Pilgrimage increasingly central to Saudi Arabia's economic diversification efforts

Makkah and Medina are situated in western Saudi Arabia, near the coast of the Red Sea and roughly 350 km apart. The cities are home to Islam’s holiest sites, and are thus important to the religious lives of many of the world’s 1.2bn Muslims. Makkah is the birthplace of the Prophet Muhammad and the location of the Masjid Al Haram, also known as the Grand Mosque, which houses the Kaaba, a shrine that Muslims consider the most sacred spot in the world. Medina, meanwhile, became the destination of the Prophet Muhammad’s flight from Makkah, and it was in this new city that he helped to build the Mosque of Quba – the first in Islamic history – and was later buried.

The city Makkah is the capital of a region of the same name. The Makkah region had a population in mid-2017 of 8.6m, up from 6.1m in 2007, according to the General Authority for Statistics (GaStat). The wider region also includes Jeddah, one of the busiest ports in the Arab world and, after Riyadh, the country’s second-largest city, with a population of 4m. Makkah, meanwhile, is home to nearly 2m people, and has nearly doubled in size in the last two decades.

Medina, to Makkah’s north, is likewise an eponymous provincial capital; in mid-2017 the city had a population of 1.5m, while the wider Medina region was home to 2.1m people, up from 1.6m in 2007. Such demographic growth in both cities has put pressure on housing and infrastructure resources, which the government has recently attempted to alleviate by undertaking largescale development projects.

Pilgrimage

Each year both cities attract millions of religious worshippers participating in one of two pilgrimages, the Hajj and the Umrah. The Hajj is an annual, five-day pilgrimage that occurs between the eighth and 13th days of Dhul-Hijjah, the last month of the Islamic calendar; in the Gregorian calendar, it fell between August 19th and 24th of 2018, and is forecast to happen between August 9th and 14th of 2019, depending on when the moon is sighted. The performance of Hajj is one of the five pillars of Islam, and every physically and financially capable Muslim is required to take part in the ritual at least once in their lifetime. During the five-day pilgrimage, hajjis (participants in the Hajj) trace the footsteps of the Prophet Muhammad around Makkah and perform a number of important rites, such as circling the Kaaba and walking between the hills of Safa and Marwa, which both occur within the Grand Mosque complex.

While Umrah entails many of the same practices as the Hajj, it is not considered an obligation, and the journey can be performed at any time of the year. In an effort to attract more mu’tamirs (participants in the Umrah), and in recognition of the stress that the Hajj exerts on local infrastructure, the government has taken several steps to ease the process of obtaining an Umrah visa, including the digitalisation of the application form, the rollout of e-visas and the reduction of visa fees for pilgrims from select countries.

Economy of Worship

The economic impact of the pilgrimages on the economies of Makkah and Medina is substantial. Recent research by the Makkah Chamber of Commerce and Industry found that 25-30% of private sector income earned in the area around the two cities is derived from pilgrimage. Likewise, the Council of Saudi Chambers estimated that spending associated with the pilgrimages will together generate $150bn in income and create 100,000 permanent jobs related to the Hajj over the 2018-22 period.

In 2016 Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud unveiled Vision 2030, a long-term economic plan that aims to reduce the Kingdom’s dependence on oil by diversifying the economy, particularly through the development of public service sectors. Activities associated with Hajj and Umrah accounted for 20% of non-oil GDP and 7% of total GDP in 2017. Coupled with the dampened and volatile global price of oil – Brent crude fell from $115 per barrel in June 2014 to a low of $29 per barrel in January 2016, and only recovered to $80 per barrel briefly in the fall of 2018 – pilgrimage has become a vital component of Vision 2030, and the government has a launched a series of projects to boost religious tourism.

Resource Stresses

Central to the government’s undertaking is a concerted effort to better ensure pilgrims’ safety. In September 2015 a crane involved in the renovation of the Grand Mosque collapsed into the building, killing more than 100 worshippers during Friday prayer. Several weeks later, during the Hajj, a stampede took place in Mina, a neighbourhood in eastern Makkah that is central to the pilgrimage, that killed hundreds and injured thousands more. Since then, national and regional government agencies have focused on improving crowd control, data collection and emergency response services, while also expanding the capacities of the holy sites.

