The 966, Episode #134, Saudi Arabia’s Booming Construction Sector with Laura Morgan, Market Intelligence Lead, MEA, JLL

Richard Wilson (00:00.884)
Hello and welcome to The 966 episode #134. I'm your host Richard Wilson and we are delighted to have with us today, Laura Morgan, market intelligence lead Middle East and Africa for JLL. Also known by us old timers as Jones Lang LaSalle, a leading global commercial real estate investment management company. Laura, thank you. Thank you for joining The 966 today. I'm really looking forward to our conversation.

Yes. The catalyst for our connecting was JLL's latest KSA construction market intelligence report. And I want to dive into that. But before we do, can you tell us a little bit about JLL and JLL in the region?

Laura Morgan (00:55.198)

Yes, absolutely. we are, as you mentioned, a real estate company. We focus on the end to end of cross projects, and we offer services from initial development assessments and through our strategic consulting team, all the way through to project delivery and program delivery. We're based in the major markets globally, but looking at the region itself, we've got offices in the UAE, in Saudi, in Egypt. And yes, we're serving high profile, amazing clients that are working on some really exciting schemes at the moment.

Richard Wilson (01:33.03)

It's an exciting place to be, for sure. So, what's your background? You've spent a lot of time in AECOM.

Laura Morgan (01:41.024)

I was with them for about 15 years in the UK and I came out to Dubai with them and then I moved across to JLL three years ago and picked up more of the market intelligence delivery and also working across projects as well. So that's my background. I was in the UK as a trainee from 18, 19, and then I've been out here in the UAE for 11 years. Prior to that, I had done six or seven years in the UK as well. So yes, it's been an interesting move, but it's very busy here. So, it's always exciting.

Richard Wilson (02:18.974)

Well, and that gives you a really useful and worthwhile perspective in that you've sort of seen the Emirates UAE go through this expansion and these transitions in Saudi Arabia. You've seen Saudi Arabia now in the midst of it sort of coming along behind, but you know, and a grand, grand scale. So, you have some perspective for, you know, what's ongoing in Saudi.
Let's segue into JLL's KSA Construction Market Intelligence Report, which was for Q1 2024. Just going to briefly, I'm going to quote quickly from it, quote, set for a potential 2 .1 % GDP growth in 2024 and 5 .9 % in 2025, Saudi Arabia's progress on numerous Vision 2030 giga projects and infrastructure developments ahead of the upcoming Expo 2030 has cemented the kingdom's position as a leader in construction activity regionally and globally. Can you talk a little bit about this intelligence report and maybe start with the methodology because you tied up with me projects, we think needs fantastic maybe tease that out for us a little?

Laura Morgan (03:32.638)

So, we focus on the key markets where JLL obviously have offices and the markets that we're looking at in the MENA region. So, we prepare the reports for KSA, for the UAE and for Egypt. And whilst our research team are fabulous and they do brilliant work every quarter in publishing the real estate market updates for the same, or for Cairo, for Riyadh and for Dubai and Abu Dhabi. This is focused specifically on the construction sector itself. So, we try and issue a publication twice a year across the region, but also country specific as well. And we just try and capture the movement, the update, any key changes in the markets, which we've seen quite considerable impacts over the last four years and the impact that's having overall to the construction sector, whether that stability, demand, supply issues and uptick in prices that we've seen, anything like that.
And we use multiple sources for the report. We use MEED Projects, as you've mentioned. We rely on Oxford Economics for macroeconomic data. And yes, just a case of capturing any key updates in the market. We speak to clients. We've spoken to the contracting sector to gauge insights and opinion that way as well. We've included that in some of our reports in the past. And then we use our own internal data to capture key rate changes and obviously our benchmarking, which our clients are always very interested in every time we update those and release those to the market as well.

Richard Wilson (05:10.26)

And with regard to this Q1 2024 report on Saudi Arabia, what were the major findings?

