Construction and real estate in Saudi Arabia, the United Arab Emirates and Qatar – sectors critical to diversifying these economies away from hydrocarbons – are recovering from the challenges posed by COVID-19 lockdowns.
Revenues the windfall of high hydrocarbon prices is expected to lift the performance of the construction sector for the remainder of 2022 and 2023. The United Arab Emirates, Qatar and Saudi Arabia are expected to experience healthy growth in total construction, estimated at 6, 8%, 6.3% and 5.6%, respectively, in 2022. Going into 2023, all three countries are likely to continue to enjoy high construction growth rates, although Saudi Arabia is expected to exceed the two countries, posting a growth of 6.8%, while Qatar and the United Arab Emirates both increased by 5.6%.
Relatively high consumer prices and tighter global financing conditions are unlikely to slow the trend significantly. The main constraint to the performance of these sectors is likely to emerge from the supply side of the building materials market and the construction labor market. Demand for both is expected to rise, particularly in Saudi Arabia, where several megaprojects are likely to face delays as building materials become increasingly scarce.
Weaker growth elsewhere in the world will make the relatively high growth projected in the construction markets of Saudi Arabia and the other Gulf Cooperation Councils (GCCs) more attractive to foreign workers in the sector. Limited production capacities of building materials will likely lead to increased shortages of building materials and higher inflation of the prices of these materials.
The construction sector results for the first quarter of 2022 were disappointing in Saudi Arabia (and probably also in the United Arab Emirates), as the sector was caught up in the slowdown during the COVID-19 induced lockdown in 2020 and 2021. Many of the foreign workers, who make up the bulk of the sector’s workforce, returned to their home countries when the pandemic hit and have returned, albeit more slowly.
Sector performance improved in the second quarter of 2022, with construction gross value added in Saudi Arabia estimated to have jumped 8.0% in the quarter, seasonally adjusted. This result, combined with extremely strong growth in fixed investment, with capital expenditure for planned megaprojects being freed up in addition to the sectoral recovery, convinced us to raise the production outlook for the construction sector for 2022 and 2023.
Most megaprojects in Saudi Arabia will become major tourist attractions, triggering further multiplier effects for construction sector spending in the form of accommodation, equipment and other infrastructure. Consequently, tourism, construction and real estate, among other sectors, will be boosted by the large-scale projects, which are in line with the kingdom’s revenue diversification goal.
The challenge for construction prospects in the kingdom is the availability of construction workers, especially skilled personnel, and the rising prices of construction materials. Both of these factors will likely be mitigated by new influxes of construction workers, mainly from countries in South Asia and East Africa, and the current decline in construction material costs following a spike in commodity prices following the Russian invasion of Ukraine. The sheer demand could still lead to shortages of materials and workers in the realm in the short term.
The strong total construction growth in Qatar is partly due to the ongoing preparations for the 2022 FIFA World Cup. It is estimated that the Qatari economy has spent more than 60 times more than what South Africa has spent during his 2010 World Cup.
Qatar is planning a halt to several construction sector projects during the World Cup, which will slow down activity expected in November and December while the event is taking place. We do not believe the pause will lead to a longer-term slowdown in construction sector activity in the emirate.
The question of the use of stadiums and hotel rooms after the World Cup persists. While the risk could be partially offset by the prospects for additional tourism and hospitality in the coming years, particularly in the event of a successful hosting of the World Cup, the pace of construction and infrastructure spending is expected to slow markedly. compared to the period before the World Cup. Period 2022.
We believe that the main strength of the Qatari economy this decade, after the World Cup, remains the expected massive expansion of gas production capacity through the expansion of North Field, which is expected to see the production capacity of gas to rise more than 60% by 2027. It is likely to fuel an expansion in economic activity, especially as fast-growing and European economies seeking to replace Russian gas supplies eye new production of gas from the Gulf countries.
Neo Construction Perspectives Joseph Sibiya, Economist, Global Construction, S&P Market Intelligence
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.