2016 Hotel Market Update: Riyadh & Jeddah

Riyadh and Jeddah both have plenty of reasons to attract the attention of global hotel groups and the interest of homegrown hoteliers. Major infrastructure projects, increasing religious tourism and a policy shift towards easing visa requirements are all positives, and major brands are clamouring to get their slice of the pie.

But pressure caused by low oil prices and, in turn, a dip in corporate travel has hit Riyadh, a city that has very little leisure tourism. CAGR has fallen from 25% to 23% and a number of projects are on hold.

Conversely, the story in Jeddah is one of burgeoning supply, with room numbers forecast to double by 2018, according to the ‘Jeddah Hotel Market Overview’ report by JLL. The current supply will see another 8,600 rooms forecast by 2018 taking total stock to 17,200 hotel rooms.

Major projects in the Jeddah pipeline include: The Ritz Carlton, Jeddah; Radisson Blu Al Salamah; Mövenpick City Star; Elaf Galleria and Assila Hotel & Residence by Rocco Forte.

Christian Renz, VP for sales and marketing, Rocco Forte Hotels said the growth figures made the city “a clear choice for Rocco Forte Hotel’s development in the Middle East”. Certainly only optimism from Renz, who highlighted the hotel group’s association with the respected Alissa family in the region.

Jeddah is of course the gateway for pilgrims travelling to the holy cities of Makkah and Madinah, and its coastal location makes it popular with domestic tourists, a sector of demand Riyadh can’t rely on. It is also benefitting from a boom in business tourism with a number of significant infrastructure projects paving the way for additional investment and, in turn, lodging demand.

The major players are making statements of intent, with AccorHotels Middle East set to increase to over 3,000 hotel rooms in the coming years with its current foundation of 600 rooms an apparent first step only, rather than a near complete journey.

Olivier Granet, managing director and chief operating officer of AccorHotels Middle East, revealed earlier in the year that the company has 50 operational hotels in KSA with more than 13,500 rooms. “By 2020 we are quintupling our network in Jeddah with a fivefold increase from three existing hotels to 15,” he continued. In order to attract both business and leisure clientele, AccorHotels has been focusing on the development of multi-brand projects.

“A particularly large-scale project in Jeddah will introduce a Novotel, ibis and Adagio to Al Andalus Road, which I personally believe will become a local landmark as it combines office, retail and hospitality components in one of the city’s most vibrant areas,” Granet confirmed.

Colliers International has also predicted a massive influx of hotel stock — predominately in the five- and four-star sectors. But what is the situation like on the ground and while growth is good, it also brings a host of unwanted challenges for hoteliers?

Performance

It is here that we taste the tonic to the sweetness of positivity surrounding expansion. Makarem Annakheel Village, Jeddah general manager Amir Ataya reveals that Jeddah “has seen a large delay in hotel openings during 2015, with close to 30 % of forthcoming supply being delayed for one year, and 25 % being delayed for two”.

“This trend in delays is expected to continue over the next five years,” he says.

Vincent Miccolis, area general manager, The Ascott Limited, GCC also makes pertinent points, highlighting that RevPAR in the region dropped by over 10% year-on-year. “RevPAR and GOPPAR are basically trended similarly to the price of crude oil over the past decade,” he tells Hotelier Saudi Arabia.

“The KSA hospitality market relies a lot on corporate travel for event, conventions or project, hence overall profitability has declined in line with the drop in oil price.” Having said this, he continues to say that “Jeddah has shown more resilience to economic conditions and seasonality fluctuations due to the diverse markets it caters to such as pilgrims and local families”.

When you add in the development of Jeddah economic City and King Abdul-Aziz airport extension, there is plenty of good news for Jeddah.

Riyadh and Khobar on the other hand “have been more severely affected by the decrease of corporate demand”, says Miccolis. “Forecasted performance on 2015 is expected at -15 % (RevPAR) as the city is also witnessing stronger competition with new openings,” he reveals.

