By Rob L. Wagner
4 March 2016
Jeddah – A surge in hotel construction in Saudi Arabia is showing no signs of slowing despite the Saudi government’s aggressive plan to revive its economy by pulling back on spending on new projects.
Private investors and family-owned, high-end brand hotels with optimistic long-term goals continue to invest in new projects. New hotels are scheduled to open over the next year in Mecca, Medina, Jeddah, Riyadh and Al-Khobar, according to industry insiders.
Jil Assaf, managing partner of the Lebanon-based Lumen Hospitality Consultants with clients in the kingdom, said investors see no reason to curb projects in Saudi Arabia.
“Owners acknowledge the challenges they face but there is nothing that will impede investment in Saudi Arabia,” Assaf said.
Those challenges include the economic slowdown that may prompt tourists to spend less money while on holiday. Assaf, however, said key infrastructure projects, such as the Riyadh Metro rapid transit system and the Haramain High Speed Rail Project from Mecca through Jeddah to Medina, remain on schedule for completion over the next two years.
About 124 hotels are in development throughout the kingdom with a whopping 47,431 rooms scheduled for completion. Fifty-two hotels with 20,000 rooms are set to open in 2016, according to a study commissioned by the Hotel Show Saudi Arabia 2016.
The soaring number of projects is due largely to a projected 400% growth in domestic tourism over the next three years and Saudi Arabia’s push to develop its religious tourism industry.
The country’s need to wean itself from oil revenue and focus on other revenue-generating industries have left, at least for now, the tourism industry untouched while the government targets other sectors for its austerity programme.
The healthy outlook for hotel construction is particularly evident in Jeddah where the occupancy rate hovers around 77% during the off-season and nearly 100% during haj and umrah seasons. The gross operating profit per available room (GOPPAR) in Jeddah in 2015 was $150.77. Riyadh, which is considered less of a tourist destination than Jeddah, but strong in attracting visitors for business, had a 62.8% occupancy rate during the off season in 2015 with a GOPPAR estimated at $113.29, according to HotStats, which collects data for hoteliers.
Christopher Hewett, associate director of TRI Consulting in Dubai, said occupancy levels have dropped off in key markets by about 2% over the past year but there are many development projects on schedule.
“Riyadh and Jeddah have seen quite a lot of development projects in past year or two and Jeddah has significant properties in the pipeline,” Hewett said.
Hotel leaders say the outlook looks promising with the Ritz-Carlton opening in Jeddah in March and the Kempinski Al Othman Hotel set to open in Al-Khobar in May. Nobu Hotel will open its first Saudi hotel in Riyadh in June, according to the Hotel Show Saudi Arabia 2016.. In addition, Hilton Worldwide has set aside 28 properties on which to build hotels over the next decade.
Aziz Awlya, general manager at 494-room Al-Shohada Hotel in Mecca and long-time tour operator, said the primary obstacle to successfully completing projects in Saudi Arabia are the hotel owners themselves.
“Not all international operators know the market,” Awlya said. “Owners come in with a classic real estate background and build massive units but in no way understand how to manage them and designs are not supportive of a hotel. People who have the ability to build a hotel need to back it up with a proper design.”
Hewett agreed that hotel owners can create their own set of challenges. “A lot of people we deal with are new to the industry and after success in another industry, including real estate, they bring certain ideas that can’t be applied to the hotel market,” he said. “We have to educate our clients on what is suitable and do it at an early stage.”
Hewett pointed out that the Saudi hospitality market is relatively immature and that many hotel owners “don’t have a true appreciation” of what they need to get their hotel built. “It’s an education process that is still maturing and a natural evolution of what we see in the market,” he said.
Unlike many business ventures, hotel owners do not look at what their investment returns in the short term but what long-range benefits they will reap. Hoteliers are less concerned about the economic environment in 2016 and 2017 but instead are more interested in the climate in 2020 and 2025.
The drop-off of tourism is a concern, according to Assaf, but is not a deal-breaker to green light a project.
“Even with the slight drop in occupancy, it doesn’t affect the long-term (outlook),” Assaf said. “Saudi Arabia has had strong economic resources for quite a long time and eventually will come out of it. Even with the critical scene happening now with Syria and Iran, it will eventually settle down in two or three years and pick up.”