Construction costs in Saudi Arabia and the UAE are in danger of accelerating over the next few years as both countries pour billions into infrastructure, energy and housing projects, observers have warned.
Rises in the prices of steel, cement, glass, aluminium and components for air conditioning systems are driving the growth of building materials costs, according to the global project management consultancy Currie & Brown.
The UAE, with the construction sector busy from Abu Dhabi and Dubai to Ras Al Khaimah and Fujairah, is experiencing similar, if less acute cost challenges to Saudi Arabia.
It is likely that construction costs will rise by 5 to 7 percent this year in Saudi Arabia, and by 2 to 5 percent in the UAE, says Doug McGillivray, managing director for the southern Gulf at Currie & Brown.
Demand for professionals in the mechanical, electrical and plumbing sector, as well as for high-rise construction, sports infrastructure engineering and project management are adding to cost inflation.
“If the proposed projects in both countries begin to run concurrently, we expect these materials and skills to experience faster-than-average cost inflation over the next two to five years,” McGillivray says.
Among the big projects currently running in the UAE, Dubai has restarted work on Palm Jebel Ali. Abu Dhabi is expanding its industrial infrastructure, and Ras Al Khaimah is establishing an entire residential and tourism landscape around a Wynn Resort that will house the Gulf’s first casino.
The development of renewable energy sites and of data centres in both Saudi Arabia and the UAE is putting further strain on inputs, including labour.
Saudi Arabia is building a whole new region in Neom, as well as the world’s tallest building in Jeddah; history’s “most complex structure”, the Mukaab in Riyadh and the largest water park in the world in Qiddiya.
Neom alone is said to be consuming a fifth of the world’s steel.
Cement sales in Saudi Arabia grew more than 12 percent year on year in the fourth quarter of last year, according to a local supplier, Al-Yamama Cement.
All this is paving the way for the largest Arab economy to become the world’s largest construction market by 2028.
Dean Furey, who heads the real estate practice in Saudi Arabia for the global project management company Turner & Townsend, says: “Riyadh is currently one of the most expensive cities for construction in the region,” with an average cost of $2,600 per square metre.
Meanwhile, the flow of supplies is hampered by the reduction in maritime traffic through the Red Sea because of Houthi militia attacks, and by the impact of the Gaza war on general business sentiment.
“While a ceasefire has been announced, companies remain cautious and this is impacting supply chains, causing delays for goods being shipped to Saudi Arabia,” Furey says.
In an effort to counter this, Saudi authorities are working to localise the supply chain and prioritise Vision 2030 projects linked to international events such as the Asian Winter Games in 2029, the Expo in 2030 and the Fifa World Cup in 2034.
As part of this strategy, the state-owned Public Investment Fund this month acquired a 30 percent stake in Masdar, one of Saudi Arabia’s largest construction materials distributors.
At Currie & Brown, McGillivray says: “If local manufacturing capacity expands over the next couple of years, especially in Saudi Arabia, and supply chains adapt, we may see some cost stabilisation in materials.
“However, labour shortages could persist, due to the sheer scale of developments.”
Local stakeholders will need to embrace a greater degree of flexibility and invest in new approaches to get around possible bottlenecks, such as localising production and procurement and training local employees, McGillivray says.
Dal Bhatti, head of the construction practice for India, the Middle East and Africa at Marsh, a global insurance brokerage and risk management firm, says that notwithstanding the construction activity, insurance rates in the Saudi construction sector remain competitive relative to global averages.
“Insurers themselves have made a realisation that this is where the developments and investments are happening,” Bhatti says. “What we are seeing in the region is insurers releasing capacity, which can result in more competitive pricing and terms and conditions.”
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