Laura Morgan (05:18.122)

The major findings we reported up Q1 of this year. And we're just looking at the projects market overall. So what we're really trying to focus on at the moment is the high value pipeline, which we track from mead projects and understanding the share between the key players in the MENA region, which is, know, the UAE and Saudi and looking at actually what's being awarded, the impact that's having on the supply chain, the contracting sector availability. Clients want to know, you know, what's with construction inflation, what we see in intended price inflation, you know, what are the key commodities doing at the moment. So we're really trying to focus on tracking, are we seeing any movement to the value of projects awards, given an indication of how busy the market is, are we seeing a change to commodity prices, what does that mean for construction materials in terms of rebar being a key item, structural steel, concrete for example, we try and track those based on the data that we receive between the reports as well to give an indication of the movement in the market.
So, there have been some signs of stability. Commodity prices in general have increased, especially over the last six months. We've seen an uptick towards the end of last year, but we have seen a slight change in construction material prices as well not to the same degree and also tracking freight for example and looking at the global freight index because you know in this region, we have a significant reliance on the imports of materials, and we know that that has had a significant impact following the pandemic.

Laura Morgan (06:56.8)

KSA had a very strong year last year in terms of the value of projects awarded. It was the highest value that my projects have recorded at $97 billion, which gives you an idea of the way that the, you know, the projects are progressing there and the key giga project programs. But we are still looking at a very high value pipeline and you know, the change between or the difference between the pipeline to what's being awarded is still actually quite low, which means, you know, there's a lot still to come on to the market and we're looking at things like capacity and reporting on any changes to where we see skilled labor demand and supply and any significant impacts there may be in terms of internal or external risks in the region.

Richard Wilson (07:44.18)

Well, for our listeners, I wanted to share some tidbits from the report, and you touched on that. That was really helpful. So, I guess in the pipeline of unawarded Saudi construction projects, that's approaching one point five trillion dollars. I guess Saudi Arabia accounts for 39 percent of total mean of pipeline value. You know, so this one point five trillion is 39 percent of the total mean of value.

And this is where we get down to the construction. Within that pipeline construction, the construction sector represents roughly 62 % of that 1 .5, about $950 billion. I guess leisure and hospitality sectors accounted for 23%. So roughly, you know, a lot of the remainder. Can you distinguish between awarded and unawarded projects? You sort of alluded to and so, you have this huge projected pipeline, and then you have actual bids put out and accepted and that sort of thing. Where do we stand in that relationship?

Laura Morgan (08:54.688)

So, last year for 2023, the awarded value was $97 billion for Saudi against a pipeline of $1.5 trillion and that pipeline has roughly stayed at that value for the last maybe 18 months. It moves slightly up and down, but the overall value seems to be that more projects are coming online or announced anyway. And obviously the estimates of those values are done by Mead projects, who we reference in the report.
And yes, so if you look at the value of that pipeline, think at the moment around 5 % is under a main contract, which is about to be awarded to a main contractor. So that means the remaining 94, 95 % are in design phase feasibility or pre -qualification phases.
So that might mean that they may not get awarded for another two, three, four years, I believe Mead Projects tracks up to. So, it's not to say that's all looking to be awarded in the next six months or the next 12 months because that's not going to happen. You know, that's not happening. So yes, that's just looking at the value of what's being awarded against the pipeline. So, there is a very strong pipeline which maintains between about $1.5 trillion, according to MEED Projects and then we're tracking the valuable projects awarded. I think for Q1 this year it was around about $30 billion so far, well in Q1 anyway, for Saudi Arabia.

Richard Wilson (10:24.136)

So, you've seen extraordinary infrastructure projects in the Emirates. And now we're seeing this, many people say, the largest sort of construction initiative in the world at the moment, certainly in emerging markets. What's driving this expansion and the construction activity awards?

Laura Morgan (10:44.126)

I mean, it's interesting because...Especially for the UAE, for example, we take them, know, 2019 before the pandemic was quite a quiet year or a slowing year, perhaps. you look at the value of projects awarded; we definitely saw a dip. And then we start to hear and see of the vision programs being announced. So, Dubai, Abu Dhabi, the UAE as a whole have their vision programs. And then obviously Saudi have announced theirs as well. And the purpose behind them is the economic diversification away from the oil sector and looking at ways to generate economic activity in both the UAE and KSA and you know we've got we're looking at the Public Investment Fund to have you know the umbrella of all those major projects and it's interesting to see that's now coming to fruition.
We're looking at some of those projects that have been announced and or are being awarded under those under PIF and under other key developers in Saudi and obviously it's mainly from the announcement of the Vision 2030 program and the targets that they're trying to achieve in bringing in more tourism and generating an income outside of the oil sector.

