Saudi Arabia's two holy cities of Makkah and Medina poised for growth

As home to the world’s most important Islamic sites – including the Masjid Al Haram, or Grand Mosque, which houses the Kaaba – the holy cities of Makkah and Medina are at the centre of religious life for the world’s 1.2bn-strong Muslim population. Located near Jeddah, in western Saudi Arabia, each year the two cities attract millions of religious visitors performing the annual pilgrimages of Hajj and Umrah.

Population Pressure

The annual influx of pilgrims, along with the rapidly expanding resident population, has created challenges in terms of infrastructure and services for local and federal authorities alike. In an attempt to address these issues, in recent years the government has rolled out a series of overlapping, comprehensive strategies aimed at updating and expanding the transport networks, housing stock, utilities systems and related facilities of the regions of Makkah and Medina. While these developments have yet to be completed, work continued apace in 2015-16, despite the negative impact of lower oil prices on the Saudi Arabian economy.

“Nationwide, 2015 was a bit of a slow year, and we expect to see continued slow growth through 2016,” said Raed Tahseen El Jarrah, the manager of project development and controls at the Jeddah-based multinational construction conglomerate, Saudi Binladin Group. “That said, there is always building activity in Makkah and Medina, due in large part to the value of the land itself and the thriving regional economy.”

Local authorities face a variety of challenges. The Makkah region, which encompasses the cities of Makkah and Jeddah, and the Medina region have been hit by falling energy prices, which have caused government revenues to decline across the Gulf region. In 2015 Saudi Arabia posted a record $98bn budget deficit, forcing the state to cut public investment expenditure by more than 60% for the year. As per recent government forecasts, spending on transport infrastructure is likely to decrease by an additional 63% over the course of 2016. Across the two regions, a number of major projects are widely expected to be impacted by this situation, including the new metro systems in development in both Makkah and Medina, as well as road works throughout the area.

That said, given the unique situation of the two regions and the government’s clear support for ongoing developments, many investors are broadly positive about Makkah and Medina’s future potential. “The construction sector has been noticeably hit by low oil prices and public fiscal consolidation,” Majed Tawfiq Al Ayoubi, chairman of Madina Net Holding, told OBG. “However, the industry is poised to recover, especially in Medina. There are many infrastructure projects set to be rolled out, and residential real estate offers opportunities for the private sector to develop.”

Regional Focus

The Makkah region, which covers an area of more than 153,000 sq km on Saudi Arabia’s western coast, boasts a population in excess of 8m, making it the most populous region in country. Jeddah, with around 3m residents, is the region’s largest city – and the second-largest city in the country after the capital, Riyadh.

The region of Medina, which lies to the north of neighbouring Makkah, covers an area of around 152,000 sq km and is home to a population of approximately 1.8m people. The regional capital is Medina, and other major cities include Yanbu’ al Bahr and Badr Hunayn. The UNESCO World Heritage Site of Mada’in Saleh is also located in the region. In addition to being uniquely significant to Muslims globally, the two cities of Makkah and Medina have posted growing population figures in recent years, in line with countrywide expansion.

Perhaps more importantly, each year Makkah and Medina attract millions of Muslim pilgrims. During the Hajj – which in 2016 took place between September 9 to 14 – more than 1.86m Muslims arrived in the region to carry out a series of tasks in Makkah and Medina, including circling the Kaaba in the Grand Mosque. The annual event is widely considered to be the single largest temporary gathering of people on earth. The Umrah pilgrimage also entails visiting the Kaaba but can be performed at all times of the year. While the Umrah is not considered obligatory to several schools of Islam, it is recommended and also brings millions of foreign Muslims to the region. Due to concerns about overcrowding and limited space at holy sites, the government strictly controls the number of Hajj and Umrah visas it issues.

Given this situation, it is perhaps not surprising that Makkah and Medina have been the focus of a range of government-led development programmes for decades. Indeed, a near-constant series of expansion and renovation projects have been undertaken at Makkah’s Grand Mosque since the mid-1950s in an effort to keep up with the rising number of visiting pilgrims and domestic worshippers. Over the past 60 years, a considerable number of facilities have been added to the mosque, the internal prayer area was expanded, a large outdoor prayer area was added and subsequently expanded, various royal residences were built, and the authorities installed air conditioning, escalators and a modern drainage system.

