It is no coincidence that the most profitable hotels on the planet are located in the holy city of Makkah. For fifteen centuries, Muslims have travelled to Makkah from all over the world for the Haj and Umrah pilgrimages, making the city the highest source of inbound foreign visitors in Saudi Arabia. Makkah is arguably the most attractive hotel investment opportunity available in the Middle East and I am proud to be deeply involved in this unique hospitality asset class this spring.
There are a number of reasons why Makkah hotel investments exhibit the potential for 16-18 per cent annual dividends. One, the Saudi kingdom intends to triple the number of Umrah visas and religious tourists are expected to rise to 17.5 million sometime in the next five years. Ironically, the crash in oil prices has increased the strategic importance of tourism as a source of revenue and job creation in Saudi Arabia, as Prince Mohammed bin Salman bin Abdulaziz, Deputy Crown Prince, Second Deputy Premier and Minister of Defence, noted in his recent Economist interview. Two, tourism is the second largest employer of Saudi citizens even now, a key priority for a government committed to job creation opportunities for Saudi nationals.
Three, 9.4 million pilgrims travelled to Saudi Arabia in 2015, with a 10 per cent compound annual growth rate in the number of Umrah visas. As Makkah is the epicentre of a pilgrimage sacred to 1.8 billion Muslims, its hospitality sector faces a virtually unlimited demand curve and is a proxy for rising affluence, middle class population growth and wealth creation in Saudi Arabia, the Gulf and the entire Islamic world. This makes Makkah's hotel micro-markets the most attractive investment in the world for a regional or global investor.
Four, the Saudi Arabian government has initiated a number of infrastructure and transport initiatives that only enhance the risk/reward calculus of hotel development in Makkah. The kingdom plans to spend $80 billion in the continued expansion of the Grand Mosque so that it can accommodate upto 2.2 million worshipers. This is essential before Saudi Arabia can increase Haj/Umrah visa quotas for such populous Muslim countries as Turkey, Pakistan, Indonesia, Egypt and even non-Muslim countries such as India, Britain, France, the US and Canada, a strategic diplomatic priority for the kingdom.
Five, Saudi Arabia's planned expansion of the Grand Mosque and exponential increase in foreign pilgrimage visitor quotas is complemented by more than $100 billion investments in the transport infrastructure of the Hijaz. For example, the expansion of the Haramein high speed rail links and the increase in Jeddah's airport capacity to accommodate 30 million passengers will anchor the rise in pilgrims who will need hotel rooms in Makkah. This colossal commitment to airport/high speed rail transport/expressway capacity expansion makes strategic sense since the Saudi government plans to triple Umrah pilgrimage visa issuance by 2018. This makes investing in Makkah hospitality a non-brainer.
Six, property market investing necessitates sophisticated supply-demand models and real time analysis. Makkah hospitality has the world's most attractive supply-demand metrics in 2016. The recent large scale demolitions have eliminated 26,000 rooms in Makkah while there is a chronic shortage of four-star hotel rooms, a mere 11 per cent of total supply in a market where international hotel branded keys are a mere third of total supply. As demand spikes due to the rise in visa issuance, supply plunges due to demolitions, restrictions on new developers (only Saudi citizens, not even GCC nationals, can develop real estate in Makkah) and the downgrade of many existing four-star hotels to two-star or one-star due to the Supreme Commission for Tourism and Antiquities (SCTA) reclassification programme.
I envisage a major rise in occupancy rates and pricing power for four-star branded hotels. This niche is a RevPar and gross operating margin (GOP) dream not possible in Dubai, London, New York or Hong Kong. There are a mere 12,000 four-star hotel rooms available in Makkah, a city that attracts 7.3 million Umrah pilgrims in 2015. The forecast for 2016 is 9.9 million Umrah pilgrims alone. This data makes four-star hotel investments in Makkah the property deal of the decade.
It takes at least three years to lease land and permits for hotel construction in Makkah. It costs $100,000 per room to develop a four-star hotel in a global gateway city but a mere $60,000 in Makkah. This is a hotel investor's dream come true!
By Matein Khalid
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