Saudi construction firms set to see continuing pressure on margins

Strong competition will continue in Saudi Arabia’s construction sector due to extensive cuts in capital expenditure, forcing continued downward pressure on contractors margins, according to a new report.

Property consultancy Colliers International said the decline in construction costs in the Gulf kingdom is set to ease, but “tough” market conditions will prevail.

Construction costs have plummeted since the oil-price crash began in 2014, which led to a massive scaling back of building works in Saudi Arabia, Colliers said.

But it added that the rate of the decline in costs is forecast to ease next year and possibly reverse in 2018.

Average construction costs in Saudi Arabia declined by 3.1 percent in 2015, 11.5 percent in 2016, and are set to fall by a further 3.9 percent next year, its report added.

Its 2016 Construction Cost report said the prices of rebar dropped 13 percent, concrete prices dropped by 3 percent, and cement prices have remained stable.

It added that contractors’ profit and overhead pricing plummeted throughout 2016, in some cases to negative margins.

“As global construction related commodity pricing creeps up in 2017, this will affect the pricing of copper, aluminum and steel. Strong competition will continue due to extensive cuts in capital expenditure, thereby forcing continued downward pressure on contractors margins,” said Colliers.

It added that subsidy cuts in Saudi Arabia will be further passed onto increase material costs, which are manufactured within the GCC.

An increase of national workforce (1.6m to 1.8m over the next 5 years) coupled with public sector targets to reduce wages, will result in a requirement for increased Saudization within the private construction workforce, Colliers noted.