Richard Wilson (12:01.086)

So again, I strongly recommend this KSA Construction Market Intelligence Report. Part of this report notes that this growth, ongoing growth in KSA, has occurred despite challenges such as persistent inflation, elevated interest rates, geopolitical tensions, and the potential impact of the U.S. presidential election in Q2. How does JLL assess geopolitical risk in such a volatile period in the region?

Laura Morgan (12:32.786)

It's a good question. I know as a team in Projects and Amendment Services when we're advising our clients, so we're looking at key projects. And obviously, we take those into consideration. We can assess those as risks, we can assess those and try and understand the financial impact or the impact that will have to the supply chain, for example. So, it's a case of monitoring and increasing transparency, the need for more data. The more data we have, the more obviously it gives us a better reflection of the market.
So it's really trying to understand when there is a shock or an impact that we've seen a lot of in the last four years, that looking at the trends that that then has two things like the commodities, looking at what that does to the contracting sector, whether there's perhaps a slight reluctance or, you know, clients perhaps in holding back a little bit because of the uncertainty in the market or the complete opposite. actually there, you know, they're steamrolling forward and we're seeing these programs that are just going and going and going and they're doing it in spite of what's going on in the rest of the world because, you know, it's such a strong market here.

Richard Wilson (13:49.172)

That's the I want to emphasize that in spite of what's going on and in spite of declining oil revenues or certainly stagnant and they've run a deficit now for six quarters in a row I believe, and they anticipate deficits in 2025 and 2026 as well. So, it is maybe in contrast to the other parts of the world.
I'm interested and I'm going to take a left here just slightly. In terms of, know, everything you're doing is data driven. You know, you have to have access to data. Is it easier to get reliable data in Saudi Arabia now than it was five, 10 years ago?

Laura Morgan (14:38.848)

That's an interesting question. I wasn't actually looking at the Saudi market five or 10 years ago, so it would be interesting to hear other people's opinion on that. I think there's definitely more data available. I think because everyone is so interested in it, I think it's encouraging people to be more transparent and to release that data. know, the government themselves, they have a very good website which publishes key data metrics, which I use on my reports as well. So, I think it's definitely improving. And I think obviously as more and more projects that we seek, you come to light, there'll be more data around those as well. But the need for sharing and being transparent, especially for consultants, very much helps us when we're working on these programs with our clients to share data.

Richard Wilson (15:29.46)

My experience and I've been mining information about Saudi Arabia for over three decades now is so vastly improved. There's, you know, just much more available, better transparency in many ways.
Back on track.
So, a recent market survey, Turner and Townsend finds that Riyadh has become the priciest city in the region for construction with costs soaring to $2,382 per square meter due to rapid growth. Now, the JLL's market intelligence report speaks to this, and it points out there's a decline in employment levels in the sector as companies seek to manage costs and cash flow. What are the challenges this sector is facing and keeping up with the pace of construction?

Laura Morgan (16:19.058)
I mean, it's a good question. think I have seen a Turner and Townsend report where it references the rate that they've given for Saudi or Riyadh and it's interesting. I think. I sort of thought about that for a minute and tried to understand what was driving that cost change. I think understanding that perhaps specifications have changed over recent times and perhaps we're seeing a, or a specification change is definitely having an impact on that too.
Richard Wilson (16:53.81)
And by specifications, you talk about regulatory requirements and other building codes.

Laura Morgan (16:59.648)

I don't necessarily know whether it's linked to building codes or if it's just we're seeing a greater specification or a change in the model of what we're seeing coming online to meet perhaps international demand of real estate. So, it could just be a factor in some of these resorts or the five -star hotels that we're seeing being constructed now. That would obviously be a change.

Richard Wilson (17:24.574)

Certainly, in the travel area and the hospitality area, much of the investment at the moment has been in the high end luxury end. obviously, residential construction in Riyadh is racing along. It's not able to keep pace right now. But that's an interesting response. Because as you say, things just may be coming in on the high end primarily in terms of the market.
We talked a little bit about this. Last year, Saudi Arabia's Public Investment Fund took significant positions, totaling $1.3 billion in four Saudi contractors, Nesma, Al-Seif, Al-Bawani, and Almabani. And this is part of an effort to build up local contracting capability.

