Major investments set to benefit both residents and pilgrims in Saudi Arabia's Makkah

Home to the holiest site in Islam – the Grand Mosque and the Kaaba contained within it – and a place of pilgrimage for millions of Muslims, Makkah is a unique city. Its special status also presents local authorities with a unique set of challenges, not least how to expand capacity and facilities in a way that both satisfies the needs of pilgrims, for whom visiting Makkah is a religious duty, and remains sensitive to the city’s role as a centre of Islamic and Arab culture. Striking a balance between the two is thus a crucial consideration as Makkah undergoes a wave of investment in infrastructure that is rapidly transforming the city into a modern metropolis.

In Figures

According to government estimates, the population of Makkah is currently just below 2m people, and in the coming years it is anticipated to grow at a steady rate to reach 2.35m by 2025. The Makkah region is the most populous in the Kingdom, with an estimated 8.1m people, and includes the country’s second-largest city, Jeddah, as well as the city of Taif. Alongside its permanent residents, Makkah also receives millions of religious pilgrims, the numbers of which peak during the annual pilgrimage, the five-day Hajj. Owing to renovation and expansion work currently taking place on the Grand Mosque (see analysis), the government has for the past two years placed a temporary limit on pilgrim numbers during the Hajj. Nonetheless, in 2014 around 2m pilgrims took part in the Hajj, with an additional 6m people from across the globe coming for a 15-day Umrah. Umrah is the lesser pilgrimage, which can be undertaken at any time of year. When domestic pilgrims undertaking Umrah are also factored in, the total number of pilgrims visiting Makkah during the whole year is estimated to be close to 11m, and authorities anticipate this figure will reach 17m by 2025.

Pilgrimage

Such large numbers of visitors have, unsurprisingly, ensured that Makkah is the leading market for hotel accommodation in the Kingdom. According to figures from real estate consultancy Colliers International, Makkah has a total of 107,000 hotel rooms, while as per government figures, the wider Makkah region accounts for two-thirds of the Kingdom’s total hospitality facilities.

In recent years a number of significant hotel developments have transformed Makkah’s hospitality sector. From 2010 onwards the Abraj Al Bait complex, located immediately south of the Grand Mosque and home to the Makkah Royal Clock Tower, has welcomed several international five-star hotel chains, including Fairmont, Mövenpick, Rotana and Raffles. Meanwhile, since 2012 the Jabal Omar complex to the south-west of the Grand Mosque has seen three hotels open, including Marriott, Hyatt and Hilton Suites, while the Conrad is expected to open by 2016.

Despite these significant new developments, 37% of Makkah’s accommodation remains unclassified – i.e. falling below the one-star standard – and 13% is of five-star quality. Hospitality benchmarking company STR Global estimates that as of December 2014 5936 rooms were under construction in Makkah, placing the city third in the MENA region behind Dubai and Doha. However, given that as recently as 2012 there were 19,000 branded hotel rooms in Makkah and that current occupancy rates during peak periods reach 100%, with room rates increasing by a multiple of 10 or even 20, there is clearly room for substantial further investment in the hospitality sector. Indeed, several recent regulatory changes have improved the city’s hospitality investment profile.

First, the Umrah season has been extended to cover eight months of the year, helping to smooth demand for hotel accommodation. Second, the authorities have become stricter in enforcing health and safety regulations and minimum standards for hotel accommodation, with much of the older, informal stock either demolished or closed down. When combined with the general rise in pilgrim numbers, these two trends are leading to substantial demand in the mid-to up-market segment. Thus, while 2014 witnessed a modest decline in occupancy and room rates, owing to restrictions on pilgrimage visas and fears over the Middle East respiratory syndrome virus, the long-term fundamentals for the city’s hospitality sector remain robust. According to Mansour Abu Rayash, chairman of the real estate committee of the Makkah Chamber of Commerce and Industry (MCCI), pilgrims spend on average SR2500 ($666) on accommodation during their stay, rising to between SR4000 ($1066) and SR7000 ($1865) for those staying in a central location, and up to SR25,000 ($6662) for those staying in the most luxurious accommodation.

Government

The responsibility for the cities of Makkah and Medina is an important element of Saudi identity, and since 1986 the Kingdom’s monarchs have adopted the title “Custodian of the Two Holy Mosques” as their preferred royal style. The province of Makkah is governed by Prince Khalid Al Faisal bin Abdulaziz Al Saud, who was reappointed governor of Makkah in January 2015 as part of King Salman bin Abdulaziz Al Saud’s first government reshuffle. Prince Khalid had previously served as governor of Makkah from 2007 to 2013 and from 2013 to 2015 as minister of education. He replaced Prince Mishaal bin Abdullah Al Saud, who became an adviser to the new king.

Makkah’s urban administration is provided by the Holy Makkah Municipality (HMM), which handles an annual budget in the region of SR1bn ($266.5m), covering maintenance and the provision of services. Alongside the city’s administrative budget, however, significant sums of public money are currently being invested in expanding Makkah’s infrastructure.

