Tourism in Saudi Arabia increases hotel supply

The year 2017 emerged as a bumper year for new openings in the hotel and leisure segment, as investors prepared for growth in visitor arrivals. Additional building and higher occupancy rates will be driven by efforts to ensure that the Kingdom can host a large number of pilgrims safely, combined with rising business travel as the economy diversifies and government programmes to develop more leisure offerings step up.

A record 68 hotels with 29,033 rooms were due to open in Saudi Arabia in 2017, with Riyadh set to account for 48 of these, according to a report by Tophotelprojects, an international hotels database. There are also 170 hotels with 60,395 rooms in the pipeline.

Arrivals

While it is not typically regarded as a leisure destination, Saudi Arabia has the 17th-largest travel and tourism sector in the world, according to the World Tourism and Travel Council (WTTC). This is largely due to its status as the primary pilgrimage centre for the world’s 1.8bn Muslims, the large number of business travellers it welcomes and its considerable number of domestic travellers. The WTTC expected the Kingdom to attract 18.8m visitors in 2017, rising to 31.6m in 2027.

Plans to reinstate normal pilgrim quotas after a 20% reduction was imposed in 2013 are likely to prove important in meeting tourism targets. After an incident caused by overcrowding occurred in 2015, 2016 saw the number of pilgrims fall to a 10-year low, as the government restricted visas to allow for construction works. Furthermore, in October 2017 the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, announced plans to establish two new companies, Rou’a Al Haram and Rou’a Al Madinah, tasked with developing areas around Makkah and Medina, respectively. The works aim to accommodate 25m-30m pilgrims per year, and will include 150,000 rooms, with the first phase of the projects to be completed in 2023 and 2024. Foreign partners have been invited to play a central role.

“Major hotels account for a large part of ongoing construction projects driven by religious tourism, especially in Makkah and Madinah,” Yousef Alhamouri, operations director of Mechanical and Chemical Supplies, told OBG. “Makkah’s Holiday Inn is set to be the biggest in the world upon completion.”

Local Partners

FAS Hotels, part of the Fawaz Al Hokair Group, is one of the local firms looking to capitalise on this growth. It focuses on four- and five-star hotels, and has established a close relationship with international partners such as Marriott International and Starwood Hotels & Resorts. It is through these strategic partnerships that the company aims to build 1000-room hotels in the Kingdom, and is in the process of ramping up its total room ownership to 10,000 keys, with major projects including the JW Marriott Salboukh and the Four Points by Sheraton at the Mall of Arabia in Jeddah. In September 2016 Fawaz Al Hokair Group won a major contract to develop the King Abdulaziz International Airport City, a mixed-use commercial zone on a 2m-sq-metre plot adjacent to the airport in Jeddah. FAS Hotels is to develop hotels within the zone, which is expected to see SR7bn ($1.9bn) in investment.

Jeddah Market

Jeddah is well placed to benefit from the growth in pilgrim numbers. The city had 10,400 hotel rooms as of the third quarter of 2017, according to real estate company JLL. The opening of the five-star Ritz-Carlton Jeddah in the second quarter was significant not only for its 224-room supply and bringing a new high-end name to the port city, but also for its 7700 sq metres of conference facilities – an important addition in a city with a shortage of such venues.

JLL expected 900 rooms to come onto the market in the final quarter of 2017, followed by an additional 1600 rooms in 2018 and 1400 in 2019. Projects under development include Staybridge Suites Her’a Dyafa Centre (200 rooms), the Mövenpick Hotel & Apartments Al Tahlia Jeddah (164 rooms), the Somerset Corniche (135 rooms) and the Hyatt House Sari Street (104 rooms).

With a wave of new openings, occupancies have dipped over the past year, falling from an average 72% in the first eight months of 2016 to 62% in the same period of 2017. The average daily rate (ADR) dropped 4.4% to $258 in the same period, while revenue per available room (RevPAR) was down 16% to $165. However, the market is expected to strengthen in the coming years, as higher pilgrim quotas and increased leisure offerings attract visitors to the city and fill the new supply.

Riyadh Rising

The capital’s hotel market has also softened over the past year. Average occupancy dipped from 56% between January and August 2016 to 52% in the same months of 2017, according to JLL, with the ADR dropping 12% to $185. While some 900 new rooms have come onto the market each year since 2014 – taking the city’s total supply to 12,200 by the third quarter of 2017 – the last three months of 2017 alone were expected to welcome 1300 additional rooms.

JLL forecasts that there could be 15,700 rooms in the city in 2019. The demand outlook is improving, though, with King Salman bin Abdulaziz Al Saud placing a strong emphasis on promoting cultural heritage, and projects including a 334-sq-km entertainment city.

Dammam

Hoteliers in Dammam, the capital of the Eastern Province, are also anticipating a brighter outlook after a challenging period in which the slowdown in the hydrocarbons industry – the region’s main economic driver – had an impact. Average occupancy dropped from 62% in the first five months of 2016 to 52% in the same period of 2017, according to JLL, with the ADR down 9% from $170 to $154. At the same time, RevPAR fell by 24% to $80. However, JLL expects an uptick in the market in 2018 as the economy strengthens and the government implements its Vision 2030 strategy.

The Dammam Metropolitan Area is expected to develop as a leisure tourism destination in the coming years, with projects like the 5000-sq-metre family entertainment centre opened by Abdulmohsen Al Hokair Group in mid-2017. “Prospects for local tourism are getting brighter,” Turki Alhokair, CEO of FAS Hotels, told OBG. “As Saudi incomes have been squeezed in the past year, local tourism destinations have become much more competitive than other traditional destinations in the GCC.” As of mid-2017 there were 6500 hotel rooms in the Damman Metropolitan Area, with 1500 keys added since 2014. JLL projects total supply to reach over 7000 in 2018 and over 8000 in 2019, although the recent slowdown may see some projects put on hold.

Red Sea

In August 2017 Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud announced the launch of a large tourism project on the country’s Red Sea coast, an unprecedented development that could change the face of tourism in the Kingdom. The zone will have no visa requirements for travellers from most countries. The development will encompass attractions such as coral reefs, historical sites, dormant volcanoes and wildlife reserves. The PIF, which will own the project, aims to attract 1m tourists per year to visit the area by 2035, generating SR15bn ($4bn) annually. The first phase is expected to be complete by the end of 2022.