Richard Wilson (18:23.713)

In your opinion, how is this effort progressing? is an important goal for Saudi Arabia to have the ability to meet these construction and contracting demands with as great a percentage of involvement from local companies as possible.

Laura Morgan (18:40.456)

Yeah, and I mean, we've taken quite a positive stance on this because we obviously, you know, they're interested in a position that they've been able to create. And I think the idea behind creating greater opportunities and creating more investment for those contractors to obviously help improve the market and increase their capacity and their offering is, you know, it's very positive. There is still perhaps a shortfall, especially in the MEP.

In particular, and there is still huge demand and perhaps gap in what's available in terms of the skilled labor force in Saudi. Although we're seeing that still globally, I think that's still an issue following the pandemic anyway, but it's definitely, you know, it's very positive that we've seen that investment and it will definitely go some way into helping them meet and achieve their vision goals and the programs that we're likely to see in the next few years.

Richard Wilson (19:37.716)

I thought it was interesting just this last week, Diriyah Company announced that a record -breaking construction contract, $2 billion, that was taken by Saudi's El-Seif Engineering Contracting Company. One of the companies that PIF took a position in and the China State Construction Engineering Corporation. This is the kind of thing obviously Saudi Arabia, PIF and leadership want to see. And you can have, El-Seif has been great for a long time and this investment further enables them and others to be champions for the for the sector for Saudi Arabia. So, I'm really curious, you know, drawing on your experience with AECOM and JLL, what are the smartest construction and contracting firms doing to access this booming market?

Laura Morgan (20:28.404)

I think it's trying to set yourselves apart and understand the differentiators that we can offer our clients, serving them the best value, giving them the best value, understanding what the gaps in the market are, but being very heavily driven by digital and you mentioned earlier data as well. So, within JLL, we're looking very much at, sorry, we're looking very much at the end -to -end services of projects and we've invested very heavily in tech at the moment, which I think we're setting ourselves apart from our competitors in the way we're doing that. So, think it's a case of understanding the market needs, understanding how important data is for clients, for developers, and looking at ways that we can introduce tech and data into our service delivery.

Richard Wilson (21:22.652)

Now, I'm a bit of a homer and I'm here in the US, you're calling in from the UK where you hail from. But I'm particularly interested to know if there are any US based firms that you feel have positioned themselves well and are really approaching the market in an intelligent way. Again, I'm a US corporate champion. Tell me good things Laura.

Laura Morgan (21:39.142)

Okay, I know. I think it's interesting because there's obviously so many opportunities out there. don't know any specifically, I won't be able to mention them name by name, but I think there's definitely a prominent market available there and you're definitely seeing the opportunities arising for these companies to set up there. They're really encouraging head offices to be placed or headquarters to be placed in the likes of Saudi, for example. And as the scale and size of the projects that we're seeing in the market now is definitely, you know, everyone can have a piece of the pie. There's definitely a lot to go on there. You can see the draw, especially when we've seen perhaps a slight slowdown in the likes of Europe and maybe even the States and Asia for China, for example. And the fact that the region here is busy. There's a very solid positive pipeline. So, I'm sure we'll start to see more and more, perhaps move this way.

Richard Wilson (22:44.884)

So, you, this was the Q1 market report 2024. So, I'm sure you're already deep into the Q2 market report. It's been really fascinating and inevitable. If you ask me the discussion ongoing in Saudi Arabia. So, for example, the Minister of Finance, Mohammed Al -Jaddan, spoke last year about rationalization. You know, we're going to be making choices about projects to move forward. We're going to be adjusting timelines. We may be, you know, we may be stopping things altogether. We may be pushing other things forward. But we're analyzing everything and there's now additional reports that current Prince Mohammed bin Salman has set up a team to really start making hard decisions about these things, which again, as I referenced in deficit spending and you know, they've already been into debt markets at enormous pace this year, trying to maintain this momentum. And vision 2030 projects. As you're looking now, when you come out with your next report, are you are you trying to determine.
To what degree this rationalization will impact the contracting sector?