In 2015 the government began work on the third phase of the most recent Grand Mosque development project, a $27bn expansion programme that began in 2011. The project is considered to be a key component of the government’s plan to more than double the capacity of the Grand Mosque to 2m worshippers by the early 2020s. A similar programme is under way at the Prophet’s Mosque in Medina, where the current peak capacity of around 1m worshippers will be expanded so that the mosque can comfortably accommodate 1.6m worshippers in the coming years.

Alongside this ongoing work at the country’s most important religious sites, commercial property and housing have also been a focus in both cities in recent years. Major real estate projects like Makkah Gate, also known by its Arabic name, Bawabat Makkah, and Darb Al Sunnah in Medina, both of which are currently under way, are expected to reshape large areas of each city.

Oversight & Planning

Projects supporting pilgrimage sites have been developed and carried out by a range of government and private sector entities. Since early May 2015, authority for the development of the entire Makkah region was formalised under the Integrated Development Centre (IDC), a new oversight body established by Prince Khalid bin Faisal Al Saud, the governor of the region. With a mandate to serve as a coordinating body for all of the development projects in the region, upon its establishment the IDC was responsible for ensuring that more than 2500 ongoing projects were completed. The centre works alongside and in conjunction with a range of government authorities, state-owned development companies and private players.

“The IDC has already provided us with a good degree of latitude with regard to accessing public financing,” said Nidhal Abdulramhan Taibah, vice-president for development at the Jeddah Development and Urban Regeneration Company, which was established by Jeddah municipality. “It has also clearly improved our access to private funding. Private banks seem to be far more eager to work with us now, given the formalised state support in the form of the centre,” he told OBG.

At the national level, oversight for Makkah and Medina is a matter of royal concern. The Kingdom’s monarch, King Salman bin Abdulaziz Al Saud, holds the title of Custodian of the Two Holy Mosques, while Prince Khalid oversees the Makkah region as a whole and Prince Faisal bin Salman bin Abdulaziz Al Saud is governor of the Medina region.

At a more local level, the Holy Makkah Municipality (HMM) and Medina Municipality have a mandate to provide public services to their respective cities, in addition to upkeep of regional infrastructure and urban development. In January 2016 HMM launched a new online portal, which was designed to streamline interactions with citizens and improve public service delivery. This includes links to a wide range of online services.

Lastly, a range of smaller state-owned, partially public and fully private entities are involved in the development of the region. For instance, the Al Balad Al Ameen Development and Urban Regeneration Company (ABAM) was established by HMM in 2009 to develop infrastructure and urban regeneration projects in conjunction with private sector partners. The firm has been involved in a range of projects throughout the region – including a 2012 initiative aimed at improving housing and living conditions in five informal, unplanned districts in Makkah – in large part by improving and expanding the city’s transport infrastructure systems. ABAM’s most significant initiative to date, however, is Makkah Gate, a SR60bn ($16bn), 25-to-30-year project designed to house more than 750,000 people on a 110-sq-km plot of land about 14 km west of the Grand Mosque.

Religious Spotlight

The primary aim of recent developments at the holy sites in Makkah and Medina is to boost capacity in an effort to ensure the safety of pilgrims. During the 2015 Hajj, which took place in late September, many pilgrims were killed and injured in a stampede in Mina, a neighbourhood in eastern Makkah. According to Saudi Arabia’s own figures the death toll was 769, while estimates from the Associated Press put the number of deaths at 2411. The incident is one of a number of accidents that have taken place during the Hajj in previous decades.

At the same time, demand for access to Hajj sites has continued to rise, putting pressure on the government to allow an ever-growing number of visitors. In recent years, some 3m pilgrims have streamed into the Makkah region during the five-day Hajj, though in 2014 and 2015 this figure dropped to 2m per year after the government curtailed visa issuance during the ongoing construction work at the Grand Mosque and elsewhere.

As a result, ensuring that the Grand Mosque and other religious sites in Makkah and Medina not only meet, but exceed international standards in terms of crowd control and related logistical facilities is at the forefront of the Kingdom’s ongoing development plans for its religious sites.

Grand Expansion

In mid-July 2015 King Salman announced five new projects under the third phase of the ongoing programme to expand the Grand Mosque, which was launched in 2011 by King Abdullah bin Abdulaziz Al Saud, King Salman’s predecessor. The new initiatives include plans to enlarge the building itself and its major squares, add new tunnels, construct additional services buildings and expand a ring road around the city.