Jeddah’s hotels in Q2 saw occupancy figures drop 8% year-on-year to 68%. Although occupancy is expected to drop lower due to lower corporate demand, Jeddah’s ADR levels (US $259) are benefitting from an expanded demand base.

The hospitality market witnessed growth in average rates between 2013 and 2014 as a result of the supply remaining fairly stable, according to Ataya.

“However, 2015 witnessed a slight decline in average rates and occupancy as a result of the return of tourism flows to the Egyptian destinations combined with new hospitality supply in Jeddah including serviced apartments,” he continues. “Both occupancy and ADR faltered in Riyadh due to a decrease in corporate and government demand, and full-year performance is expected to close below last year as the market sees the addition of new properties and competition intensifies.”

Becoming trendy

When it comes to trends, the obvious ones continue to leave their mark, the large number of pilgrims visiting Makkah throughout the year, directly impacting on occupancy rates in Jeddah.

However, Miccolis also reveals that “the hospitality sector is quickly becoming a viable career option for Saudi nationals”. “We have developed new management trainee schemes, aimed at assisting Saudi locals in developing hospitality-related management skills and gaining on-the-job working experience,” he continues.

Then there is Saudi Vision 2030, which is encouraging economic diversification by allowing foreign companies to enter and invest in the Kingdom. While this is expected to increase the demand as foreign investors show interest in KSA, Ataya warns “this change is expected to require time as companies set up their strategy to enter the Saudi market”. “Also, the demand from these companies is not expected to be significantly large until the economy stabilises and new rules and regulations are in place.”

And there are more pressing challenges to face than the expected increase in foreign interest.

The first of these is attracting more young Saudi talent to the hospitality sector to build more significantly on the early signs of an upturn in interest, according to Miccolis. “Then there is the discipline and commitment from staff, while overall customer service standards have to be enhanced,” he says.

“The development of international hotels will help to do this,” he says, although the issues surrounding “recurrent delays in openings” and “visa regulations” are less easily solved.

Pipeline numbers and supply are certainly a challenge and as more hotels come onto the market there is the very real threat of oversupply.

“With this comes increased competition and the possibility that more rooms and more competitive rates will drive down overall ADR,” Ataya says.

“Supply is a challenge in terms of remaining innovative and relevant in the face of rising competition and there will be increased competition. However, that increased competition is good for consumers as it provides more choice and intuitively drives up the quality of offering for guests,” he adds.

“Increased competition drives more creativity in communicating unique points of difference and delivering the best possible experience for all visitors.”

But despite these issues, Jeddah and Riyadh remain a very attractive proposition for hotel groups.

Riyadh is noting a strong showing from local operators such as Boudl Hotels, which currently operates nine branded hotels in the city between the upscale four-star and luxury segments. The Ascott Villas Riyadh, which is set to open its doors in November 2017, is located in the prestigious Hittin district, close to the upcoming King Abdullah Financial District (KAFD), which has been billed as Riyadh’s new central business district.

It is the future home of the Saudi Stock Exchange, Capital Markets Authority and a host of other financial and professional services firms.

Ascott is set to open another property in Riyadh, the 234-units Ascott Rafal Olaya Riyadh. This property is due to open in the latter part of the year.

But the year ahead will see challenges and opportunities jostle for attention.

“Despite a robust supply pipeline in Jeddah and Riyadh, delays in openings are expected to continue into 2017-2018, allowing existing hotels to grab strong fair share and perform well,” says Ataya.

“Two key projects that will positively shape the long term outlook for the hotel market are the Jeddah Economic City and Airport expansion 2017-18 and, in the meantime, low oil prices continue to reflect slowing demand growth with gradual recovery forecasted in the medium term, thus further sustaining and stressing the growing development opportunity for economy and mid -market hotels.”

Miccolis says that the expected arrival of new international branded operators will continue to enhance service standards in KSA, while tourism from pilgrim and domestic families will continue to increase as infrastructure improves.

“2017 might still be a difficult year for Riyadh and Khobar which are more dependent on corporate and government demand and will therefore take a bit more time to recover,” he warns. “Jeddah and the holy cities will be maintaining similar occupation with an ADR uplift.”