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Al Mazaya Report: construction material sector capable of revitalising investment prospects

Mobility of the construction material sector across the Gulf markets significantly hinges on the pace of real estate and infrastructure projects, with the region showing vulnerability towards the developments experienced in other key sectors, including energy, banking and tourism.

The building material sector has a number of advantages, being part of the stimulus plans adopted by the region’s states to expand and revitalise other sectors, especially the industrial platform.

In the meantime, it has transpired that the open market system applied in the Gulf region adversely affects the current status and future of the domestic building materials sector in light of the abundance and oversupply of imported products in quantity and quality, including their preferential prices, which impose a difficult reality, especially when supply of real estate developments slows down.

 

Infrastructure Development

Al Mazaya Holding said in its weekly report that building material prices are currently hitting significantly low levels matching prevailing real estate rates. Prices of construction materials play a direct role in accelerating or decelerating the completion of real estate projects, the report indicated.

The report evaluates current infrastructure projects in the region at about US$1.1 trillion. Roads and bridges developments account for the majority of projects currently being implemented by the region’s governments in line with their comprehensive development plans.

The Kingdom of Saudi Arabia and the United Arab Emirates are at the forefront of spending on infrastructure projects across the region, with  Expo 2020 Dubai’s projects estimated at AED 15 billion. The report doubles on the fact that the building material sector is one of the main sources of income for the building and construction sector in the region. Therefore, the higher the volume of investments in the sector is, the more positive economic and real estate growth will be.

Oversupply

Al-Mazaya report added that signs of decline in the real estate markets, in general, have reflected negatively on the pace of demand and prices of building material in the countries of the region, due to an excessive property glut that goes beyond market needs. Therefore, the report adds, the domestic building material sector should develop its own innovative  tools to increase exports and reduce imports of foreign material which are highly likely to deal a heavy blow to the domestic industry should the current state of dumping and oversupply persist.

Positive indicators

Al Mazaya said that the region’s construction materials industry heavily relies on the real estate industry, despite its volatilities. Current data indicate that the total value of construction projects in Dubai during the period from 2014 through 2030 will hit to the tune of $870 billion. The sector plays a significant role in ensuring success for the economic diversification strategy, as it is closely linked to primary sectors such as the aluminium, cement and finance sectors. Government endeavours and plans appear to be supportive and stimulating for the industrial sector, including manufacturing industries. The UAE federal government seeks to raise the contribution of the industrial sector to GDP to 16% by 2021 and 20% by 2025, targeting new investments of about $70 billion.

While Saudi Arabia leads the construction industry at the regional level and has the highest domestic demand rates, pressures on its construction sector are casting a negative shadow on demand, in addition to creating difficulties in opening up new markets.

In the meantime, the current low prices of building materials represent a catalyst for those seeking to build homes and investment projects, capitalising on the current stagnation witnessed in the construction sector, which led to a drop in demand for building material. Current industry indicators show positive signs of growth in the construction sector through the launch of various new projects with an average annual value of US$100 billion. Construction sector assets currently hit to the tune of US$53 billion, with the Saudi construction sector accounting for 39% of the entire GCC construction market.

Challenges & Opportunities

The report highlighted the challenges faced by primary sectors as an opportunity to develop their performance and boost their competitiveness.

The construction industry, in general, and manufacturing and building materials in particular, require protectionist frameworks against the unfair competition of foreign companies, which seek to dominate the region’s markets.

Other challenges include energy and operating costs as well as hard-to-get finances for SMEs, the report added, noting that the current level of investments in the sector makes it difficult for the region to turn into consuming markets.

Solutions

Al Mazaya’s report highlighted anti-dumping duties as suitable solutions that can be applied to re-energise investments, bearing in mind that the effects of dumping duties on imports will push domestic prices up. However, prices will remain within the limits currently recorded with no negative bearing on sector performance or increasing recession prospects. The report stressed that the local building material industry is able to even meet higher domestic demand than the current ones, especially if current fees have been reconsidered.

The report concluded by saying that such a solution is conducive to optimising total project costs and ensuring the attractiveness of real estate developments.