At the time of the announcement, Ibrahim bin Abdulaziz Al Assaf, minister of finance, told local media the five projects would result in the creation of six new floors for prayer, 680 escalators, 24 elevators and 21,000 toilets and ablution sites. The expansion of the building will add nearly 1.5m sq metres to the Grand Mosque site and will be accessible by 78 new ground-level gates.

This construction work follows a series of earlier initiatives implemented under the state’s $26.6bn Grand Mosque expansion project, which is being carried out by Saudi Binladin Group. While most major ongoing development projects in the rest of the country have been paused due to the challenging economic situation, work in Makkah has continued due to the particularly high demand.

In Medina, meanwhile, the state is in the midst of a SR25bn ($6.7bn) expansion of the Prophet’s Mosque, another key Hajj site. Launched in 2012, the project aims to boost capacity at the mosque to 1.6m, primarily by building out the western and eastern sides of the mosque. By the end of the first quarter of 2015, basic infrastructure work had been completed, and concrete columns were being constructed. The construction has not interfered with the customs of Ramadan, and worshippers were able to break fast as usual at the mosque complex in June 2016.

In order to expand the mosque, the government had to acquire and then demolish around 10 hotels and a considerable number of other buildings, including commercial and residential properties, near the site. As of mid-2016, the land for the expansion had been secured and more than 90% of the existing structures demolished. This work is part of the first phase of the project, which will boost capacity at the Prophet’s Mosque to around 800,000 worshippers. A second and third phase, which have not yet begun, are expected to add room for an additional 800,000 worshippers. Plans also call for the construction of a new neighbourhood near the mosque to host the facilities that were demolished during building. Indeed, an additional 26 hotels are slated for demolition in the second and third phases of the project.

Real Estate

According to data from the IDC, as of mid-2015 a total of 2568 development projects were under way in the Makkah region, including both public and private initiatives. Based on data reported in the Ihsan Al Haramain Index, which tracks Saudi-listed firms involved in real estate development in Makkah and Medina, the market grew by around 7% in 2015. According to Alpha1Estates, the multinational real estate advisory firm that maintains the index, this was the Ihsan Al Haramain’s smallest increase in five years. Regardless, the index performed better than the Tadawul All Shares Index, which tracks the Saudi stock market. Makkah stocks also performed considerably better than firms focusing on Medina. Indeed, according to Alpha1Estates, the combined value of Medina-related stocks fell by nearly 10% in 2015, while Makkah-related stocks rose by around 15%. This compares to a 1% increase in real estate stocks across all of Saudi Arabia in 2015.

The Knowledge Economic City Company is also working on a new development in Medina. Similar to other such projects in the nation, the new district is intended to serve as a catalyst for commercial activity and investment opportunities. Medina is a likely candidate for a new Knowledge Economic City (KEC) not only due to the enormous respect it commands among Muslims, but its population of 1m also makes it the fourth-largest city in the Kingdom, and its annual population growth rate of 3.4% exceeds that of the rest of Saudi Arabia.

The Medina KEC will cover 6.9m sq metres about 5 km from the holy mosque and will be located near the major axis connecting to the airport, as well as rail lines. The first phase of development includes residential areas, schools and universities, shopping and cultural districts, and a hospitality and commerce tower.

Short Stay

Given rising demand from pilgrims and other visitors (see Jeddah chapter), hotels, serviced apartments and similar facilities account for a considerable share of sector growth in Makkah. As a result, the rate of hotel development is quite unique, with a very high rate of turnover resulting in old hotels being demolished and quickly replaced by new businesses.

Like other markets in the Gulf region, the hotel sector in Makkah and Medina is dominated by the four-star, five-star and luxury segment. According to a report on Saudi Arabia’s hotel segment carried out by TopHotelProjects, a global hotel database, as of March 2016, some 24,133 new hotel rooms were in Makkah’s construction pipeline, more than double the number of rooms under way in Saudi Arabia’s next largest hotel market, Riyadh, which had a pipeline of just over 10,000 rooms.

Makkah is not only the leading hotel development market in Saudi Arabia; according to TopHotelProjects, it is also the second-ranked city in the Middle East in terms of upcoming hotel developments, after Dubai. “With the holy cities of Makkah and Medina forecast to exceed 17m visitors by 2025, the number of local and international hoteliers looking to invest continues to grow,” Christine Davidson, the group event director of the hospitality portfolio at dmg events, a US-based events management firm, told local media in late March 2016. One of the highest profile new hotel properties in the region is the Abraj Kudai, a $3bn complex in Makkah, which, upon completion in 2019, is expected to have 10,000 hotel rooms, making it the largest hotel in the world. Located just 2 km south of the Grand Mosque, the 1.4m-sq-metre development comprises 12 towers, 70 restaurants, multiple helipads and a full-scale conference centre. Designed by the Lebanese architectural firm Dar Al Handasah, Abraj Kudai is being funded by the Ministry of Finance.

