MARKET UPDATE: Saudi Arabia

The Saudi government is set to invest $30.9 billion in tourism over the next decade, with the sector closely aligned to the country’s GDP.

But in the meantime, hoteliers in both Riyadh and Jeddah have to strategise in order to cope with their own unique supply and demand challenges and maintain the rates to which they have become accustomed

Things are moving fast for Saudi Arabia, the world’s second-largest Arab state, and home to the biggest energy company in the world, Saudi Aramco which generates more than $1 billion a day in revenues.

With the Kingdom’s GDP predominantly driven by oil and gas, it has been sheltered from the economic downturn of recent years and has been powering ahead with infrastructure projects that look set to boost tourism in the coming years.

In fact, travel and tourism investments in Saudi Arabia have grown at a CAGR of 5.8% since 2001 and are estimated to have reached SAR 20.55bn (US $54.8bn) at year-end 2012. This is expected to increase at an annual rate of 6.7% to reach SAR 33.5bn ($89.3bn) of total investments by 2020.

According to a Colliers report, economic activity generated by hotels and other key industries in the tourism sector have been closely aligned with the country’s economy, and between 2008 and 2011 the correlation between KSA GDP and tourism contribution to GDP equated to 95.7%.

This along with upcoming infrastructure developments have combined to instill a high level of confidence in hotel groups looking to invest in the country, reflected in the impressive pipeline of 118 properties set to open within the next three years.

Hilton Worldwide, which has been operating in KSA now for 20 years and currently has six properties there, has a pipeline of 20 hotels to open by 2017 — more than tripling its portfolio in a seventh of the time it has been in the country.

The company will also open its first Saudi corporate office in Jeddah this quarter so it can manage the upcoming pipeline more effectively.

Intercontinental Hotels Group, which celebrates its 40th anniversary in Saudi Arabia next year, has the largest international branded portfolio in the Kingdom, with 24 operating hotels offering 5800 rooms, and seven more in the pipeline to open in the next two years.
Additionally, Fairmont Raffles Hotels International is venturing out beyond Makkah – where 100% of the group’s operating KSA portfolio is based – with the opening of the luxury Fairmont Riyadh in the hope of diversifying its market share and attracting corporate visitors.

Riyadh, the capital city and seat of the Government, is regarded as the financial centre of the country, while the Eastern province cities of Al Khobar, Dhahran and Damman are largely linked to oil and gas, and thus attract another segment of corporate traveller.

Jeddah is both a popular domestic tourism destination, especially during the summer, and a strong corporate market since it is the largest port in KSA. Makkah and Madinah on the other hand remain heavily driven by religious tourism and are currently experiencing huge expansion and development.

Although the main purpose of inbound tourism continues to be religious pilgrimages, which constitutes 40% of overall inbound visitation, in this month’s Hotelier market update we will focus on the development of infrastructure and properties to support the corporate visitor market. The focus will be on Riyadh and Jeddah, which share the corporate business related to government.

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Riyadh
While in winter the government is based in Riyadh along with corporate business pertaining to it, in the summer months it moves over to Jeddah. Additionally, Riyadh is viewed as the financial centre of the country while Jeddah has more trade and construction related business.

Although currently business travellers account for 14% of overall visitation to the Kingdom, the majority of this is to Riyadh.

According to a report by Colliers, as of November 2013, from a regional perspective Riyadh had achieved the strongest rates in a sample of the three preceding years as compared to Jeddah, Makkah, Madinah, Khobar and Damman. Riyadh maintained its lead despite ADR at the city’s hotels falling from 770 SAR (US $205) in 2001 to 750 SAR (US $200) in 2013.

In the other cities, excluding Makkah, ADR had increased, although it did not catch up with Riyadh.

TRI Hospitality Consulting senior consultant Christopher Hewett warns that while in comparison to the other cities in the country, Riyadh has been doing relatively well, the 38 hotels coming on line in the next three years may force a reduction in rates.

He comments: “I think Riyadh is the market that will face the biggest challenge. At the moment rates are dropping in the four- and five-star market and as new supply comes this year this will continue. With occupancy levels maintaining the same base point as 2013, one of the biggest challenges for accommodation providers will be not to get sucked into a rates war.”

