Industrial Projects And Housing Lead Positive Growth Story

BMI View: We expect that industrial construction projects along with sizable investment in affordable housing will drive real growth within the Saudi residential and non-residential sector over our 10-year forecast period. Our Infrastructure Key Projects Database show that efforts to expand the non-oil economy is yielding billions of dollars of investments, and our new forecasts for the residential and non-residential construction see real growth averaging 7.6% up to 2023.

We hold a very positive outlook for the residential and non-residential building sector over our 10-year forecast period; our new forecasts are based on existing and anticipated large-scale government investment in a broad base of residential and non-residential projects, focussed on developing new economic cities to broaden Saudi Arabia's non-oil economy. Also, we believe the Kingdom will continue ploughing funds into housing and social infrastructure over the next year as the government remains keen to keep the population placated in the wake of the troubles in the wider Arab world. That said, we note the risk of tightening budgetary pressures on the horizon, which may have seen the major investment spends in the social infrastructure sector already pass.

Widening The Economic Base

Industrial Base Growing
Industrial Projects Under Development By Sector, % of Total Value (USD110bn)

Industrial Projects And Housing Lead Positive Growth Story

BMI View: We expect that industrial construction projects along with sizable investment in affordable housing will drive real growth within the Saudi residential and non-residential sector over our 10-year forecast period. Our Infrastructure Key Projects Database show that efforts to expand the non-oil economy is yielding billions of dollars of investments, and our new forecasts for the residential and non-residential construction see real growth averaging 7.6% up to 2023.

We hold a very positive outlook for the residential and non-residential building sector over our 10-year forecast period; our new forecasts are based on existing and anticipated large-scale government investment in a broad base of residential and non-residential projects, focussed on developing new economic cities to broaden Saudi Arabia's non-oil economy. Also, we believe the Kingdom will continue ploughing funds into housing and social infrastructure over the next year as the government remains keen to keep the population placated in the wake of the troubles in the wider Arab world. That said, we note the risk of tightening budgetary pressures on the horizon, which may have seen the major investment spends in the social infrastructure sector already pass.

Widening The Economic Base

By far the major driver in terms of value growth within our residential and non-residential real growth forecasts is industrial construction; petrochemical complexes, metal and mineral refineries, oil refineries and manufacturing plants under development within our Infrastructure Key Projects Database add up to nearly USD110bn worth of capital investment in the pipeline in the coming years. Investments are being made to extract greater value from Saudi Arabia's natural resources. Projects include the USD20bn Sadara  Chemical  Company, a joint venture between Saudi Aramco and the US' Dow Chemical, the USD10bn Yanbu refinery being developed by Saudi Aramco and China's Sinopec, and an expansion of the Petro Rabigh petrochemicals facility.

Industrial Base Growing
Industrial Projects Under Development By Sector, % of Total Value (USD110bn)

It is the industrial sector which we expect to support our long-term view for residential and non-residential construction, which is that by the end of our forecast period, it will be growing at a faster rate than infrastructure. In particular, the development of industrial 'cities' across Saudi Arabia, will be a key factor behind this, as Saudi aims to boost less traditional manufacturing industries such as autos.

Indeed it is vital that Saudi develops a more diverse industrial base, as while over the short to medium term oil and gas projects will offer major opportunities, it is our view that downstream projects will become rarer. We have already seen considerable developments in Saudi Arabia's downstream business, with the 400,000b/d Jubail refinery becoming operational in October 2013. The Yanbu and Jazan refineries, also both with a 400,000b/d capacity, are due to come online in 2015 and 2017, respectively. However, while Saudi Arabia's natural resource base supports the expansion of the oil refining sector by providing a reliable source of crude, we expect the country to face greater challenges with other downstream developments.

This is particularly the case for the petrochemicals sector which will demand a large volume of natural gas - currently in tight supply. While Saudi Aramco is pledging to invest heavily in unconventional gas developments and increase gas production, at present, gas which could be used elsewhere is being directed towards growing demand in the power sector.

Building Over Infrastructure
Residential and Non-resindential Building and Infrastructure Industry, Real Growth % chg y-o-y

Despite high levels of investment, we are forecasting that the sector will struggle over 2014. This is in line with our view that over the first half of the year smaller, local players which are undertaking much of the work in the residential and non-residential building sector would be adversely affected by the new Saudi labour laws, as opposed to the major players who are building infrastructure projects. However, we expect a bounce back in 2015 with 9.9% real growth and then for the sector to average 7.6% up to 2021. Importantly from 2022 onwards we expect the sector to outperform in terms of growth the infrastructure sector. As government investment in infrastructure wanes, we expect that the private sector will capitalise on an improved logistics and power networks, and become the driver of investment. 

Housing A Key Government Target

While individual projects themselves may not be high in value due to a focus on affordable housing, our positive forecasts for residential and non-residential sector has been heavily underpinned by two housing budgetary provisions: firstly, the two packages of social benefits outlined in Saudi Arabia's Ninth Development Plan (2010-2014), amounting to USD130bn in funds for education, healthcare and housing; secondly, a pledge of an additional USD66.7bn to be spent on housing that was added to the bill. With housing a key priority of the government - it is estimated that developers must build around 300,000 new units a year just to keep the deficit at 1.65mn homes - there have been increasing efforts to turn these pledges of government funds into tangible results. 

Despite the demand for housing, there have been structural issues within the housing market which have stymied sales. A sluggish bureaucratic system has resulted in people being slow to receive state aid to purchase houses or land. In response, the government has launched a scheme to provide housing aid to its citizens. Through ESKAN, Saudi citizens will be able to register for state aid and receive their allocation within three months.

It is hoped that the universality of the system will reduce the complexity of allocating state support, and allow for those most in need to be targeted. The situation will become clearer for the private sector to allocate resources to projects, be it real estate developers or banks and mortgage firms. This will address a key issue within the sector; in September 2013, the Jeddah Chamber of Commerce and Industry (JCCI) stated that there is a lack of market information across the country with regards to the demand for housing, which is creating a situation whereby houses are built but not sold, which subsequently puts off the building of more badly needed homes.

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