Saudi Arabia ranks among top countries for hotel development

Published November 8th, 2015 - 05:23 GMT
The InterContinental Riyadh (Al Bawaba/File)
The InterContinental Riyadh (Al Bawaba/File)

Saudi Arabia is among the world’s top ten countries for hotel projects under development, according to a new report.

The kingdom has 108 projects under way, featuring 28,000 rooms, according to Top Hotel Projects – a hotel research consultancy.

The capital city of Riyadh alone has 42 hotel projects under way, the data shows, with a capacity of 10,000 rooms. This makes it the fourth most active city in terms of hotel development after Dubai, New York and London.

Meanwhile, the Red Sea city of Jeddah is ranked seventh globally with 31 hotels comprising 7,000 rooms under construction.

The tourism sector is a key plank of the Saudi government’s plan to expand the non-oil economy. Apart from being a major job generator, the hospitality sector is leveraging Saudi Arabia’s potential as the Islamic world’s most important religious tourism destination. In addition, the kingdom is also looking to develop its cultural and historic sites to attract visitors from all over the world.

The Saudi Commission For Tourism and Antiquities has laid out an ambitious strategy to attract 45.3 million tourists each year by 2020, compared to 14 million in 2013. The plan envisions the development of 50,000 addi- tional hotel rooms and 74,000 new furnished apartments. The SCTA has earmarked a total of 40 tourism development areas that will require heavy investment.

The strategy is expected to pay off in big ways: it will gener- ate 1.5 million direct and indirect jobs and yield SAR 80bn in direct tourist expenditure (domestic and foreign) by 2020. This, in turn, will generate SAR 86bn in sales, SAR 19bn in income and SAR 60bn in value added revenues.

The direct contribution of travel and tourism to the coun- try’s gross domestic product last year was SAR 68.4bn, or 2.4 per cent of GDP, according to the World Travel And Tourism Coun- cil – which has a lower forecast for the sector’s growth.

“This is forecast to rise by 6.2 per cent to SAR 72.7bn in 2015. This primarily reflects the economic activity generated by industries such as hotels, travel agents, airlines and other pas- senger transportation services (excluding commuter services),” WTTC says in a report.

“But it also includes, for exam- ple, the activities of the restaurant and leisure industries directly supported. The direct contribu- tion of travel and tourism to GDP is expected to grow by 4.3 per cent per annum to SAR 110.8bn (2.8 per cent of GDP) by 2025.”

The total contribution of the sector will rise by 4.4 per cent per annum to reach SAR 356.6bn by 2025, compared to SAR 218bn last year, WTTC forecasts.

Some of the biggest development will be undertaken in the holy places of Makkah and Medina.

Saudi Arabia recently announced a massive expan- sion plan for the Grand Mosque. The last expansion of Islam’s most holy site cost SAR 100bn and analysts expect the latest phase to exceed that price tag.

Once complete, the project will nearly double capacity. It will accommodate a total of 2.5 million worshippers during the peak Hajj season.

“Between 2014 and 2025, the number of annual visitors to Makkah is expected to increase at a compound annual growth rate of 4 per cent to 16 million, while that to Madinah will expand at a CAGR of 3 per cent to nine million,” Aljazira Capital says.

The Grand Mosque expansion will be supported by a number of transportation infrastructure projects including the $9.3bn Haramain High-Speed Rail net- work connecting the holy cities of Mecca and Medina to King Abdullah Economic City, and a soon to be completed $7.2bn passenger terminal at Jeddah’s King Abdulaziz International Airport.

There is also scope for massive hotel development in the southern region.

Aljazira Capital estimates around 43 per cent of the hotel supply in Makkah and 46 per cent in Madinah is three star and above, suggesting an oversupply of premium hotels. This may explain the growing popularity of branded economy hotels and apartments in both regions.

“Premium hotels dominate the supply in the three cities and given the increasing number of business tourists in the cities, luxury brands should continue to prosper,” Aljazira notes in a report. “In addition, there is considerable potential for the economy hotel segment, Asian travelers are more price-sensitive. Branded residences are also gaining popularity among the wealthier tourists (mainly business travellers).”

Indeed, the rapid development in Jeddah could see oversupply of upmarket hotels in the city.

“The segments expected to experience the most disturbance are the luxury and upper upscale ones with more than 70 per cent of new rooms rated four or five star and internationally branded,” according to real estate consultant Jones Lang LaSalle. “This steep increase in competition will have a positive effect on the market in terms of quality of product offered to guests.”

However, the development of Kingdom City, a high-profile project that is set to feature the world’s tallest tower, could spur further development north of Jeddah. Locations like Obhur Creek on the eastern side of the Red Sea could become more attractive as a result.

“This indicates the opportunity to develop branded resorts in Obhur, catered to the growing leisure market,” real estate firm Colliers International says. “With the emerging dining trends in Jeddah, the city’s corniche presents an opportunity to develop signature dining venues, featuring popular brands and trendy concepts.”

While Riyadh is traditionally seen as a corporate destination, weekend occupancy has improved in the past decade due to growing demand from domestic families, Colliers notes.

However, the city’s average revenue per available room may soften as a new spate of projects come on stream.

“While many of these projects will in reality also experience delays, the increased level of competition will inevitably place downward pressure on perfor- mance levels over this timeframe.”

Apart from attracting private and international investment, the sector is also expected to generate much needed jobs for the kingdom’s youth.

“By 2025, travel and tourism will account for 942,000 jobs directly, an increase of 3.8 per cent per annum over the next ten years,” WTTC says, compared to 603,000 currently employed.

Including indirect jobs, that figure could exceed 1.6 million – or 12.8 per cent of total employment – the organisation estimates.

The sector attracted capital investment of SAR 92.4bn last year, and that figure could rise annually to just under SAR 150bn by 2025, rising at 5.5 per cent, according to the council.

The kingdom’s hospitality sector is ripe for development and could emerge as an invest- ment magnet. Especially if the authorities launch more business- friendly legislation that boosts the industry and helps nurture the existing 250 operators.

“We believe this number is expected to grow further given the increasing inflow of tourists along with growing business and leisure tourism,” Aljazira says.

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