SR638bn ($170bn), accounting for 27.9% of total credit. From June 2017 to July 2023 the REDF deposited a total of SR50.2bn ($13.4bn) in the accounts of Sakani beneficiaries.
The PIF-owned Saudi Real Estate Refinance Company (SRC), established in 2017, is the Saudi equivalent of US mortgage financier Fannie Mae. In May 2023 Moody’s Investor Services upgraded SRC’s credit rating to an “A+” and its outlook to positive, in line with the SRC’s efforts to create a stable second-hand real estate market. That same month the SRC sold SR3.5bn ($930m) of sukuk (Islamic bonds) as part of a SR20bn ($5.3bn) programme guaranteed by Saudi Arabia through its Ministry of Finance to support the country’s Vision 2030 housing goals.
In February 2023 the SRC announced that it was cutting the long-term financing rate by 26 basis points on mortgage tenors of between 20 and 30 years, despite higher interest rates. In a transaction typical of its dealings with local mortgage lenders, in March 2023 SRC signed a portfolio purchase agreement with Al Rajhi Bank – the world’s largest Islamic bank by mortgage assets and market capitalisation – to refinance more than SR5bn ($1.3bn) of its real estate financing portfolio. The SRC will provide liquidity, capital management and balance sheet de-risking solutions to expand its financing capacity, which is expected to drive housing demand. Non-REDF mortgage demand is also robust, driving the average monthly mortgage lending figure of SR6.8bn ($1.8bn) in May 2023, according to Al Rajhi Capital Research, a Saudi financial services company.
Performance
Based on IMF data, Saudi Arabia’s was the fastest-growing economy in the G20 in 2022, having grown by 8.7% over the year. The Kingdom’s giga-project development is driving a boom in the local construction industry, which is already the largest among the GCC countries. Saudi Arabia accounted for roughly 58% of the region’s contracts for planned projects in 2022.
As of May 2023 the SCA valued the sector at $68bn, with related work accounting for an estimated 6% of GDP, making it the second-largest nonoil sector in the Kingdom. Under Vision 2030, the goal is to raise the construction industry’s contribution to GDP to 8.8% by 2030. GlobalData, a UK-based data analytics firm, valued the local construction market at $133.1bn in 2022 and forecast an average annual growth rate of more than 4% from 2024 to 2027 due to investment in transport, renewable energy, housing and tourism projects. The sector’s expected growth is set to be spurred by giga-projects such as NEOM, a $500bn flagship Vision 2030 effort to build a new technology-focused urban area on a site more than 14 times the size of Singapore; and the Qiddiya and Diriyah entertainment and cultural projects in Riyadh. Some $55bn worth of projects were awarded over the course of 2022, roughly 37% greater than the annual average for the preceding nine years. Notably, construction contracts negotiated in the fourth quarter of 2022 were valued at SR71.5m ($19.2m), the highest quarterly total since the first quarter of 2015.
Material & Tender Prices
Vision 2030 is driving a boom in the raw materials segment. In September 2022 the Saudi International Iron & Steel Conference in Riyadh led to the signing of SR400bn ($107bn) worth of related agreements. Despite the strength of the current project pipeline, annual tender price inflation remained under control in 2022, rising by a modest 5% for the year after global economic volatility in the first half led to spikes in prices, which then eased during the third quarter.
Although domestic prices remain relatively stable, firms tend to rely on imported inputs from countries with high rates of inflation. With this in mind, in January 2023 the NHC launched a new online platform connecting developers with materials producers, with an eye to providing more reliable inputs, supporting domestic suppliers and reducing prices. Prices for locally produced building materials have remained relatively stable, in line with the Kingdom’s overall inflation rate of less than 3% for 2022. Domestic cement sales reached nearly 3.9m tonnes in July 2023, while exports were up more than 41% to 944,000 tonnes that same month compared to the corresponding period in 2022. Material prices have also remained consistent, with 50-kg bags of white cement and black cement costing SR38.10 ($10.20) and SR15.10 ($4.00), respectively, as of July 2023.
Infrastructure Projects
Saudi Arabia continues to inaugurate new construction projects, and infrastructure development in the Kingdom is moving at a rapid pace. In July 2023 NEOM Green Hydrogen Company, a subsidiary of ACWA Power, announced that it would proceed with building the $8.4bn NEOM green hydrogen facility after signing off on the deal in May 2023. Indian contractor Larsen & Toubro is the project’s sub-EPC contractor after winning a $2.8bn contract, and it will oversee the plant’s renewable power grid. The Kingdom is home to multiple renewable energy and clean hydrogen projects, including new wind, solar and combined-cycle natural gas plants that require significant construction inputs.
