Saudi Arabia’s M&A volume reached $955 million in the first quarter, driven by the chemical sector

RIYADH: Saudi Arabia’s state-backed initiatives, including NEOM and Vision 2030, are driving growth in the construction sector, attracting significant domestic and international investment, an analysis has found.

In its latest report, global consulting company Turner & Townsend emphasized that the Kingdom’s preparations for EXPO 2030 and the 2034 FIFA World Cup are also driving the construction activities.

This comes after Saudi Arabia emerged as the leader in global construction activity in the first quarter, with the Kingdom home to projects worth $1.5 trillion, according to a report released earlier this month by real estate consultancy JLL.

JLL’s analysis further showed that the Kingdom accounted for 39 percent of all construction projects in the Middle East and North Africa region, worth $3.9 trillion.

“The standout story is the accelerated growth of Saudi Arabia, where huge ambitions are being realized through projects such as The Line, King Salman Park and Diriyah Gate,” said Mark Hamill, director and head of real estate and major programs in the Middle East, at Turner & Townsend.

The Line is a linear smart city currently under construction in Saudi Arabia’s $500 billion NEOM megacity, while King Salman Park is a large-scale public park and 4,102-acre urban district under construction in Riyadh.

The report highlights that despite political uncertainty, significant investment is driving growth in the Gulf region as countries seek to diversify production beyond traditional energy sources.

This comes against the backdrop of a Turner & Townsend ranking that placed the Kingdom as the 19th most expensive country in the world to build in, a sharp contrast to the US which dominated the top 10 list.

The report further noted that construction cost inflation in Riyad is declining from a high of 7.0% recorded in 2023, but is projected to remain high at 5.0% through 2024.

The analysis also highlighted Saudi Arabia’s efforts to attract tenants from around the world through its regional headquarters program.

She added: “This program encourages companies to open offices in Saudi Arabia, and office investment is cost-effective, with the average multi-story office building in the Riyad Central Business District costing a relatively low $2,266 per square meter.”

The British company also noted that Saudi Arabia is also facing a shortage of skilled labor, which is crucial for the construction works to materialize and be completed as planned.

“Skilled labor shortages are also driving up costs, as Saudi Arabia suffers from a clear shortage of the skilled labor needed to implement its most ambitious programs. The talent and resources needed to implement mega projects in the country also increase the overall efficiency of the Middle East supply chain,” the report said.

Regional insight

According to the report, Qatar’s capital, Doha, is the second most expensive market in the region at $2,096 per square meter.

However, due to strong production in the run-up to the 2022 FIFA World Cup, construction cost inflation is expected to decline from 3.5% in 2023 to 2.5% in 2024, the study said.

On the other hand, the average construction cost in Dubai is $1,874 per square meter, which is supported by high tourist activity and the development of the residential sector.

“The United Arab Emirates has been a popular tourist destination in the region in recent years, and its relatively low construction cost compared to Western markets continues to make it an attractive location for building transport hubs and facilities for international tourists,” the report said.

He added: “In Dubai, residential development is reinvigorating the local market as the city seeks to support its growing population. Its market attractiveness is increased by the comparatively low construction cost.

On the other hand, Abu Dhabi is the fourth most expensive market in the Middle East at USD 1,844.2 per square meter.

Hamill noted that as inflation declines, significant real estate opportunities are opening up in the United Arab Emirates and Qatar.

He added: “However, as workforce capacity is stretched across the region, customers will need to review their procurement and contracting models to help mitigate supply chain disruptions and maximize the potential opportunities on offer.”

Global perspective

The report shows that the number of construction pipelines around the world will increase this year, but skills shortages may remain a serious problem.

“The global real estate market is emerging from a difficult period of inflationary pressure, volatility and disruption. Our sector has proven resilient and our focus on building a new approach to procurement and developing the supply chain to increase efficiency and productivity is opening up new opportunities in many markets,” said Neil Bullen, managing director of global real estate at Turner & Townsend.

He added: “Customers need to understand where labor market bottlenecks may be limiting their capital investment programs and work with the supply chain to understand how to best mitigate supply risk.”

The United States dominated the rankings of the most expensive places to build, with six cities from this country in the top ten.

New York retained its position as the most expensive market to build in for the second year in a row, with an average cost of $5,723 per square meter, followed by San Francisco at $5,489.

Zurich took third place, overtaking Geneva in the ranking with an average cost of $5,035 per square meter. Geneva, which came in fourth place, averaged $5,022 per square meter.

The US cities of Los Angeles, Boston, Seattle and Chicago took fifth, sixth, seventh and eighth place on the list, respectively.

In Asia, Hong Kong ranked ninth with an average cost of $4,500, followed by London with an average cost of $4,473.

The report also highlights that implementing technology in the construction sector can help overcome various challenges facing the industry.

“Accelerating digitalization also presents a huge opportunity, but requires us to keep up with demand for skilled labor, and persistent shortages could limit potential growth,” Bullen said.

He added: “As interest rate cuts become an increasing possibility for many markets and pent-up investor appetite can be unlocked, production capacity can be further tested.”