GLOBAL REPORT— Makkah and Medina’s hotel industry is getting a boost thanks to stricter rules on non-hotel accommodation in Saudi Arabia’s two holiest cities that is leading to skyrocketing hotel rates. Also working in hoteliers’ favor is an extension of Umrah, the second-most important pilgrimage, from being held for two months a year to all year, except for the five days of Hajj.
International chains and Saudi Arabia’s burgeoning domestic brands have taken notice and further desire to invest there and in other Saudi cities.
Examples of recent Makkah and Medina activity have included:
- Dur Hospitality, previously known as Saudi Hotels & Resorts, re-launched its hotel-management arm Makarim Hotels to specialize solely in religious tourism;
- Accor Hotels Group’s 834-room ZamZam Pullman will open in Medina, Islam’s second holiest city, next March and, according to Guy Wilkinson of Dubai’s Viability Management Consultants, will effectively be an Islamic timeshare operation, a new financing vehicle in Saudi Arabia;
- The Jabal Omar development in Makkah, adjacent to the Ka’aba, Islam’s holiest site and the final destination of Hajj pilgrims, is the largest-ever development in Saudi Arabia, a $3.2-billion project to be finished in 2017 that will include 40 hotel towers, accommodations for 160,000 and international partners such as Hyatt Hotels Corporation, Marriott International, Starwood Hotels & Resorts Worldwide, Millennium & Copthorne Hotels and Best Western International; and
- Opened in June 2014, the 1,743-room Anjum Hotel, also adjacent to the Ka’aba, announced in September that it would open a further 7,000 keys before 2021, for which an international operator is being sought, also according to Wilkinson.
Dur Hospitality’s 30 November announcement said it was actively seeking international partnerships. All properties in Saudi Arabia, as they are also in Bahrain and the United Arab Emirate Sharjah, are subject to Islamic sharia law.
Dur will invest 1.5 billion Saudi Arabian riyals ($400 million) in 14 new hotels by 2018 and 20 by 2023, mostly in Makkah and Medina but also in secondary cities such as Jubail, the Middle East’s chief industrial city, and Taif, where the Saudi royal family and entourage move to escape summer’s heat. Dur currently has eight properties, all in Saudi Arabia.
At press time, Dur had not responded to interview requests.
Religious tourism revised
Causing the increased development, investment and partnerships is that religious tourism has radically changed, and very quickly, according to sources.
“Health and safety and security rules have tightened. During Hajj everything is full from tents to ultra-luxurious hotels, and rates can be increased by a multiple of 10 or even 20. Then, Umrah, which was restricted to a month or two even a couple of years ago, is now all year, which improved average daily rates and occupancy,” said Guy Wilkinson of Viability Management Consultants.
Wilkinson added that accommodation rules have led inevitably to an expansion of mid-market hotels, which coupled with a Saudi focus on infrastructure improvements have upped opportunity for international flags.
“Quotas of pilgrims allowed from each country are a reflection of Saudi ability to handle them,” Wilkinson added.
Filippo Sona, director of hotels and hospitality, Middle East and North Africa, at Colliers International, said with hotels in Makkah and Medina so heavily regulated, growth is aligned with these quotas and the increased ability to control property profitability.
“Every developer wants a presence,” Sona added.
A dig into the numbers reveals why.
“Pilgrims are the catalyst, 95% of demand, with Makkah currently having 107,000 keys, only 13% of which are 5-star, and 37% unclassified,” Sona said.
It’s about supply, he explained.
“The historical evolution of Hajj pilgrims over the last 10 years has seen demand increase 5.1%, but supply has not really grown,” Sona added.
Chiheb Ben Mahmoud, executive VP, head of hotels and hospitality, Middle East and Africa, for JLL, said international interest is not just about industry changes but also because of traveler demand.
“For centuries, accommodation was short-term apartment rentals, (but) the system has reached its limitations with the democratization of travel and increasing demands from pilgrims for services. (This has resulted in) the model having shifted towards a service-driven, mainstream hospitality model, which allows year-round operations,” he said.
“It’s an immune market, not dependent on oil prices, so it’s not difficult to see why Dur is doing this,” Sona said, who calculated an additional 11,000 keys in the holy cities by 2017.
Ben Mahmoud said the two holy cities had seen in the past five years an increase of hotels exceeding 1,000 keys.
“Pilgrim travel (is) part of a very complex chain-management system, (but still) the cities cannot accommodate increasing demand from more than 1.8 billion Muslims worldwide,” he said.
He added the Jabal Omar development will in the short-term “significantly reduce the number of visas until after the 2016/2017 date of completion.”
“Hajj numbers peaked at close to four million, but because of the renovation project, 2014 numbers did not reach two million. This caused challenges. Questions the authorities have to ask are how they can manage Hajj travelers when work is complete and the risks of health epidemics and terrorism,” Ben Mahmoud added.
Frothy fundamentals
Despite uncertainties, holy city markets will continue attracting investors and operators due to four simple concepts, according to sources:
- resilient demand;
- immense mismatch between demand and supply;
- short-term supply reduced due to government regulations; and
- costs and hardship of pilgrimage formerly controlled numbers, but with the democratization of air travel, no longer.
High entry barriers might see international chains prefer to enter via secondary and tertiary cities, sources added.
“There are 15 to 18 secondary markets where demographics are right, with Saudi Arabia having five economic cities, the only country in the world to have this many, although they are at different stages of development. Key is that such places have little branded supply,” Sona said.
Quickly out of the blocks is Marriott, which on 8 December signed a deal, also with Dur, to manage two properties (80 and 140 rooms, respectively) in Riyadh, the first two hotels to be opened in the capital’s Diplomatic Quarter.