Other hospitality properties either currently under way or in the planning stages in Makkah and Medina include two Park Inn by Radisson hotels, a Marriott hotel, a Hyatt Regency and a Holiday Inn, among others. “The substantial rise in supply expected over the next few years in both Jeddah and Makkah will be interesting to observe,” Grant Salter, the head of travel, hospitality and leisure at Deloitte, told local media in early 2016. “The supply and demand dynamics currently show a market in balance with occupancy and average daily rates relatively unchanged over the last 12 months. Makkah should be able to cope with the rise in supply […] but Jeddah could face headwinds.”

Housing

With a population that is projected to grow from around 31m at end-2015 to 37m by 2025, Saudi Arabia faces a looming housing shortage. The Ministry of Housing estimates that the country will need 3.3m new units over the course of the coming decade to meet rising demand. Over the past four decades, comparatively, the government built just 150,000 units per year on average, or 1.5m per decade. In 2011 the state allocated $67bn to the Ministry of Housing to construct 500,000 homes, but only a fraction of these were delivered, with developers citing bureaucratic issues and a lack of available land as key inhibitors. In Makkah and Medina, where land is considerably more expensive than in many other Saudi Arabian cities due to steadily high demand, housing is a particularly acute challenge. Fareed Maimani, CEO of Al Maimani Holding Group, told OBG, “Housing developments are a big part of the economic cities and will compose the bulk of Medina’s KEC, which is currently under development.”

While many of the large mixed-use projects currently under construction have a housing component, these developments are expected to target high-end buyers, effectively pricing out middle- and lower-income Saudis. Despite rising demand for housing, particularly affordable housing, vacant lots are not an uncommon site in the two holy cities. Landowners have a tendency to purchase a plot of land and hold it for a lengthy period of time before selling at a profit. This practice is widespread in Saudi Arabia; as of 2013, an estimated 40% of the land in Riyadh consisted of empty plots. In an effort to encourage landowners to build or sell, the government introduced a 2.5% tax on the value of all undeveloped land in late 2015.“Housing demand is a big problem here,” El Jarrah told OBG. “The new land tax should force some landholders to sell their land to the government for housing construction. It also serves as a new source of income for the state at a time when new revenues are very much needed.”

Infrastructure

In recent years the state has launched a range of high-profile infrastructure development programmes. New transport systems of various types are currently under way in Makkah, Medina and Jeddah. Metro train networks are at the centre of both the SR62bn ($16.5bn) Makkah Public Transport Programme and the Medina Public Transport Programme, which also include supplementary rapid-transit bus lines.

Additionally, the Haramain High-Speed Rail Project, which is slated for completion in 2017, will link Makkah, Medina and Jeddah with a 450-km rail line capable of handling trains at speeds of up to 300 km per hour. The system, which was designed to accommodate around 3m passengers per year, is set to alleviate a considerable amount of road traffic across the area for the foreseeable future. Additionally, work under way at many of the region’s major airports is also expected to improve connectivity in the region (see analysis).

Another major project is the King Abdul Aziz Road in Makkah, which is being overseen by Umm Al Qura for Development & Construction Company. The firm awarded the SR6.7bn ($1.8bn) project to Saudi contractor Nesma & Partners in April 2015. Starting in the western section of Makkah, the 3650-metre road is expected to alleviate congestion in the city and lead to better services for pilgrims and visitors alike.

Outlook

The extent to which more modest economic growth has affected and will continue to impact these initiatives – whether work slows slightly or projects are formally put on hold until the situation improves – remains to be seen. “The government has some very good ideas on the table, but it will take time to push these through in the form of legislation and completed projects,” said El Jarrah. “In the meantime, the economy will continue to shrink until it reaches a critical point, then it will turn around and start to rise again.”

Many market observers and participants remain optimistic about Saudi Arabia’s long-term prospects, particularly in the Makkah and Medina regions. This optimism can be attributed in part to the government’s continued outpouring of investment in the two regions, along with rising levels of private sector participation, both in the form of public-private partnerships and standalone ventures. Moreover, the expectation of continued demand growth from both residents and visiting pilgrims bodes well for the future of both regions.