Market Update: Makkah and Madinah hotel markets still important

With over 50,000 existing rooms and another 35,000 more in the pipeline, the Makkah and Madinah markets remain an important segment for hotel operators, with some entering the competitive market for the first time this year.

The investment is bolstered by Saudi Vision 2030, which aims to boost domestic tourism. Vision 2030 targets include plans to attract 3.75 million Hajj pilgrims by 2020 and 6.7 million by 2030, while growing Umrah pilgrims to 15 million by 2020 and 30 million by 2030.

Today, Makkah and Madinah record on average 20-25 flights a day, and the number triples during the Hajj season.

Emaar Hospitality Group CEO Olivier Harnisch notes: “Saudi Vision 2030 outlines the important role the hospitality sector plays in promoting tourism and diversifying non-oil revenues. Increasing pilgrim numbers will provide significant opportunities for expanding hotel room supply and the hospitality market will benefit from the surge in demand.”

Emaar Hospitality is set to enter the Makkah market for the first time in 2019 with the opening of its flagship 1,490-room Jabal Omar Address Makkah.

In 2017, the Kingdom reported 2.35 million Hajj pilgrim arrivals, up 26% (or 1.8 million) from 2016. The number of foreign Umrah pilgrims was reported at 6.75 million (as of June 2017), up 5.6% from 6.39 million during the same period in 2016, according to TRI consulting.

Occupancy increased marginally across Makkah. However, the increase in supply saw ADRs fall from US$245 in 2016 to $229 in 2017, causing a 4% decline in RevPAR. In Madinah, four- and five-star branded hotels saw occupancies improve marginally from 61.8% in 2016 to 62.0% in 2017. However, a 6.4% drop in the ADR from US$208 to $194.4 during the period resulted in lower RevPAR – down 6.2% year-on-year – and caused a 3.8% decline in GOPPAR during the year.

2018 has been particularly tough for hotels in Makkah. According to STR, year-to-date as of April 2018, Makkah’s RevPAR is down 20%, and Madinah’s down 8%, owing in large part due to the $26 billion expansion of the Grand Mosque and the subsequent restriction of visas due to the ongoing work. This led to more competitive pricing by hotels to try and increase market share to compensate for occupancy declines and increased competition.

These challenges, however, are not restricting operators’ expansion plans for this market. With over 14,000 rooms and 31 hotels, the InterContinental Hotels Group is the largest international operator in Saudi Arabia. IHG vice president operations Middle East Bastien Blanc says: “We are continuously looking to open more quality hotels to cater to the ever-growing number of pilgrims undertaking Hajj and Umrah each year. We understand the market and have a dedicated team who have the intimate knowledge of specific understanding of the location to meet the unique and individual requirements of pilgrims.”

Makkah’s diversification

While the Makkah and Madinah markets have traditionally leaned toward luxury offerings, recent trends reports show visitors are expecting more diversified choices.

Blanc notes: “In a market traditionally dominated by luxury and upscale hotels, we are seeing more and more interest in mainstream brands; our Holiday Inn brand is well suited to this demand.”

Research by STR also notes more diversification in the classes of hotels coming into the market, with more mid-range hotels being built.

There is also growing demand for extended stay accommodation. Harnisch says: “Makkah today has one of the fastest supply growth rates in the Kingdom, especially in branded residences, meeting the demand for guests looking for unique personalised experiences.”

According to TRI director Rashid Aboobacker, visitor demographics in Makkah and Madinah are changing — a shift that is likely to have a “profound impact” on the markets.

He explains: “Empirical evidences suggest that the visitor demographics may be slowly be changing as more youth are beginning to travel to Makkah and Madinah for pilgrimage, both from within and outside the region. This may be due to a combination of factors; including the increased availability of visas, growing accessibility and connectivity, and or other cultural and behavioural changes. This shift is likely to have profound impact on the hospitality markets in Makkah and Madinah in the medium- to long-term as hotels will need to adapt their offerings to new types of customers, such as millennials, in the future.”

Challenges and opportunities

One of the most common challenges that the hospitality sector in Makkah and Madinah is confronted with, is the need to grow the skilled workforce.