According to GaStat, 2.37m people – 1.76m foreigners and 613,000 Saudis – took part in the Hajj in 2018, up slightly from the year prior, when Makkah welcomed 2.35m pilgrims. Those totals significantly exceeded the decade-low of 1.86m hajjis recorded in 2016, but fell well-short of the 10-year high reached in 2012, when 3.25m people took part. Vision 2030 aims to attract 5m pilgrims by 2030 through measures like visa liberalisation and capacity expansion. The gains made since 2016 are attributed in part to the lifting of quota restrictions imposed during the expansion of the Grand Mosque to ensure the safety of visitors.

Alongside its target to increase Hajj visits, the government has placed greater emphasis on attracting more Muslims to participate in the Umrah, as the pressure of tourism on infrastructure can be more evenly distributed across the entire year. In 2017, 12.6m mu’tamirs visited Makkah, with more than 6.7m coming from outside the Kingdom. In total the government has set a target of attracting 15m foreign Umrah pilgrims by 2022, and by 2030 the government hopes to have the infrastructure in place to accommodate 30m foreign and 20m Saudi mu’tamirs per year.

The drive to expand religious tourism has situated Makkah and, to a lesser extent, Medina at the centre of the government’s large-scale development projects. While much of the country has been adversely affected by the slowdown associated with the fiveyear slump in oil prices, both cities have continued to prosper, predominantly on the strength of investments in infrastructure and hospitality. As Nidhal Taibah, founding partner of the KSA office of EHAF Consulting Engineers, explained to OBG, “Makkah, unlike the rest of Saudi Arabia, was not impacted as much by the economic slowdown, due to the demand created by the influx of religious pilgrims every year.”

Transport & Internet

In September 2018, under the purview of Vision 2030, the Public Transport Authority announced the opening of the high-speed Haramain High-Speed Rail project, which runs between Makkah and Medina, via Jeddah, the King Abdulaziz Airport and King Abdullah Economic City. The train, which cost SR60 billion ($16bn) to develop, can reach speeds up to 300 km per hour and is expected to cut the transport time between the two holy cities from five hours to two. Officials expect it to transport 60m passengers annually, which should greatly improve road congestion, particularly during the Hajj.

Along with this investment in transit, the government has worked to provide high-speed internet services to the growing number of internet-savvy visitors. In 2018 the Commission for Communications and IT added 3000 signal towers to the 13,000 existing sites in Makkah and Medina to facilitate high-speed data communication. This investment builds upon an existing network of 3000 public Wi-Fi access points, as well as the 920 sales outlets run by the country’s multiple telecoms operators.

Capacity Growth

The expansion of the Grand Mosque started in 2011 but halted abruptly in September 2015, following the deadly crane accident, and the project only resumed in October 2017. The $10bn development will increase the area from 356,000 to 400,000 sq metres, build out its capacity from 1.5m to 2.5m worshippers and add two minarets to the 11 towers currently in place. In addition, the King Abdullah Expansion Structure will accommodate 1.2m more worshippers over an area of 456,000 sq metres and add 78 gates, which will improve the flow of people into and out of the complex and allow as many as 400,000 worshippers per hour to pass through the Mataaf, the circumambulation area around the Kaaba.

In Medina work began in 2012 to build out the capacity of Masjid an-Nabawi, or the Prophet’s Mosque, to accommodate as many as 1.6m worshippers. A significant number of hotels were demolished to make way for the structure’s expansion, which includes tunnels, 15,000 toilets and new pedestrian pathways throughout the structure. While the demolition phase of the project has been completed, no further construction occurred on the site in 2018.

Visa Regulations

Due to the Grand Mosque expansion project, the Saudi government tightly restricts the number of visas given to pilgrims. For Muslim-majority nations, Saudi Arabia sets a quota of 1000 Hajj visas per million Muslims. In 2017, 221,000 hajjis travelled from Indonesia – home of the largest Muslim population in the world – with the help of government subsidies, while 179,000 Pakistanis made the same trip. Muslims from countries where they do not constitute a majority are not restricted by a quota when applying for Hajj visas. The number of British Muslims attending Hajj has steadily risen over the years, rising from under 1000 in 1968 to as many as 25,000 last year. An additional 100,000 attend the Umrah annually from the UK. In many countries the waiting list for a Hajj visa is years long, and given the limitations on the number of pilgrims that can be accommodated during the event, the government has promoted the Umrah to boost year-round religious tourism.

