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Boosting competitiveness, mobility & maintaining asset values require sustained progress

Al Mazaya Real Estate Report: Growing need to enhance efficiency of contracting sector to stop failing projects

 

Over 2,900 projects being implemented in Riyadh worth SAR 243 billion

The Gulf real estate market has succeeded in surviving many of the challenges and obstacles besetting the ongoing economic development, expansion and diversification drive. However, increasing the pace of activity and maintaining the value of assets invested still require further progress. And the need is now more urgent than before to enhance the efficiency of the relationship between owners, contracting companies and official authorities going all the way up to end users, who need to get real estate products at fair prices.

According to Al Mazaya Holding’s weekly real estate report, many of the challenges and obstacles that have been overcome and those that await more innovative solutions are related to contracting companies, which in the past have suffered from poor rating, often leading to projects faltering and difficult to deliver to their owners on time, which adversely affected the performance of the sector leading to the loss of many investments that were pumped on failing projects.

The report pointed out the growing need to launch as many projects as possible to meet the large rise in the number of residents and investors led construction companies to complete projects as soon as possible so as to take advantage of the momentum. However, this contributed to the entry of many unclassified and unqualified companies. In the meantime, many companies succeeded in adapting to the surrounding conditions, benefiting from the recorded pace of activity, and developed their tools and mechanisms to obtain appropriate classifications that earned them an appropriate presence in the local and regional real estate sector.

Shedding light on the Saudi real estate sector, the report shows that market indicators at the present time have shown a direct relationship between the failure of projects in most of the major cities in the Kingdom and the performance of construction companies. Within this context industry data indicate that stumbling projects in Riyadh valued SAR 34 billion, accounting for 24% of  the total projects under execution. Lack of technical and financial resources comes on top of direct causes behind the failure of real estate projects, while other projects stumbled for administrative, and regulatory considerations.

It should be noted here that the number of projects being executed in Riyadh exceeds 2,900 at an estimated total cost of SAR 243 billion. In addition, more than 880 projects were completed by the end of 2017 at a total cost of SAR35 billion. Projects with a total value of SAR216 billion are being executed, with completed projects being concentrated on the transport sectors, while delayed and troubled projects are found on the housing and public services sectors.

The report said that the Saudi real estate sector is attracting local, regional and global interest during the current period due to the ongoing investment plans and expansion of economic, commercial, industrial and tourism activities as well as real estate and energy projects.

However, reaching an international level of efficiency for construction companies is a target and a challenge at the same time, said the report.

The report addressed the official measures taken by the Saudi government to restructure the work of contractors and consultants in line with the ongoing developments and prerequisites of the Saudi Economic Vision 2030. The new measures are aimed at enabling the government to determine the real capabilities of contracting companies capable of qualifying for governmental levels. The new measures also aim to provide a professional working environment for contractors to ensure projects are being executed as per international standards, as well as to encourage contractors to improve performance.

The report said we can talk about the developments recorded and required in this regard without mentioning the developments and achievements made in terms of the performance of the construction sector and the classification of companies in the United Arab Emirates where the classification of construction companies in the Emirate of Dubai has been improving, overcoming many of the challenges and negative factors that accompanied the peak of recovery in the real estate sector during the period ahead of the global financial crisis in 2008, and the accompanying repercussions. Such developments prompted the official authorities there to update and modernise laws and legislation in order to prevent the recurrence of old mistakes, and boost performance in the property sector. Within this context, the Emirate of Abu Dhabi has been going in the same direction for several years. The new classification of contracting companies and consultants entered into force at the end of 2012, and requires contracting companies to obtain quality certification in terms of security and safety. The new system is expected to contribute to regulating the construction sector in the UAE capital to facilitate its contribution to the sustainable development drive in accordance with the requirements of the economic vision.

According to the report, there is a growing need to reach a balanced assessment within the framework of identifying the shortcomings and challenges faced by the sector of contracting companies in the countries of the region, which, the report says, must secure durable solutions in this concern.

Contracting companies in the Saudi market face great challenges in obtaining the necessary funding, while suffering at the same time from a decline in the number of projects being launched across the Kingdom. In addition, the fees imposed on employment and recruitment of new workers have a great impact on contracting companies, and resulted in reducing  the number  of projects in the government and private sectors. Finally, the non-availability of qualified sub-contractors represents an additional challenge faced by the sector.

Al Mazaya Report believes that if appropriate solutions can be found within the context of the implementation of a modern classification system, the sector will be able to overcome many of the challenges and obstacles that prevent its comprehensive and positive contribution to the national economy. It pointed out that more than 53%  of the contracting companies in Arab countries face liquidity challenges, while the decline in the pace of urban activity and fluctuations in the volume of government spending come second in terms of their impact on the performance of these companies.

The report underlined the need to benefit from the experience of major countries and companies at the global level in the coming period. It added that investment-conducive environments require constant development and modernisation in order to prevent the aggravation of challenges and negative impact on existing and ongoing projects and planning. The existence of a large number of contracting companies under such circumstances where urban activities are on the decline is another factor that weakens local companies’ ability to survive the headwinds over the coming period. In the meantime, some markets in the region have made some achievements and are still forging ahead in implementing many projects, which verifies the fact that the existence of developed contracting sectors is likely to protect investments and ensure growth at the local and regional levels.