Osama Al Bar, mayor of Makkah, told local press in 2013 that ongoing projects in the city, including transport, utilities and accommodation, had an estimated total value of SR300bn ($79.95bn). In order to deliver the municipality’s strategic vision for the city, and encourage private sector participation, in 2009 the local authorities established Al Balad Al Ameen Development and Urban Regeneration Company (ABAM).

ABAM’s scope is wide-ranging, and it offers housing solutions, including new, suburban, mixed-use developments, the regeneration of unplanned and informal settlements, and the provision of integrated transport solutions. It is mandated to achieve this through cooperation with the private sector, including joint ventures with private developers.

Housing

ABAM is working on redeveloping Makkah’s informal settlements with projects involving restoring or demolishing unauthorised structures, as well as better integrating new developments within the municipality through the provision of public services and transport networks.

According to the local authorities, one of the areas with sub-standard housing is directly to the south of the Grand Mosque. In 2014 HMM’s Committee for Dilapidated Buildings received a total of 124 reports on homes in this area, issuing instructions for the renovation of 18 and demolition orders for five. New developments also led to the appropriation by the government of around 5800 properties in this area.

ABAM has taken steps to improve the supply of new housing in Makkah. Wahat Makkah, for instance, is an SR1.4bn ($373.1m) affordable housing project covering a built-up area of 670,000 sq metres. Darb Al Mashaeer, while covering a similar built-up area of just under 770,000 sq metres, will be a more substantial project involving investment of around SR7bn ($1.86bn) and located to the east of the Grand Mosque.

ABAM’s most significant investment, however, is the SR60bn ($15.9bn) Makkah Gate project, also known by its Arabic name of Bawabat Makkah, which is designed to accommodate up to 800,000 people upon completion in 15-20 years’ time. The project is located 14 km to the west of the Grand Mosque and covers an area of 110 sq km, which is partially bisected by the Makkah-Jeddah Highway and the forthcoming Haramain High-Speed Rail. Makkah Gate is being developed by Bawabat Makkah Company, a wholly owned subsidiary of ABAM. The first private developer to sign up has been Sumou, which will construct a township with a built-up area of 2.6m sq metres in the south of the development. Expected to house 25,000 people, it is set to be completed in five years.

Independently of ABAM, another significant mega-project under way in Makkah is Jabal Omar, to the west of the Grand Mosque. This development, which is managed by the Jabal Omar Development Company, the Kingdom’s largest listed developer by market value, is set to consist of 38 towers able to accommodate up to 100,000 people during peak times in a mixture of hotel and residential units. Indeed, in early 2015 Jabal Omar was able to secure a new SR4bn ($1.06bn) loan on improved terms to refinance the first phase of the development over a 15-year period. As well as residential and hotel accommodation, Jabal Omar will contain one of the Kingdom’s largest shopping malls, with an estimated 809 commercial and retail units. The total cost of the project was initially expected to run to SR25bn ($6.7bn) and cover five phases of construction.

Real Estate

According to an index developed by Alpha1Estates, a real estate advisory firm, Makkah’s real estate sector performed strongly in 2014. The Ihsan Al Haramain Index, which tracks the real estate sector in Makkah and Medina, saw growth of 22% over the full-year period, led largely by a 40% rise in the Makkah portion. Leading the charge was the Jabal Omar Development Company, whose shares rose by 80%. Figures collected by Alpha1Estates show that the Makkah market’s performance has been consistently strong for the past three years, with the deal flow in 2013 in particular rising 350% from SR16.1bn ($4.29bn) in 2012 to SR59.4bn ($15.83bn). There are currently three development companies listed on the Saudi Stock Exchange with significant projects in Makkah: the previously mentioned Jabal Omar, with a market capitalisation of SR73.93bn ($19.7bn); Makkah Construction and Development Company, valued at SR18.30bn ($4.88bn); and Taiba Holding Company, worth SR7.04bn ($1.87bn).

Foeign Ownership & Competition

According to Alpha1Estates, a proposal was made in 2014 by the Shura Council’s Committee of Economic Affairs and Energy to relax foreign ownership regulations for Makkah and Medina. The proposal faced strong opposition, however, and the government also withdrew plans to allow non-Saudis to own property in Makkah and Medina on a time-share basis.

Alongside restrictions on foreign ownership, local business leaders have also complained of crowding out by the public sector. Maher Saleh Jamal, chairman of the MCCI board of directors, told local press in November 2014 that the Kingdom’s private sector has been facing unhealthy competition from the government sector in real estate development, particularly in Makkah. “All five-year development plans approved by the government of the Custodian of the Two Holy Mosques clearly stressed the importance of supporting the private sector,” Jamal told press, adding that the MCCI had recently met with a number of investors to discuss such fears, as well as concerns about capital flight from the real estate sector.