New Visas

The government has moved to ease the process by which Muslims obtain Umrah visas and to expand the permissions those visas grant. In 2018 the government relaxed the geographical parameters of the visa, which had previously limited worshippers to visiting the Makkah and Medina regions, such that visa-holders can now travel to major cities across the Kingdom. In recognition of the same limitations, and in tandem with regulatory reform, travel companies that have typically served hajjis have begun to promote the Umrah pilgrimage more vigorously. These public and private efforts are expected to boost the tourist industry in Makkah and Medina considerably.

As of early March 2019 – Umrah season began in mid-September 2018 – the government had issued 4.3m Umrah visas, and more than 3.9m mu’tamirs had already arrived in the country. Should the pace of visa issuances be sustained through the second half of the Muslim year, the number of Umrah visitors will far surpass the 6.7m foreign mu’tamirs that entered Saudi Arabia in the previous year. This increase has come amid efforts to closely monitor the issuance of these visas, as the government works to ensure that pilgrimage sites do not become too heavily congested, especially with the work on the expansion of the Grand Mosque continuing throughout the year.

“The Saudi government manages the flow of visas very carefully in that they make sure the number of pilgrims can be absorbed by the Grand Mosque in Makkah,” Faisal Tahir Khan, founder and CEO of the global consultant FT Konsepts, told OBG. “They appear to have successfully created a balance whereby there is a continuous flow of pilgrims, meaning the Grand Mosque is neither too full nor too empty at all times.”

Makka Hospitality

Half of the hotel rooms slated for development in Saudi Arabia will be located in Makkah, with 23,000 rooms currently under construction and a further 32,000 in the pipeline, according to a July 2018 report by Alpen Capital. Many of these rooms are part of two large-scale developments, Jabal Omar and Rou’a Al Haram al Makki, that are catering explicitly to the demands of religious tourists.

The SR20bn ($5.3bn) Jabal Omar development, a 2.2m-sq-metre plot within walking distance of the Grand Mosque, will comprise 93 commercial units and 38 hotels equipped for 36,000 guests. “This project will have a big impact on the hospitality market in Makkah city due to its heavy focus on hotels,” Taibah told OBG. “As the Jabal Omar site is very steep, it has not been possible to build malls, but there will be some commercial infrastructure in the development with a retail shopping area on the ground floor.”

Phase one comprised the construction of 10 hotel towers, including Hilton Suites Makkah, Makkah Marriott Hotel and Hyatt Regency Makkah, and was completed in mid-2017. Phase two, encompassing an additional 1033 hotel rooms and all 93 commercial units, is expected to conclude in early 2019. Foremost among the additions will be a multi-towered building, constructed atop a retail podium, that will house the Four Seasons Hotel, where all 375 guest rooms will offer unobstructed views of the Grand Mosque and the Kaaba. “Four Seasons will be the jewel in the Jabal Omar master development plan,” Yassar Faisal Al-Sharif, CEO of Jabal Omar Development Company, told local and international media in October 2017. “It will bring to life a vision for the ultimate hospitality experience to enhance Hajj and Umrah pilgrimages.”

Another mixed-use mega-project, Rou’a Al Haram Al Makki, could transform the local market. The project, announced in late 2017 by its financier, Saudi Arabia’s sovereign wealth fund, will span some 84,000 sq metres, add 70,000 hotel rooms and, according to an estimate from JLL, contribute SR8bn ($2.1bn) to the national economy. The first phase is projected to be fully operational in 2024. Fayyaz Ahmad, national director of the JLL in Saudi Arabia, told OBG that, “The Jabal Omar and Rou’a Al Haram Al Makki projects will significantly increase the supply of rooms in the hospitality sector in Makkah, and are key for the government’s targets for religious pilgrims in Vision 2030.”

In 2018 there was a string of other notable hotel openings in the Al Naseem complex, including the Four Points by Sheraton Makkah Al Naseem (1140 keys), the Copthorne (492 keys) and the Millenium Hotel (815 keys). JLL forecasts the number of rooms available in Makkah to increase to over 51,000 in 2019, up from 40,000 rooms projected at year-end 2018.

