Market Update 2015: Riyadh and Jeddah

As the second largest Arab state (after Algeria), development in the GCC country of Saudi Arabia is unlikely to be limited by lack of space. Constituting the bulk of the Arabian Peninsula, Jeddah, Riyadh, and the religious sites of Makkah and Madinah continue to be key markets for hoteliers.

With growth in corporate demand increasing, Riyadh’s hotel RevPAR is expected to witness a 2% increase by the end of 2015 compared to 2014, while Jeddah’s hotel market has seen a slight increase in performance — RevPAR is forecasted to increase by 3% by year-end, according to Filippo Sona, director — head of hotels (MENA region) at Colliers International.

Christopher Hewett, associate director of TRI Consulting adds: “With hotels in Jeddah continuing to achieve strong performance levels with a market wide occupancy of 78.2% for the past 12 months, this has allowed hoteliers to yield marginally higher ADR, which has increased 3.5% to $274.9. RevPAR increased in line with ADR, growing 2.5% to US$ 215.0. Although Riyadh has witnessed an influx of supply over the past 12 months, the hotel market has successfully increased market-wide occupancy levels to 63% on the back of greater corporate demand in the capital. Although ADR has not followed this trend and remained on par with 2014 figures, the growth in demand resulted in a 9% increase in RevPAR to $148.9.”

Hoteliers have already acted upon such numbers with many international operators capitalising on the religious and business demand in the country.

“Religious tourism is extremely important for our growth and presence in the market,” reports One to One Hotels and Resorts COO Philippe Harb. “The sheer density of developments around the Haram are pushing larger developments outwards and Al Aziziyah is considered a prime district for future intake of more hospitality supply and that’s where One to One Hotels & Resorts are going to be located. Hajj visitor numbers is expected to continue to grow to 5.2 million by 2025 from two million in 2013. Furthermore, there are ongoing negotiations to manage four additional hotels in KSA and increase our presence and strength in the market.”

Sami Nasser, senior vice president, operations, Middle East, Africa & India for FRHI Hotels & Resorts explains the company’s approach: “KSA continues to be a key growth market for us. It was initiated five years ago with the debut of our tri-branded (Fairmont, Raffles and Swissôtel) Makkah complex, which today collectively represents approximately 3000 guestrooms within the Abraj Al Bait, located in the Haram area of the city. This is staggering considering that it accounts for almost half of the accommodation within proximity to the holy site. Following the success of our operation in Makkah, we have announced Fairmont Jeddah (during AHIC this year), Swissôtel Jeddah, and Raffles Jeddah, all slated to open before 2020, in addition to Fairmont Riyadh, Business Gate which will open next year.”

FRHI is not the only one. Ali Hamad Lakhraim Alzaabi, founder, president & CEO of Millennium & Copthorne, Middle East & Africa also has an aggressive expansion strategy over the next 12 months, reporting: “With more than 10,000 keys in the pipeline, our outlook is positive and it’s integral to our expansion programme. The next hotel to open will be Millennium Hotel Hail, a 191-room upscale five-star property situated opposite Hail Economic City. The opening will be followed by Copthorne Riyadh by Millennium, a 145-key property with an excellent location on King Fahd Road in Riyadh.

“We have also signed several new hotels this year, underlying our position as the fastest growing operator in the Kingdom. These include four agreements with Taiba Holding Company including bringing the Biltmore brand to Riyadh and a 299-key Grand Millennium Hotel Madinah, both set to open in 2018. We have also recently signed four hotels, which will open in Knowledge Economic City in Madinah. These properties include two Millennium hotels and a Studio M and Millennium Executive Apartments, the Group’s budget and service apartment brands.”

Another company planning on making a debut is London-founded luxury operator Rocco Forte Hotels, which will make its Saudi Arabia debut with a hotel and serviced apartment complex in Jeddah. It was initially set to open in quarter one of 2015, but is now targeting quarter one of 2016. It will mark the group’s re-entry into the Middle East hospitality market.

Rocco Forte Hotels vice president of sales & marketing Christian Renz told Hotelier: “We decided to open the Assila — A Rocco Forte Hotel, in Jeddah as the city currently is a very attractive market for luxury with no European brands currently present. With 210 rooms and suites, four restaurants and bars, a large scale spa as well as 94 residences, we think we can make a big impact on this city. It is also important for us to have a presence in the Middle East, as it is one of our key markets for customer base for our ten other hotels.”

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However, Harb is cautiously optimistic: “Ambitious investments in tourism infrastructure and the continued development of the city’s leisure and commercial areas will allow the hotel market to perform well throughout the rest of 2015/2016 and in the near future. We do, however, forecast a rate correction as new supply is well absorbed in the overall Saudi Arabia market.”

