Challenges for construction as market fragments

31 December 2020
While Kuwait and Saudi Arabia performed better in 2020 than in 2019, the UAE did not fare as well due to its declining real estate market

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Industrial projects gain traction across Mena region
Water security trends upwards in region
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The region’s largest construction markets are divided in their outlook. In the GCC, Saudi Arabia is looking forward to future growth and the UAE is dealing with the mistakes of the past.

Outside the GCC, Egypt continues to dominate the agenda as it launches ambitious new projects.

The economic disruption and uncertainty over the future affected all GCC markets in 2020.

According to regional projects tracker MEED Projects, there were $34bn of construction and transport awards made in the GCC by late November and, with just one month to go until the end of the year, that total was 38 per cent down on the $55bn of contracts let during the whole of 2019. 

Kuwait was the only market to already outperform 2019 by the end of November. It had awarded $1.9bn of contracts during the first 11 months of 2019, an increase of 12 per cent compared with the $1.7bn it awarded in 2019. 

UAE decline

The other five GCC markets are all down compared with 2019.

Although the UAE remains the most active market, with $10bn of awards by the end of November, it is the worst-performing market when compared with 2019, when it awarded $26bn of deals.

While the 60 per cent drop will slightly narrow with contract awards during December, it is unlikely to improve its performance significantly.

The UAE also completed the most amount of work in 2020. By the end of November, it had completed $29bn of work, which, despite the operational disruption caused by the Covid-19 pandemic, is slightly less than the $31bn of work completed in 2019.

Combining the awards and completions data demonstrates the difficulties the UAE’s construction sector has faced over the past two years. If the total value of completions is subtracted from total value of awards to give an indication of market growth, the UAE market contracted by $18bn by the end of November 2020, a significant increase on the $6bn drop recorded in 2019. 

Saudi performance

The total value of deals awarded in Saudi Arabia was not as great as in the UAE, but was a better performance when compared with 2019. By the end of November 2020, the kingdom had signed $9bn of contracts, which is down 26 per cent on the nearly $13bn total registered during 2019. 

There was also a significant drop in completions when 2020 is compared with 2019. By the end of November 2020, there were $12bn of contracts completed in Saudi Arabia, a decline of 64 per cent when compared with the nearly $35bn completed in 2019. 

Subtracting completions from awards gives a market contraction of $3bn for Saudi Arabia for the first 11 months of 2020, which is an improvement on the $22bn figure recorded for 2019. 

The more positive numbers for Saudi Arabia do not reflect the improving sentiment in the market as construction activity on the kingdom’s new wave of large-scale projects starts. These schemes, which include the self-styled gigaprojects, were mostly launched in 2017 and over the past two to three years have been locked in the planning and design phases. 

In 2020, key elements of these projects started to move onsite. One of the most significant moments came in July, when The Red Sea Development Company (TRSDC) awarded an estimated $250m contract to a joint venture of local contractors Nesma & Partners Contracting Company and Almabani General Contractors for the airside construction works for the airport serving the Red Sea Project on the west coast of the kingdom. That award plus others means TRSDC is expected to have awarded close to $4bn of deals for work on The Red Sea Project by the end of 2020.

Megaproject activity

Significant construction contracts were also awarded at the Amaala, Qiddiyah and Dirriyah Gate projects, while at the same time consultancy activity ramped up as major construction packages moved toward the tender stage for the $500bn Neom project in the northwest of the kingdom. 

Selected contractors submitted prequalification documents in October and November for construction work on the infrastructure backbone of the Neom project. The deals cover building high bridges and viaducts, cut-and-cover utility tunnels, tunnel access points, drill and blast tunnels, and water reservoirs.

The infrastructure backbone is a corridor that will include utilities, roads and a railway, running more than 120 kilometres inland from the Straits of Tiran, the waterway that separates Saudi Arabia and Egypt.

Another major rail scheme, the Saudi Landbridge that will link Jeddah on the Red Sea with the capital Riyadh, is also progressing. The consortium developing the planned $10.6bn scheme presented the findings of the project’s feasibility study to the Transport General Authority in October and the award of the project’s engineering, procurement and construction contracts are expected in 2021. Saudi Railway Company and China Civil Engineering Construction Company signed a memorandum of understanding to implement the project using a public-private partnership (PPP) model in October 2018. 

PPP projects

Across all sectors, there are more than 100 planned PPP projects worth an estimated total of $90bn in Saudi Arabia, which includes social infrastructure. For schools, Tatweer Buildings Company (TBC) and the Education Ministry signed agreements for the first phase of the PPP schools programme, which includes 60 schools in Jeddah and Mecca, with a local consortium of Ajyad Knowledge for Education & Training and Al-Bawani Company in November. TBC has confirmed the bidders prequalified to work on the second phase of the programme, and a third phase is also planned.

In healthcare, the National Centre for Privatisation & PPP has received statements of qualification from interested firms for the deal to develop the 244-bed Al-Ansar hospital PPP project in Medina.

In the UAE, the outlook for new projects is less optimistic, but there are still upcoming opportunities. In Dubai, there are real estate projects moving forward, although the quantity and scale of the schemes coming to tender are a reduction on previous years. In Abu Dhabi, larger schemes are moving forward, such as housing projects for UAE nationals and civic projects such as museums. 

Arabtec crisis

Further clouding the outlook of the UAE’s construction sector is the future of its largest construction company, Dubai-listed Arabtec Holding. The company’s shareholders voted to liquidate the company in late September and shareholders were planning to meet at the end of November to review whether the liquidation deadline should be amended.

If the liquidation goes ahead as planned, it could have far-reaching consequences for an industry that is already struggling with challenging trading conditions. Experience from the UK following the collapse of Carillion shows that the contagion effect of a major main contractor leaving the supply chain with unpaid bills forces other subcontractors and suppliers into bankruptcy, which could then threaten the delivery of other projects they are working on. 

The banking sector will also be affected by Arabtec’s liquidation. Lenders are said to have close to AED2bn ($136m) of exposure to Arabtec in the form of loans and it is estimated they hold another AED8bn of company exposure in the form of performance guarantees. 

Decreased value

Outside the GCC, Egypt is the most active construction projects market, with just over $7bn of construction and transport awards in 2020 by the end of November. The construction sector has performed consistently over the past five years supported by major schemes such as the expansion to the Suez Canal, the New Administrative Capital scheme and additional lines for the Cairo Metro. 

The expectation is that this trend will continue into the future as the government continues to support infrastructure schemes together with the private sector.

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