Oil and gas revenues will boost real estate and construction spending in the Gulf

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Construction and real estate in Saudi Arabia, the United Arab Emirates and Qatar — sectors critical to diversifying those economies away from hydrocarbons — are recovering from the challenges posed by COVID-19 lockdowns.

The revenue Windfall from high hydrocarbon prices is expected to carry the performance of the construction sector in the remainder of 2022 and 2023. The UAE, Qatar and Saudi Arabia are expected to see healthy overall construction growth estimated at 6.8%, 6.3% and 5.6% respectively. and in 2022, respectively. In 2023, all three countries are likely to continue to see high growth rates in construction, although Saudi Arabia is expected to overtake the two countries with growth of 6.8%, while Qatar and the United Arab Emirates both grow by 5 .6% increase.

Total Construction Expenditure Data Middle East Qatar Saudi Arabia UAE

Relatively high consumer prices and more restrictive global financing conditions are unlikely to slow the trend. The main constraint on the performance of these sectors is likely to come from the supply side of the building materials and construction workers markets. Demand for both is expected to increase sharply, particularly in Saudi Arabia, where several mega-projects are likely to face delays as building materials become increasingly scarce.

Slower growth in other parts of the world will make relatively high projected growth in construction markets in Saudi Arabia and other Gulf Cooperation Council (GCC) sectors more attractive to foreign workers. Limited production capacity for building materials is expected to result in increasing shortages of building materials and rising price inflation for these materials.

Saudi Arabia

The results of the construction sector for the first quarter of 2022 were disappointing in Saudi Arabia (and probably also in the United Arab Emirates) as the sector was gripped by the downturn during the COVID-19-induced lockdown in 2020 and 2021. A large number of migrant workers, who make up the bulk of the sector’s workforce, returned to their home countries when the pandemic hit and are coming back, albeit at a slower pace.

The sector’s performance improved in the second quarter of 2022, as construction gross value added in Saudi Arabia is estimated to have increased by a seasonally adjusted 8.0% in the quarter. This result, combined with an extremely strong growth in fixed investments, with investments being released for planned mega-projects in addition to the recovery of the sector, convinced us to raise the prospects for the production of the construction sector for 2022 and 2023.

Most mega projects in Saudi Arabia will become major tourist attractions, which will trigger further multiplier effects on construction sector spending in the form of housing, facilities and other infrastructure. Therefore, tourism, construction and real estate, among others, will be boosted by the large-scale projects that meet the Kingdom’s goal of income diversification.

The challenge for the construction prospects in the kingdom is the availability of construction workers, especially skilled workers, and rising building material prices. Both factors should be mitigated by the continued influx of construction workers, mainly from South Asian and East African countries, as well as the recent decline in construction material costs following a spike in commodity prices following the Russian invasion of Ukraine. The sheer demand could still cause material and labor shortages in the kingdom in the near future.

Qatar

Qatar’s high overall construction growth has been driven in part by ongoing preparations for the 2022 FIFA World Cup. It is estimated that the Qatari economy spent over 60 times more than South Africa during its 2010 World Cup.

Qatar plans to pause several projects in the construction sector during the World Cup, which will slow projected activity in November and December while the event takes place. We do not believe the pause will result in a longer-term slowdown in construction activity in the emirate.

The question of how stadiums and hotel rooms will be used after the World Cup remains. While the risk could be partially offset by prospects for further tourism and hospitality over the next few years, particularly if the World Cup is successfully hosted, the pace of construction and infrastructure spending is likely to slow significantly compared to the period leading up to the 2022 period.

We estimate that the key strength of the Qatar economy in this post-World Cup decade remains the expected massive expansion of gas production capacity through the expansion of the North Field, which should increase gas production capacity by more than 60% by 2027. This is likely to spur an expansion in economic activity, especially as fast-growing and European economies trying to replace Russian gas supplies will eye new Gulf state gas production.

Construction insights from Neo Joseph Sibiya, Economist, Global Construction, S&P Market Intelligence

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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.

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