The outlook for GCC's construction projects market

It has been more than 18 months since the pandemic took hold the world over. Over this time, few sectors and industries globally have been left untouched by the economic upheaval and disruption left in Covid’s wake. The construction market has been no exception. Experts from Deloitte and MEED Projects walk through the state of GCC’s construction projects market and its outlook. 

In 2020 total contract awards of construction projects dropped 35% to just $69 billion as the coronavirus, falling oil prices and lower government spending precipitated a dramatic slowdown in capital expenditure. As a result, last year was the worst for the market in nearly two decades.

Yet while the virus’ effect on spending levels is undeniable, not every market and sector experienced the same impact. Worst hit were Saudi Arabia and the United Arab Emirates (UAE) where year-on-year contract awards declined 53% and 33% respectively according to data from MEED Projects.

However, expenditure in Qatar fell by only 6%, while in Oman and Kuwait award values actually increased on 2019 totals, albeit from a much lower base.

Outside the GCC, Iraq and Egypt also registered growth. Individual sector performance was also uneven. Construction, historically the largest market segment, saw deals fall 29% year-on-year to $29.7 billion, while oil and gas had precipitous falls of 74% and 76% respectively. On the other hand, both the power and water sectors grew marginally on their 2019 totals, reflecting the growth over the past half-decade in renewable energy production and water treatment and distribution projects.

The overall decline in spending was compounded by a fall in contracts moving from tender to final award. In 2019, 88% of 667 projects under bid evaluation at the start of the year were awarded within the next 12 months. However, in 2020 only 58% of the 713 under bid projects were awarded over the same timeframe, reflecting the inherent uncertainty caused by the pandemic and the subsequent need for many clients to reconfigure their schemes. 

Covid-19 has not been the only factor behind the market’s performance. In Dubai, once the single largest projects hub in the region, the ongoing oversupply of property has been the overriding driver for the decline in its market. While Abu Dhabi and the Northern Emirates have been reasonably stable over the past few years, a lack of new project launches in 2020 resulted in the Dubai market shrinking to just a quarter of its 2017 peak, thereby making Abu Dhabi the largest projects market in the federation for the first time since 2013.

After the 2020 annus horribilis, the market’s expectation for 2021 was high. But while it has performed better, the recovery has arguably not been as quick or as strong than might have been hoped. Contract awards for the first nine months of the year were $58 billion compared with $69 billion for 2020 as a whole.

The 2021 market is therefore likely to outperform the year previous but is still going to fall far behind the 2019 number as the region continues to shake off the pandemic’s lingering impact. 

Bright spots

There have been some bright spots, however. Qatar is likely to outdo 2019 and 2020 combined thanks to some $15 billion of contract awards this year on its massive LNG program. A final push on projects to be completed in time for next years FIFA World Cup has also helped. Similarly, Kuwait, Bahrain and Oman could well match or even exceed the 2019 and 2020 totals.

The UAE remains the most disappointing market having awarded just $9.6 billion of contracts in the first three quarters of the year. The continuing dearth of new projects in Dubai and ongoing delays in several major oil and gas projects in Abu Dhabi have contributed to the slump.

That said, the recent rise in property prices and the successful launch of a handful of notable villa projects suggest that the emirate may have turned the corner. The 2020 Expo in Dubai is providing a boost to its short-term fortunes.

But it is Saudi Arabia where most eyes are currently fixed. The region’s largest economy has in recent months begun to ramp up tendering on its Public Investment Fund (PIF) ‘gigaprojects’ program, particularly on the Neom, Red Sea, Diriyah Gate and Qiddiya developments as it seeks to turn its ambitious tourism and real estate plans into action on the ground.

Since the summer of 2021 more than a dozen major contract packages have been released on Neom alone as the estimated $500 billion development enters full-scale construction.

This is just the beginning; there are an eyewatering $720 billion worth of projects under the PIF program alone of which only 1% have so far been awarded. It is no surprise therefore that many UAE-based consultants and contractors are increasingly focusing their resources on the kingdom. Although only $18.2 billion of contracts were awarded in Saudi Arabia in the first nine months of 2021, the sheer number of projects out to bid suggests that next year could see a record-breaking total if all goes to schedule.

In total, there are a little over $173 billion worth of projects under tender in the GCC, of which $80 billion are in Saudi Arabia. This indicates a very healthy short-term pipeline as projects where tenders have been issued are typically expected to be awarded in the next six months. This also reflects the large backlog of contracts delayed by the pandemic and suggests the next 12 months could witness a substantial pick-up in activity levels as the market continues its recovery.

Further reading: Saudi Arabia needs to learn from the past for future mega-project success.

The long term outlook

Longer term, the outlook is even brighter. There are currently more than $2.3 trillion of known planned and un-awarded projects in the pipeline in the GCC. Saudi Arabia has the largest share of this at $1.18 trillion worth of projects. The kingdom is followed by the UAE, with just under $650 billion and then Kuwait, Oman and Qatar each with between $125 billion and $170 billion of future projects. Even if only half of these projects go ahead, this would still compare favorably with the more than $1.2 trillion worth of contracts awarded in the region over the past decade.

It has been an undeniably difficult period for the regional projects market, but the strong short and long-term pipelines suggest that there is light at the end of the tunnel. Yet while there is still plenty of work for years to come, contractors and the projects supply chain in general cannot afford to stand still. Digitalisation of the construction industry is gaining momentum as clients demand greater efficiencies and reduced costs.

Emerging construction technologies such as 3D printing, big data, digital twinning, robotics and the internet of things are increasingly being employed on projects and companies that fail to embrace innovation will run the risk of finding themselves side-lined.

Traditional challenges also remain. Fewer opportunities and late payments continue to pose headaches to contractors and their supply chain partners. The world is a very different place to where it was 18 months ago. The most successful companies going forward will be those that adapt fastest to change while maintaining strong business fundamentals. And if there is one lesson learnt from the pandemic it is that those that fail to change will run the risk of being left by the wayside.