NEOM’s website claims that the city will be carbon neutral by 2030, with prefabricated components to account for an estimated 90% of its construction. An estimated 85m tonnes of cement will be needed to build The Line, a zero-carbon linear city spanning 170 km that is projected to be home to 9m people once completed. The NEOM project consists of three primary developments: The Line; the floating city OXAGON; and the Trojena mountain resort. Construction has already started on The Line, with the area for the high-speed rail line that is set to run the length of the linear city currently being excavated.
In May 2023 NEOM signed a €1.4bn contract with Italy-based Webuild and its Riyadh-headquartered joint-venture partner Shibh Al Jazira Contracting to build the majority of the rail link connecting The Line and OXAGON, which is planned to be an industrial city oriented around sustainable energy, autonomous mobility, water innovation, sustainable food production, and health and well-being. Trojena is a planned ski resort in the mountains near NEOM, and it is set to host the 2029 Asian Winter Games.
In order to handle the expected influx of visitors to these projects, in November 2022 the Kingdom released its masterplan for the King Salman International Airport in Riyadh, which is projected to handle 185m passengers annually by 2050 and contribute over $7bn to non-oil GDP. The airport aims to achieve LEED Platinum certification by implementing various green initiatives and relying on renewables to provide power throughout the facility.
There are multiple giga-projects on the drawing board, such as the Green Riyadh urban forestation project, which aims to plant more than 7.5m trees in the capital; and King Salman Park, which intends to transform the previous King Salman Air Base into one of the world’s largest urban parks. These, along with municipal improvements, water infrastructure enhancements and the government’s affordable housing programme raised the capital expenditure forecast to SR157bn ($42bn) by the end of 2023.
Subsectors
The share of real estate in the Kingdom’s non-oil GDP reached 12.8% in the first quarter of 2023. Saudi Arabia’s real estate price index was up 0.9% through the first nine months of 2022 compared to the corresponding period in 2021, with a dip in commercial and agricultural property prices partly offsetting the 2.5% increase seen in the residential component. National development plans, strong economic growth and a large spike in the population as foreigners return to the Kingdom following the pandemic are all helping drive demand for residential property. The latest census data released in May 2023 reported a population of 32.2m, up 34.2% from 2010, with some 42% of this figure consisting of foreign nationals.
International advisory firm PwC Middle East projected in December 2022 that this population growth would continue, leading to annual housing demand rising by 50% to 153,000 homes by 2030, compared to just short of 100,000 homes in 2021. While more than 500,000 new residential units are set to be delivered by 2030, there could still be a deficit, especially considering the country’s rapid population growth; the number of people in Riyadh alone is expected to more than double by 2030, according to real estate consultancy Knight Frank.
There is significant pressure on the existing housing stock, with average villa and apartment prices in Riyadh both showing increases in 2022, although average apartment prices were down in Jeddah, Dammam and Khobar for the year. Along with the benchmark interest rate in Saudi Arabia reaching 6% as of August 2023, higher prices have pushed up mortgage borrowing costs and put downward pressure on residential transactions nationwide. Indeed, while 84% and 85% of residents in Riyadh and Jeddah, respectively, expressed interested in purchasing a property when surveyed by Knight Frank for its 2023 report, 35% of those over the age of 35 were planning to delay such an expenditure because units were too expensive. At the same time, residential rents are increasing as demand from incoming workers overwhelms supply. In April 2023 overall housing rents were up 9.6% year-on-year, while apartment rents rose 22.2%.
Investment Targets
The PIF hopes to help address the imbalance in housing by backing another housing investment vehicle, ROSHN, which plans to spend tens of billions of dollars to build integrated communities for 2.2m people. The integrated national real estate developer, which is partnering with private sector firms, is planning to build 18,000 residential units in northern Jeddah.
Outside investors are also flocking into the space, with Bahrain-based group Investcorp pledging $1bn to the sector in January 2023. Several funds commanding more than SR10bn ($2.7bn) between them have been established to develop commercial, tourism and residential projects. In January 2023 local media reported that the government had signed agreements with business accelerators to qualify more than 3000 local housing developers.
