Giga-projects in Saudi Arabia are increasing demand and driving up construction costs in the region, according to Turner & Townsend, a global professional services company.
The International Construction Market Survey (ICMS) 2024 report states that ambitious giga-projects and state-supported developments in the Middle East are fuelling construction activity across the area.
This rapid investment, combined with inflation declines and economic diversification, continues to attract global talent while affecting the capacity of supply chains.
The survey reveals that rising demand, particularly in the Kingdom of Saudi Arabia (KSA), is pushing construction costs higher.
Riyadh tops the list as the region’s most expensive city to build in, with costs averaging $2,593 per m2, benefiting from accelerated growth as the Saudi capital city.
Domestic and international investments are leveraging state-backed initiatives such as NEOM and the 2030 Vision.
Construction cost inflation in Riyadh is easing from the highs of 7 percent seen in 2023 but is expected to remain elevated at 5 percent throughout 2024.
Increased demand is partly driven by substantial construction growth in sports, leisure, and hospitality sectors, in preparation for EXPO 2030 and the 2034 FIFA World Cup.
The average cost to build a five-star luxury hotel in Riyadh is now $4,798 per m2. KSA is also seeking to attract global corporate tenants, with the average cost of a high-rise CBD office in Riyadh standing at $2,266 per m2.
Shortages of skilled labour are contributing to elevated costs, as KSA faces a significant deficit in skilled workers crucial for delivering its most ambitious programmes.
The talent and resources required for giga-projects in the country are stretching overall supply chain capacity across the Middle East.
Doha ranks as the second most expensive market in the region at $2,096 per m2. However, following high output leading up to the 2022 World Cup, construction cost inflation is projected to decrease from 3.5 percent in 2023 to 2.5 percent in 2024.
This reflects reduced construction demand in the region, with investments and skilled talent drawn towards nearby Saudi Arabia.
Dubai, neighbouring Doha, has an average construction cost of $1,874 per m2. With a growing population and sustained high tourism rates, activity in residential development and hospitality sectors continues apace, supported by relatively lower labour costs.
Steady investment in the market, alongside foreign visitors and skilled migrants who visit or reside in the city, leads Turner & Townsend to forecast a continued high rate of construction cost escalation at 5 percent through 2024.
In light of potential labour shortages across the Middle East, Turner & Townsend advises clients to prioritise identifying appropriate procurement strategies and implementing innovative working methods and digital technologies to mitigate capacity constraints and optimise opportunities.
Mark Hamill, director and head of Middle East real estate and major programmes at Turner & Townsend, commented: “Over the past year, the Middle East has continued to experience significant growth and investment as the region strives to diversify beyond its reliance on oil.
“The standout story is the rapid development in KSA, where ambitious projects like The Line, King Salman Park, and Diriyah Gate are being realised.”
“While KSA leads in terms of activity in the Middle East, there are still substantial real estate opportunities in the UAE and Qatar as inflation moderates.”
“Nevertheless, with labour capacity strained across the region, clients will need to review their procurement and contracting models to mitigate disruptions in the supply chain and maximise available opportunities.”
Globally, the ICMS report’s survey of 91 cities worldwide shows the US continuing to dominate the list of the most expensive places to build, with six US cities in the top ten.
For the second consecutive year, New York remains the most expensive market to build in, with an average cost of $5,723 per m2.
Global trends towards deglobalisation and nearshoring, prompted by disruptions in supply chains and geopolitical tensions, are fostering growth and investment in manufacturing, particularly in emerging international markets such as Malaysia, Indonesia, Nigeria, Brazil, and Mexico.
Labour shortages continue to be a significant inflationary factor globally, affecting all but three of the 91 markets surveyed due to skills shortages.