Amid this surge in construction, hotel performance in Makkah has declined slightly. In May 2018 the 62% occupancy rate was down year-over-year (y-o-y) by 1%, though that figure remained above the national average. The average daily rate (ADR) – or revenue per occupied room per night – in Makkah fell from $138 to $134 over the same period, a y-o-y decline of 3%. This follows a much steeper decline in the sector in 2017, when ADR fell by 18.7%, due to an oversupply of rooms – particularly mid-range facilities – and the fact that 80% of total demand is concentrated in just two to three months of the year.

Medina Hospitality

Medina remains an attractive alternative to Makkah as a place for worshippers to stay, and this trend is likely to deepen as the new Haramain train speeds travel between the two holy cities. Several notable hotels opened in Medina in 2018, such as the Elaf Grand Al Majeedi, which brought 630 rooms onto the market just 20 minutes from the city’s airport. Previously an apartment complex, its transformation into a luxury hotel entailed the construction of two restaurants and a café, all of which afford views of the Prophet’s Mosque. In addition, the Millennium Medina Airport Hotel, a 227-room, five-star facility adjacent to the same airport, opened in June 2018, complete with four rooms for business meetings and a selection of restaurants. Its completion adds to the list of luxury hotels available to pilgrims staying in Medina.

Retail

Even as the tourism sector is likely to grow as a result of greater Hajj and Umrah pilgrimage, the government faces a challenge in diversifying its nonoil economy, such that it does not become solely reliant on religious visitors as sources of revenue. The retail sector is likely to be an important driver of that diversification. According to GaStat, 46% of average Saudi household expenditure is on retail purchases, concentrated in food and beverage, fashion and entertainment. Although the sector’s development is well under way, it is limited by a lack of space suited to developing large commercial sites – particularly shopping malls – in the centre of the city, as well as the difficulties associated with its geography.

“The retail sector has always been essential to Saudi Arabia, as it is the lifeline of the local economy,” Taibah told OBG. “Within Makkah’s central district there is a restriction on large plots of land to develop commercial projects, especially with regard to parking. That’s why the government has begun to develop alternative shopping experiences, where people can go to the mall without using their private car.”

Makkah has a retail shopping mall supply of 140 sq metres per 1000 residents, significantly lower than that of other large cities like Jeddah and Riyadh, according to a September 2018 report from Colliers. Moreover, more than three-quarters of the city’s available retail space is fragmented across souqs (traditional markets) and line shops, rather than clustered in showrooms and shopping malls.

JLL projected the city’s retail stock – listed as 1.26m sq metres at mid-year 2018 – to add 20,000 sq metres in the second half of 2018, as the opening of the retail component of Jabal Omar compensated for the closure of the Al Awali mall and the Tharawat Boulevard development was completed. The firm projected the market to add another 30,000 sq metres in 2019, mostly on Retaj Boulevard, which has been touted as Makkah’s largest open-air commercial strip. Colliers’ analysis of the mall segment projects more robust growth assessing the major projects in the local pipeline, the firm projects the retail space available in malls to grow from 280,000 sq metres in 2018 to 804,000 sq metres by 2025, an increase of 287%.

Given that a third of all the religious pilgrims are domestic and GCC visitors with high purchasing power, and given government efforts to increase the number of Hajj and Umrah visitors under Vision 2030, Makkah has evident potential for the development of shopping centres. A recent report from Jeddah-based Sajini Research and Consultancy Centre predicted that spending by Hajji pilgrims alone will increase from $4.2bn in 2017 to $5.6bn by the 2022 Hajj.

Outlook

As part of its strategy to diversify the economy and reduce its dependence on oil revenues, the government has invested significantly in the pilgrimage economies of Makkah and Medina as potential sources of growth. Coupled with regulatory reform intended to ease participation in the Hajj and the Umrah, spending on infrastructural capacity, retail space and hotel accommodations has helped both cities to prosper amid a tepid and volatile global oil market.

In particular, the promotion of the year-round Umrah, the expansion of the Grand Mosque and the development of the high-speed Haramain line should help to reduce the burden on the resources of Makkah and improve pilgrims’ safety. The Kingdom’s focus on leveraging its unique cultural resources has paid off to date, and savvy spending should sustainably expand those dividends for both cities in the years ahead.