Transport System

The other major strand in the municipality’s current development strategy for Makkah is the creation of an integrated transport system. The first steps in this direction were taken almost a decade ago with the proposal to build the $2bn Al Mashaer light rail. The 19-km railway was designed to transport pilgrims along the traditional Hajj route, between Mina, Muzdalifah and Arafat. The light rail opened in 2010 and can carry up to 90,000 passengers per hour during the seven days per year that it operates, helping to improve the comfort and safety of pilgrims along the route.

Since the successful implementation of the Mashaer railway, plans have been advanced to expand and extend Makkah’s transport system in an ambitious SR25.5bn ($6.79bn) project. The Makkah Integrated Transport System, announced in 2014, will feature a network of four metro lines covering a total length of 114 km, including 62 stations.

Alongside the metro, the project also includes the creation of a four-tiered bus system, with bus rapid transit, local buses, a feeder bus service and a shuttle bus connecting park-and-ride facilities with the Grand Mosque, train stations and express buses. The project comes as part of a sustained $1.1trn government infrastructure investment programme across the Kingdom, which also includes integrated transport systems currently under way in Riyadh and Jeddah.

The first phase of works in Makkah will focus on the metro system and cover the red and green lines, with 46 km of track – 40% of which will run through underground tunnels. The first line, which will be 11 km long and mostly underground, will run from Mina along the northern part of the Great Mosque to the new high-speed railway station in Rusaifah, eventually terminating by the Makkah-Jeddah Highway. The second line, which will be only partially underground, will run on a north-south axis for 33 km, passing along the western side of the Great Mosque.

To manage the project, a wholly owned subsidiary of ABAM and HMM, the Makkah Mass Rail Transit Company (MMRT), was created. Thus far 15 consortiums, including international and local businesses, have expressed initial interest in the first stage of the project, while in November 2014 MMRT selected Kuala Lumpur-based transport agency Prasarana Malaysia to provide consultancy services for the first phase in a RM9m ($2.66m), 30-month contract. Prasarana is also involved, along with the China Railway Construction Corporation, in the operation and management contract for the Mashaer railway.

Regional Transport Projects

Makkah’s integrated transport system will fit alongside two other major infrastructure improvements currently nearing completion in the region: the Haramain High-Speed Rail Project and the expansion of King Abdulaziz International Airport (KAIA) in Jeddah. The 450-km Haramain line (the name means “two holy sanctuaries” in Arabic) will link Makkah with its fellow pilgrimage site of Medina, as well as Jeddah, KAIA and the new King Abdullah Economic City – currently under construction some 50 km north of Jeddah.

The SR46bn ($12.26bn) railway will not only vastly improve the travel experience for pilgrims, the majority of whom arrive in the Kingdom via KAIA’s dedicated Hajj Terminal, but will also improve connectivity all along Saudi Arabia’s Red Sea coast, with speeds on the railway reaching up to 300 km per hour and travel time along the full length of the track expected to take less than three hours.

Current plans propose seven trains per hour between the cities of Makkah and Jeddah, with a total capacity for the track of 19,600 passengers per hour. The technical demands of the project have resulted in some delays. However, work is currently proceeding apace on the second phase, which involves the superstructure and electrification of the line, and it is hoped that sections of the railway will be up and running by December 2016.

At the same time as the Haramain high-speed railway reaches completion, the first stage of a major expansion to Makkah’s closest international airport, KAIA in Jeddah, will also open to passengers. KAIA, which is the Kingdom’s busiest airport, has been undergoing significant expansion for the past decade.

The first phase of this project, which will see the delivery of a new 670,000-sq-metre terminal able to handle 30m passengers per year, is expected to be complete by 2016. The new terminal, which has cost an estimated SR27bn ($7.19bn), will feature 46 gates, including double-deck boarding bridges able to accommodate the new Airbus A380.

Successive expansion, which is expected to continue through 2035, will see capacity gradually increase at the new airport to a maximum potential of 70m80m passengers annually. While Hajj pilgrims are currently handled in a separate dedicated Hajj Terminal at KAIA, the new facilities are likely to have an impact on those visiting Makkah for Umrah.

Alongside KAIA’s expansion, recent improvements to Taif’s airport, which also handles a small amount of pilgrimage traffic to Makkah, have seen annual capacity rise from 350,000 to 750,000 passengers. The completion of a new road between the two cities, which is scheduled to be ready by the end of 2015, will further support the airport’s role as a feeder for passengers travelling to Makkah.

Outlook

Makkah’s current transformation into a global metropolis is perhaps inevitable given its role as focal point for the world’s Muslim population. However, with the coming years seeing the completion of the major long-term construction projects, such as the expansion of the Grand Mosque and the mixeduse complex at Jabal Omar, future development is likely to shift underground and away from the centre. In the first category, major investment in transport infrastructure and utilities networks will equip Makkah for the demands of the 21st century, while in the second, major mixed-use developments on the city’s outskirts will help relieve pressure on the historic centre.

In achieving all of these goals, the municipality of Makkah is committed to partnering with the private sector, and the coming years will see a number of opportunities for international firms to engage in various kinds of partnerships with the municipality.