Laura Morgan (23:49.671)

Internally, you know, we're just looking at, you know, there's been a pushback on some of the programs. Obviously, we're just trying to plan as well as a business. But I think we wouldn't necessarily report on that change. I think, you know, they're very committed to what they've announced and what they've said they want to achieve by 2030. And that might push back beyond. But I mean, some of the programs.
I think the international media sources do like a bit of negative news. I think they were quite quick to notice perhaps some of the bigger programs that were announced and perhaps it was phrased in a slightly more negative way. I think some of the programs were always going past even 2050. So, it wasn't like they were trying to do everything in the next six years or eight years from when they announced it perhaps. But it's interesting to see whether some things will fall back or what they're going to prioritize. Obviously, they've now won Expo 2030 and then, you know, the Winter Games up in Tabuk in Neon as well. So, there'll obviously be a prioritization of projects, and they've got to obviously look at what's available in the market at the moment as well in terms of contractor capacity and consultants support and things like that as well.
Richard Wilson (25:03.956)
I think that's just an important point you just made about Vision 2030. 2030, the actual chronological year is just a point in time. It's a target. It's intended to be a benchmark. It's not intended to be the close. I do, you talk about international media and other commentators. I'm always concerned about that, you.
Someone will make a judgment that X percentage wasn't completed, therefore it's a failure, which is an absolutely silly way to approach it. The extraordinary changes, foundational, fundamental, regulatory, judicial, all the things that make these things possible, you know, before you have the investment and the contracting and the real movement is meaningful change. Early on, you talked about economic diversification. Can you? And this is definitely off track but ultimately this is what Saudi Arabia is trying to do. Do you have an opinion on how they're progressing in this regard?

Laura Morgan (26:12.448)

I mean, you mentioned it as well in terms of the oil price at the moment, because obviously we know that the oil price needs to be around $100 a barrel. And obviously it's not reached that at the moment, and it hasn't been like that for quite a while. So, I think, if you look at the efforts they're going to and they're still proceeding with these projects, despite the fact that your price isn't as strong as it was or as high as it was, and you look at what we're facing in terms of the headwinds globally and regionally, the projects have not been cancelled. They're very much still alive. They're progressing. We know from me projects what's being awarded and maybe some have been put on hold or delayed slightly but haven’t.
Everything all together it's still very much you know what they announced, what they said they were aiming to do and we're seeing that from the UAE as well. I the UAE obviously you know developed the country of the Emirates over the last 50 odd years and Saudi are trying to do a considerable amount in a much shorter period, but you know they're doing it, they're moving forward. We’re working on a lot of the programs; we know many other competitors are as well, so we know that it's a busy market.

Richard Wilson (27:27.508)

That counter cyclical budgeting I think is essential and to me is a reflection of a mature and strategic and far reaching approach. know, when this, and on The 966 we've talked about it, but I always felt like obviously Saudi Arabia's in a moment, know, money was coming flowing in, grand projects, that sort of thing. What are they going to do when they hit their first deficit? And then the next one, the next and what they've done is continue to spend which is what you do if you want to maintain that economic.

Richard Wilson (28:07.318)

Laura Morgan, JLL, really appreciate you joining us. Is there anything we missed?

Laura Morgan (28:15.114)

I think we've covered quite a bit. I'm just trying to think now. mean, obviously we acknowledge that it is a turbulent time. You know, I just think the market and what we've seen happen in the last four years, I just don't think we can't sugarcoat it, but we also can't, you know, not acknowledge the fact or disregard, you know, what we're trying to face at the moment. You know, even as companies without looking at construction companies or without looking at clients as a whole, it has been a challenging market. And I feel like every, know, every few months we've been faced with something else, and it is, there is a lot going on. You know, we're all trying to face the battles of the high inflation at the moment, although we seem to be in a stronger position in the likes of the UAE but we obviously do have a reliance on external markets and that is a consideration but I just think you know it's a really exciting part of the world to be working at the moment and we're seeing some absolutely amazing projects coming off the ground so I think you know it's positive but it is also a very challenging market but yeah it's an exciting time to be working in the region that's for sure.

Richard Wilson (29:20.404)

The 966, myself, our listeners, really appreciate you joining us to share your expertise. It's been really informative, and I hope we can get you back on

Laura Morgan (29:31.08)

I would love that. Thank you so much for having me.