MARKET UPDATE: Riyadh

After years of high demand, low supply and sky high rates, Riyadh’s hotel market is finally starting to catch up, although with 8000 more rooms on the horizon, is it a case of being careful what you wish for?

For years Riyadh’s hospitality market has been operating between the extremes of high demand and low supply, meaning that hotel operators in the city have enjoyed one of the highest levels of occupancy and average room rates (ARR) in the region.

However, performance like that doesn’t go unnoticed for long and approximately 8000 new hotel rooms are due to come online in the Saudi Arabian capital over the next three years.

Now, with further new hotels being announced seemingly every month, established hotels and industry experts are starting to raise concerns about an increasing risk of oversupply as once dominant profit margins begin to be eaten away.

STR Global’s Middle East & Africa area director Philip Wooller understands that Riyadh’s established hotels are not going to be comfortable with an increase in competition, and admits that “if I was a hotelier, I’d be worried.”

“However, Riyadh has to move forward and develop as a market and can’t continue with such a small supply of hotel rooms where demand is able to force up the rates. At present things are almost unsustainable, but as it begins to develop as an expanding market everyone is going to benefit from that,” adds Wooller.

Growing pains
However, market data from fellow analysts TRI Hospitality Consulting reveals that extra supply may already be having a negative effect on the market as Riyadh’s 2012 average occupancy level fell to 58.5% from 60.20% in 2011, while ARR was down slightly at US $253.05, 3.6% lower than 2011’s average of $262.62.

These are results that TRI partially attributes to the recent trend in Riyadh's hospitality market of rapidly expanding midscale and economy hotel brands.

“Riyadh has always had a very upmarket and luxury orientated hotel supply. However, a lot of three and four-star hotels will be soon be entering the market, which will mean that instead of having no choice but to spend $300 dollars a night at a luxury hotel, guests can now look at good quality midscale hotels at a fraction of the price.

This is therefore going to cause luxury hotels in the city a problem as they try to maintain the same rates and occupancy levels they enjoyed before these new segments entered the market,” explains TRI Hospitality Consulting’s Christopher Hewett.

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As one of the largest midscale and economy hotel operators in the region, Accor is one of many ambitious newcomers to Riyadh’s hospitality market looking to take advantage of the city’s exciting performance figures.

“A major regional hub like Riyadh is essential in our present and future regional strategy,” says Accor Middle East managing director Christophe Landais.

“By 2015, Accor will be operating five hotels in Riyadh representing 1000 rooms across all market segments.

With our recently opened Ibis Riyadh Olaya Street hotel, the first Ibis in the country and first internationally branded economy hotel in KSA, as well as our Suite Novotel Riyadh Olaya, we are in a strong position to capture the demand in the mid-market segment.

Also, with the signing in 2012 of a 400-room five-star Sofitel luxury hotel due to open 2015, we will have the perfect luxury product to perform strongly in this market despite strong competition in the five-star segment,” Landais continues.

Another hotel group preparing to enter the Riyadh market is Millennium & Copthorne Hotels with the 350-room Millennium Riyadh Hotel and the 650-room Grand Millennium Hotel Riyadh both due to open in 2015.

“The Riyadh market is mainly derived from corporate and government demand which has helped the hotel market to remain sustainable, often with the highest rates in the GCC with an ADR above $250,” says Millennium & Copthorne Hotel’s Middle East and Africa vice president of operations Moine Kandil.

“However, with the large amount of room supply coming online in Riyadh, we are expecting adjustments to both ADR and occupancy in the short to medium terms.
Most of the inventory is scheduled to come online during 2013 and 2014, which we anticipate to be the years of pressure in the market,” continues Kandil.

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Upsetting the establishment
These concerns over the possible effects on market performance because of the current rush for market share are being echoed by other established and upcoming hotels in the city.