Hilton Worldwide, with one operating hotel in Riyadh, has the biggest pipeline for 2015 in the city, with plans to open nine hotels. The company's vice president of operations KSA, Mahmoud Mokhtar explains that “Riyadh is a challenging market” and that three years ago the picture was very different, which is why lots of international companies decided to come to the city. He mentions that a number of unbranded properties with much lower rates adds to this challenge.

Discussing next year’s ambitious pipeline in the face of falling rates and stale occupancy levels, he says: “I believe it will be survival of the fittest and those that will be able to provide competitive rates and services and are able to attract different segments [will win]. Every international company decided to come to Riyadh and you also have unbranded hotels offering much lower rates”.

One of the key five-star luxury openings of 2014 is the Fairmont Riyadh, to be located strategically close to Saudi Arabia Basic Industries Corporation. Commenting on the new opening, Raki Philips, FRHI area director sales and marketing Middle East said: “With the exception of a few brands I think the Riyadh market lacks luxury hotels and we’re going to be a great completion to that. Other brands that have gone into the city have done phenomenally well”.

Hotels currently performing well in the city are maintaining optimism, such as the Four Seasons Riyadh, which has increased rates year on year and has recently undergone a refurbishment to ensure it is prepared to face the fierce competition coming on line.

Greg Pirkle, general manager of Four Seasons Riyadh, comments that although rates “may diminish slightly over the next few years", they won’t “come tumbling down”. Pirkle reveals that he is positive that demand will catch up with supply owing to abundance of infrastructure taking place: “There are a lot of things happening, we will fill the hotel rooms over time”.

Pirkle refers to the construction of the $22.5bn (SAR: 84.4bn) Riyadh Metro, which starts in the first quarter of 2014, as well as a five-year, $72mn redevelopment and expansion of the city’s King Khaled International Airport (KKIA) which will include terminals designed to give a future capacity of 30 million passengers annually.

Additionally, as part of the Landbridge project, the first rail link between the Red Sea and Gulf will involve the construction of a 950km track between Riyadh and Jeddah.

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Jeddah
With Jeddah going through a similar period of regeneration, efforts have been made to enhance visitor experience for the leisure and religious segments.

The Jeddah Municipality is shortly launching a clean-up and maintenance project for Jeddah Corniche and a project managed by Jeddah Development and Urban Regeneration Company (JDURC) will see the downtown area revitalised with a transit hub, retail zone, family entertainment, restaurants and an exhibition centre forming part of an 850, 000m² community to be completed by 2030.

The hotel industry has been booming in the city, with average occupancy of 72–85% throughout 2013 and average room rate increasing exponentially over the last three years; June rates rose from $211 in 2011, to $226 in 2012 to $263 in 2013.

Sherif El Mansoury, director of sales & marketing, Rosewood Corniche revealed that in 2013 the hotel achieved 3.7% higher occupancy than in 2012 and average rate increased by 3% with revenue up almost 8.2%.

Confident that this year’s pipeline of five hotels, mostly mid-range and budget – including Novotel Jeddah Tahlia Street and Auris Lodge Suites – “will not affect business”, El Mansoury expects 2014 to see the same levels of occupancy with average rate increasing by 2.9% and a 3% rise in revenues from last year.

Hewett agrees demand will continue to outstrip supply in Jeddah for 2014, adding: “I think the market is still buoyant enough to continue to grow and in the next few years will slow down with more properties coming on to the market”.

Hewett refers to such hotels as the upper upscale Radisson Blu Hotel Jeddah Salamah to open its doors in 2015, and the JW Marriott Jeddah, due to open in 2016.

El Mansoury comments: “When five-star deluxe brands open in 2015 and 2016 it will be very challenging for us to maintain our loyal clients and take new business from the market.”

Despite this, El Mansoury is confident that infrastructure including the opening of a huge conference centre in the middle of next year will create more MICE demand in the city.

Additionally, the $11.1bn Haramain High Speed passenger line will link Makkah and Madinah via Jeddah and King Abdulla Economic City (KAEC). Increased stop over visits made by pilgrims means the city may too benefit from a share of the 40% of KSA inbound tourists who come for religious purposes.