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Construction costs tumbling in Saudi Arabia, executive says

DUBAI (Reuters) - One of Saudi Arabia’s biggest urban development projects is paying as much as 15 percent less towards construction costs as cuts in state spending reduce pressure on supplies of building materials and labor in the kingdom.

A man views the under-construction King Abdullah Financial District in Riyadh, Saudi Arabia May 12, 2016. REUTERS/Faisal Al Nasser

Fahd Al Rasheed, group chief executive of Emaar the Economic City (EEC), said construction firms’ pricing had become more competitive, leading to a drop in costs of 10 percent to 15 percent per square meter.

“Local production levels for all building materials - as well as imports - were set for a time of boom in contracting,” which has caused oversupply, Rasheed said in an interview in Dubai.

“Also, now that the number of contracts being issued by the government is much lower, contractor capacity has also improved, leading to contractors lowering their margins to compete for new work.”

The government has slashed spending on its construction projects since last year as it curbs a big budget deficit caused by low oil prices. This has reduced demand for construction materials; as a result, Saudi Arabia lifted bans on exporting cement and steel earlier this year.

EEC, a consortium affiliated with Dubai’s Emaar Properties Group, is developing King Abdullah Economic City, a massive business, industrial and residential zone on the Red Sea coast near Jeddah, with backing from the government.

EEC swung to a net loss of 81 million riyals ($21.6 million) for the third quarter from a profit of 8 million riyals a year earlier.

“The loss was related to a court case that was related to a real estate project we did a while ago. It’s a one-time. So without it, I believe we would have been positive for the quarter,” Rasheed said without elaborating.

This year, some real estate developers in Saudi Arabia have had difficulty acquiring permits to sell homes before they are built. This practice, known as off-plan sales, can make development easier by allowing companies to use the proceeds of sales to fund construction.

“This is a problem in the economy in general, because both the regulations and the owners of these regulations have changed,” Rasheed said.

In the past, the Ministry of Commerce and Investment issued permits, while now the Ministry of Housing does so, he noted. However, Rasheed added: “Because we are such a large developer and we have a very strong balance sheet, we have been able to work through these issues.”

Editing by Andrew Torchia; and Alexandra Hudson

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