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The annual tender price inflation (TPI) in Saudi Arabia has risen by 5 percent in 2022, driven by growing contractor and labour demand, commodity, and construction material price fluctuations, JLL said in its fourth quarter 2022 KSA construction market intelligence report.
The midpoint TPI forecast shows a potential year-on-year growth of 6 percent in 2023 associated with the estimated project pipeline value correlated to future demand, the consultancy said, citing information gathered from market sources.
Global economic volatility in the first two-quarters of 2022 created challenges in the Saudi construction market with regard to delivery lead times and rapid price hikes with suppliers reluctant to guarantee prices for extended periods
However, the sector saw improvements in the third quarter, implying that price peaks have passed. Nevertheless, price increases remain a significant risk due to the correlation between economic factors and observed trends since 2020.
JLL emphasised that future construction costs must be balanced against the local market and global economic factors.
Though commodity prices are softening or have already flatlined, the Saudi construction sector is heating up, putting pressure on the existing supply chain, and highlighting the need for greater competition to complete the pipeline of projects.
Need for mitigation strategies
While inflation projections for the Kingdom are relatively soft compared to global averages, Saudi Arabia, as well as the wider MENA region, relies on importing construction materials from high inflationary countries, which affects construction material prices.
“Given the volatile market conditions and rising construction material prices, which reached a significant peak during Q2 2022, there is a need for robust mitigation strategies, including a careful approach to contract execution and risk allocation,” said Laura Morgan, Market Intelligence Lead MEA at JLL.
Moving forward, the construction sector will prioritise development needs aligned with evolving trends and demands, emphasising innovation and digitisation playing a significant role within the segment and in powering Vision 2030 projects.
“That said, the importance and opportunities associated with traditional cost management mechanisms, which can assist developers in establishing budgets during the early stages of procurement in an effort to reduce program delays and support conflict avoidance, cannot be overlooked either,” she added.
Growth to Continue
Construction output growth in Saudi Arabia is anticipated to rise by 3.2 percent in 2022, with a further annual average growth rate (AAGR) of 4 percent between 2023 to 2026, JLL said, citing Global Data.
Saudi Arabia has maintained its position as the strongest market across the MENA region, with the highest total value of project awards for four consecutive years.
As of October 2022, the consultancy said that Saudi Arabia holds a 35 percent market share with a recorded $31 billion worth of contract awards against an overall MENA total of $87 billion, citing MEED Projects.
(Writing by D Madhura; Editing by Anoop Menon)
