Fall in Saudi construction costs to ease, but ‘tough’ market persists

Construction material costs have been on the decline in Saudi Arabia, according to Colliers data.

LONDON: The decline in construction costs in Saudi Arabia is set to ease, but “tough” market conditions will prevail in the industry, real estate firm Colliers International forecasts.

Construction costs have plummeted since the oil-price crash began in 2014, which led to a massive scaling back of building works, the cancelation of many projects, and contractors slashing profit margins.
But the rate of the decline in costs is forecast to ease next year and possibly reverse in 2018, said Bob Flanagan, managing director of project management and cost consultancy in the Middle East at Colliers International.
Average construction costs in Saudi Arabia declined by 3.1 percent in 2015, 11.5 percent in 2016, and are set to fall by a further 3.9 percent next year, Colliers forecasts.
Constructing an upmarket high-rise office building currently costs between SR4,207 and SAR5,124 per square meter, Colliers data show. But that is set to decrease to between SR4,072 and SR4,960 by late 2017, it said.
The decline in construction costs is “not a great trend for the industry as a whole”, Flanagan said. But the rate of decline is slowing, he pointed out.
“The rate of drop in construction costs will start to slow, if not reverse, into 2018,” Flanagan told Arab News.
A key factor behind declining construction costs has been the lower profit margins charged by building contractors, Flanagan said.
Before the oil price crash, contractors typically made a profit of between 10 and 20 percent on a job. Now, construction contracts typically attract a lower profit margin, or even a small loss, he added.
But there is a limit as to how long this can be sustained, Flanagan said.
“There’s only so long that they can price projects at low cost and at low margins. So at some stage… prices have to stabilize in order for the industry to survive.” Colliers data show that construction material costs have also been on the decline, with prices for reinforcing steel, which is known as rebar, down 13 percent and concrete down by 3 percent this year.
But trends in material prices will also reverse, softening the decline in overall construction costs, Flanagan said.
“Global construction commodity materials, such as aluminum, steel, and these type of materials, will start to slowly creep up from 2017 onward,” he said.
Other factors influencing the forecast slowdown or reverse in construction cost declines include Saudi Arabia’s plan to introduce a value-added tax in 2018, and expected higher inflation rates, Flanagan added.
Yet easing price drops do not suggest a recovery in the troubled Saudi construction market.
According to a report by The National Commercial Bank, there was a “sharp drop” in construction awards in the first half of this year. Approximately SR48.2 billion worth of construction contracts was awarded in the first half of 2016 — less than half the SR116.9 billion awarded during the same period in 2015, the bank said.
“When oil prices dropped it had a knock-on effect on construction, and it appears it also had a knock-on effect on a number of projects in the market, and confidence in the market,” Flanagan said.
The forecast trend in construction costs does not indicate that the woes of the Saudi construction industry are over, the consultant said.
“It’s definitely not a recovery in the construction industry,” he said.
But there are some positive signs on the horizon, such as the implementation of more public-private partnerships in the local market, he added.
“Procurement strategies will need to change — so the introduction of more public-private partnerships, PPPs. But it probably needs some support, and some framework policies, to be imposed by the government in order to make them more mainstream,” Flanagan said.
“It’s not all negative, but it is going to be tough in the short term.”