Hyatt Regency Riyadh general manager Nizar Weshah, who is leading pre-opening at the 257-room hotel, believes that with so “many operators entering the market within 2013 or 2014, it is inevitable that the supply of quality hotel rooms will surpass the demand, which will eventually have an impact on the overall market in terms of occupancy and average rate.”

A recent increase in infrastructure investment is also threatening to impact hotel performance, as with the city’s business hubs widening and locations becoming more diversified, customer demand is increasingly being diluted.

“In our case, the commercial business hub is slowly moving towards the northern part of the city,” says Radisson Blu Hotel, Riyadh GM and regional director of Saudi Arabia Mohamed Benamar.

“Add to that an influx of supply, especially from international hotel brands that are developing in the King Abdullah Financial District and towards the Riyadh airport and this will provide a great challenge to us as these developments will affect our retail and corporate segments in particular,” he says.

“However, all of these projects will help to reinforce the reputation of Riyadh as a first-class investment destination and will meet the demands of the region’s growing population.

Furthermore, they will create more job opportunities for residents and generate greater economic contributions from the private sector particularly within the hospitality industry,” Benamar continues.

This positivity is indicative of a wider market optimism that, whatever new hotel developments are thrown at it, or how fast they expand into it, Riyadh will be able to absorb any new property.

“In Riyadh there has been a surge in the number of hotels in development. For a long time it was limited to a very small number of players.

However, starting in 2006-2007 more hotel development started, led by investment from public and private entities because of the growing regional importance of Saudi Arabia, and therefore Riyadh as the capital,” says Jones Lang LaSalle executive vice president head of hotel advisory, Middle East & Africa Chiheb Ben Mahmoud.

“This has since been boosted by strong oil prices and a strong political willingness to implement high profile infrastructure projects such as the King Abdullah financial district, which has been a strong signal that the government means business.

This then had the knock on effect of producing higher demand and activity in the hospitality sector,” explains Mahmoud.

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Future plans
With five hotels already open in Riyadh, InterContinental Hotel Group manages one of the largest property portfolios in the city, and with five more hotels on the way IHG's India, Middle East & Africa chief operating officer Pascal Gauvin is optimistic that the “continued growth of the corporate traveller market will be one of the biggest opportunities in Riyadh.”

“Riyadh is a commercial hub and that is reflected by the number of corporate travellers staying with us. There has been strong economic growth in the city over the last few years, partly due to government investment.

When the King Abdullah Financial District is complete it will make Riyadh one of the Middle East’s main financial hubs and we will be opening two new hotels in the district to service the business travellers it will attract.

This is in part why we chose Riyadh as our first Middle Eastern city to debut Hotel Indigo, our boutique offering” says Gauvin.

Representing another brand trying to benefit from the growing number of business travellers to the city, Golden Tulip MENA president Amine Moukarzel knows that they will have to work hard to ensure they can distinguish themselves from the ever increasing levels of competition.

“We will focus on making sure that we cater to the growing market segment who wishes to have their accommodation at hotel apartments. The Golden Tulip and Tulip Inn brands appeal to a middle and upper middle market, which makes us well positioned to appeal to such customers.

One of the biggest challenges we face is ensuring that we continue maintaining our standards to the required levels,” says Moukarzel.

STR Global’s Philip Wooller concludes that “while Riyadh is still a very young market, with the full weight of the Saudi government behind it, it has the potential to become a real force in the Middle Eastern market and real competition to other Middle Eastern cities”.

“You only have to look at the total hotel supply across Saudi Arabia and realise that it’s still tiny in comparison to other markets in the area. So with the continued investment from hotels this has the potential to become a great story in time,” Wooller asserts.

Top three trends
- Market diversification: emergence of branded quality serviced apartments and economy hotels, which at the moment are undersupplied in the market, will bring new travellers but put pressure on rates.
- Corporate travellers: hoteliers will need to tap into the continued growth of the corporate traveller market, but be careful not to become over-reliant on narrow customer bases.
- The labour force: job opportunities will be plentiful, but hoteliers aired concerns over Saudisation quotas and the availability of visas for other nationalities.