To combat this problem, IHG has introduced the IHG Academy to train staff. Blanc explains: “The number of visitors are expected to increase significantly in the coming years, and the industry will need a strong supply of skilled workforce that can cater to guest needs. To overcome this challenge and to increase the proportion of the employable workforce, we have a programme called the IHG Academy, which is a pioneering global collaboration between IHG and local education and community providers.”

There are also challenges related to inventory, according to STR, specifically, fluctuations in inventory. At certain times of the year, owners occupy shares of their own inventories, so these properties need to react to changes in rooms available for sale during these times. This makes planning difficult and impacts revenue compression.

The markets are also largely controlled by the authorities, so pure market dynamics and conditions are not at play, which leads to inconsistencies in demand at certain times of the year.

The addition of new hotels also presents a challenge for operators in the market.

“The industry is currently experiencing the strain of oversupply. In the long-term, we anticipate the market will do well with the expected increase in number of religious tourists’ arrivals,” Blanc states.

In fact, operators are banking on increasing religious tourist arrivals as evidenced by the market’s pipeline.

“The expansion of Emaar Hospitality Group’s operations into Saudi Arabia is underpinned by the renewed focus of the Kingdom to strengthen its tourism sector and continued investment in the two holy cities,” Harnisch notes.

In addition to Emaar’s entry in the market, for operators IHG and Hilton, both Makkah and Madinah are important segments.

Hilton vice president operations, Saudi Arabia & Levant, Kamel Ajami states: “With the extensive investments, projects and policies in place, the demand for accommodation in Makkah and Madinah is set to grow. Saudi Arabia features Hilton’s largest development pipeline in the Middle East, several of which are in Makkah or Madinah; including DoubleTree by Hilton Makkah, Jabal Omar. We look forward to welcoming guests to this 668-guest room hotel once it is open.”

The growing demand for mid-scale and extended stay properties also offers an opportunity for operators.

Aboobacker says: “Makkah and Madinah markets offer significant opportunities across all accommodation segments, including good quality economy, mid-scale and upscale hotels and serviced apartments. Currently, good quality accommodation in these cities are largely limited to international five-star hotels, which are mainly concentrated close to the Grand Mosques. The locally branded economy and mid-scale hotels largely fare poorly in terms of their facilities and service offerings, although there are a few exceptions.”

“In addition to new developments, these markets also offer substantial opportunity for investors and operators for redevelopment and re-branding of existing properties, as well as for franchising,” Aboobacker adds.

“This is because a large proportion of the existing hotels are independently operated, and these properties are likely to face significant pressure on their performance in the face of competition from the growing number of branded and better quality hotels. The shift in demographics of religious tourists — with more youngsters making up visitor numbers — and their quality preferences, including better variety and quality of food and beverage, for example, will also increase the pressure on hotels to upgrade to stay competitive,” he notes.

Despite the challenges, however, hoteliers remain optimistic about the Makkah and Madinah markets.

Blanc says: “In the near term, we expect the supply to remain buoyant and cause some strain in terms of performance, however, as this supply stabilises and KSA begins to ease up on the number of guests entering the country, we should see an upward trend in performance in 2019.

“Significant efforts have been made to develop and modernise these markets and there is a great selection of both internationally and locally branded hotels offering travellers a range of stay options.”

The market is expected to evolve further with noteworthy efforts being made by the government, such as expansion of the two Holy Mosques, development of transport infrastructure, including modernising and increasing the capacities of the airports, development of metro, railroad and train projects.

Harnisch adds: “We anticipate robust growth in demand from both residents and pilgrims. We also see considerable potential for the branded economy hotel segment, with many visitors being more price-sensitive.”

Aboobacker, however, offers a more pragmatic view. He notes: “We expect hotel performance levels in Makkah to remain under pressure in 2018, driven by the imbalance in supply and demand growth in the short term. We expect the demand to continue to grow this year as the government continues to increase the number of Umrah and Hajj visas. However, a marked growth in supply is expected to keep competition high as the city is expected to see the addition of over 7,800 keys to its inventory this year.”