There is no shortage of targets for potential investors to choose from, with multiple urban development projects under way across the Kingdom. The largest of these is the King Salman Park project, an integrated residential community that comprises 15,000 homes, 250 sq km of retail space and nearly 2300 hotel rooms. The Jeddah Central project and MASAR Destination in Makkah are also of note, as is the New Murabba development in Riyadh, the centrepiece of which is set to be the Mukaab, a cube 400 metres in length, height and width that is projected to contain over 100,000 residential units and nearly 1m sq metres of retail space.
Leisure & Retail
Saudi Arabia is attracting investment in leisure and retail real estate due to Vision 2030’s focus on expanding these sectors as part of economic diversification efforts. According to Knight Frank, more than 300,000 hotel rooms are to be built in the Kingdom by 2030 (see Tourism chapter). PIF-owned Red Sea Global is undertaking tourism projects along the north-western coast, including an archipelago of more than 90 islands. The development, which is projected to have a dedicated airport by 2030, is set to comprise 8000 rooms across 50 hotels and up to 1000 residential properties. A similar project being undertaken by Red Sea Global is Amaala, a luxury tourist destination that will eventually be home to 3000 rooms across 25 hotels and approximately 900 residences.
In December 2022 Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, who is the chairman of NEOM’s board of directors, unveiled Sindalah, a luxury hospitality destination due to open in 2024 with an 86-berth marina. Spanning 840,000 sq metres, the development is planned to comprise 413 premium hotel rooms, a food and beverage complex, a golf course and other amenities near NEOM. Diriyah, a UNESCO World Heritage site outside of Riyadh, is the site of a tourism giga-project being led by the PIF. The project envisages the construction of more than 3000 hotel rooms around the ancient city, including in the historic area. Meanwhile, the Qiddiya entertainment development outside of Riyadh is expected to offer visitors access to immersive sport, arts and entertainment venues.
Commercial
In April 2023 the UK-based Royal Institution of Chartered Surveyors called Saudi Arabia one of the world’s most vibrant commercial real estate markets, citing data that showed that occupier demand in the first quarter of 2023 was the highest among all the countries it monitors. In May 2023 grade-A office space occupancy levels were at 97% in Riyadh, while grade-B premises were at 85%, according to Knight Frank. As of November 2022 office rental rates in Riyadh were $473 per sq metre for grade-A office spaces and $231 per sq metre for grade-B locations. In November 2022 average rents for equivalent spaces in Jeddah cost $284 per sq metre and $200 per sq metre, respectively, with occupancy running at 92% for grade-A spaces and 70% for grade-B spaces the same month. Notably, as of July 2023, 25 of the 39 office towers that were under construction in the King Abdullah Financial District in Riyadh, a 3m-sq-metre commercial development, were already fully leased.
Riyadh has seen a boom in the number of companies relocating their regional headquarters, spurred by a requirement that companies establish their regional base in the Kingdom if they want to bid on key government contracts. This has driven office demand nationwide. More than 70 companies have committed to relocating, and others are likely to do so ahead of the January 1, 2024 deadline. In 2023 some 63 ha of new space is planned for Riyadh – along with nearly 8 ha in Jeddah – amid a trend of repurposing space to accommodate new forms of hybrid working, as well as co-working and serviced offices. In addition, Jeddah has $90bn of real estate and infrastructure projects earmarked for completion by 2030, comprising 89,000 new homes, nearly 1.4m sq metres of retail space, and port and rail infrastructure expansions. However, the large influx of new supply promised by Vision 2030 development projects is unlikely to relieve near-term pressure on commercial space in the Kingdom.
Outlook
The construction, buying and selling of buildings and industrial services in Saudi Arabia is set to remain strong thanks to economic growth, significant oil revenue and ongoing giga-projects. Demand for everything from construction equipment and labour, to housing and office space is expected to remain elevated in the medium term.
Achieving Vision 2030’s goals of promoting sustainability and reaching net-zero emissions will require businesses to have access to the kinds of skills and talent that are expected to play crucial roles in the implementation of numerous high-level projects in a truncated timeframe. In addition, price pressures are likely to rise across the entire sector due to supply constraints, especially as the government starts to implement the measures necessary to drive competition in the market.
Nevertheless, the amount of public sector financing in construction projects is unlikely to diminish in the near future given the outsized resources available to the PIF. Meanwhile, market dynamics are likely to continue to create opportunities for companies that are able to utilise digital and artificial intelligence tools to maximise their production efficiency.
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