On the topic of rates, Hewett agrees and comments: “The outlook for Jeddah over the next 12 months is mixed, as the city is poised for a significant influx of new supply, particularly in the mid-scale segment and serviced apartments. This greater supply can potentially erode ADR levels as new hotels adopt aggressive pricing strategies in order to penetrate the market and establish their market share of demand.

“The outlook for Riyadh is cloudier as the continued low price of oil impacts government revenue streams. With large government-backed projects driving demand in the capital, potentially reduction in spending could have a flow on effect through reduced demand for the city’s hotels. With a strong pipeline of hotel rooms expected to enter the market over the next 12 months, the city’s hoteliers are bracing for a challenging period ahead.”

According to Sona’s research, although Riyadh is a corporate destination, weekend occupancy has improved in the past decade due to growing demand from domestic families, while supply has remained fairly stable with only one new addition to the market, the 88-key Suite Novotel Riyadh Centre.

“Internationally, branded hotel keys account for 55% of the market’s total hotel supply, 57% of which are five-star rated. Locally branded and unbranded supply account for 9% and 36% of the hotel supply respectively. Opportunities for hoteliers in this market lay in the lack of serviced apartments, with 98% of the total serviced apartment supply being locally branded and unbranded establishments.”

Hewett also cites this opportunity stating: “A trend of significant growth of quality international mid-market hotels and serviced apartments continues in Riyadh with the city having a significant future supply in the midscale segment. However, the capital will also see a number of key upper-upscale and luxury hotels in the market, located within or proximate to key developments. Lifestyle hotels are yet to gain traction in KSA, as they are normally found in more mature markets. Furthermore, this emerging style of hotel could face challenges largely due to the conservative nature of the country.

“However we anticipate that there are opportunities for a watered down version that adheres to religious and cultural norms. Jeddah is also on the cusp of witnessing a significant growth of quality international mid-market hotels and serviced apartments. With the existing supply being dominated by either high-end luxury hotels or old dated mid-market or locally operated properties, the city has been eagerly waiting for a new and fresh style of hotel to open. New midscale brands dominate the supply pipeline with a number of international operators boasting multiple properties in the city.”

Millenium & Copthorne is one such operator, as Alzaabi explains: “Despite high demand, the three- and four- star hotel market in KSA is under-supplied and instead dominated by a multitude of five-star hotels. The government is working on a long-term strategy focused on economic diversification and encouraging business travel, meaning the opportunity to build affordable and budget accommodation is lucrative.

“Operators, including ourselves, are now looking at how they can attract this market segment. We have developed our Studio M and Millennium Executive Apartment brands to target these markets. Meanwhile, our upscale serviced apartment brand, Millennium Executive Apartments offer flexibility, space and convenience for medium long term stay business travellers.

“However, there are still plenty of opportunities for growth in the luxury market, particularly in Riyadh, which is witnessing large-scale infrastructure developments in a bid to boost the city’s tourism industry. We have chosen the city to introduce our iconic Biltmore brand and believe that with a unique luxury offering and bespoke service it will thrive in this market.”

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Renz agrees, and adds: “The trend that we are seeing in KSA currently focuses on a luxury experience. This includes everything from perfect culinary offerings to exclusive gifts and experiences to the most luxurious and spacious suites and apartments.”

Ascott Tahlia is the first serviced residence in Jeddah to receive a five-star rating from the Saudi Tourism board. Having recently opened in September 2015, Vincent Miccolis, area manager, Ascott Limited — GCC reports: “We are receiving enquiries that surpass our expectations from multi-national companies that have staff staying for longer periods of time that are engaging in project style work.”

While religious and business tourism remain the main source of business, and efforts are being made to diversify, challenges still need to be overcome according to Alzaabi: “The international MICE and leisure markets could be improved — we need more relaxed visa processes to allow international exhibitors and tourists to plan their events and trips more effectively.”

Adding to the MICE potential is the opening of the Fairmont Riyadh, Business Gate next year, which offers a 4000m2 convention centre, including two ballrooms, which can accommodate up to 600 guests each as well as 11 meeting rooms.

Food and beverage is also a key consideration for hotels and Jeddah’s corniche provides an excellent location to develop the dining scene from signature, upscale restaurants to popular brands. Similarly, high profile developments, such as Kingdom City, are expected to boost corporate and leisure demand north of Jeddah, making Obhur a more attractive destination. This indicates the opportunity to develop branded resorts in Obhur, catered to the growing leisure market.

Sami Nasser has also seen a strong F&B focus, reporting: “Branded restaurants, novel concepts and casual dining is on the rise as residents enjoy higher disposal income, global exposure to restaurant brands and limited sources of entertainment. Fairmont Riyadh Business Gate will offer a wide range of food and beverage options, positioning the hotel as a leader in innovative offerings in the market.”

It’s clear that Saudi Arabia is a business hub attracting both regional and international players — as a result, the hospitality landscape, while certainly facing challenges, is dynamic and is rapidly developing to accommodate the growing demand.