Hoteliers Expand in Saudi Arabia as Mecca Goes Upscale

Hotel Expansion Surges in Saudi Arabia as Mecca Goes Upscale
Fairmont Hotels & Resorts transformed the Mecca skyline in 2010 when it opened the Makkah Clock Royal Tower, seen here, across from the Grand Mosque. Photographer: Fayez Nureldine/AFP/Getty Images

The pilgrimage starts with a private jet to an exclusive airport in Saudi Arabia, where passengers are treated to a buffet while travel-company employees process their immigration documents. The visitors are then taken in air-conditioned cars and buses to the InterContinental Hotel overlooking the Grand Mosque in Mecca.

“We try to make it a little more comfortable for our clients, that’s all,” said Abdulrahman Mohammad Al-Shaya, a sales executive for Kuwait-based Al Marwa. The company offers wealthy pilgrims a seven-day package for the Hajj, the Islamic pilgrimage every able-bodied Muslim is obliged to make, for about 5,500 Kuwaiti dinars ($19,800).

Rising wealth in Islamic countries from the Persian Gulf to Indonesia is boosting demand for a higher standard of accommodation as about 3 million pilgrims prepare to descend on Mecca for the annual Hajj in October. That’s contributing to a surge of hotel investment in Saudi Arabia by companies including InterContinental Hotels Group Plc, Hyatt Hotels Corp. and Starwood Hotels & Resorts Worldwide Inc.

Hilton Worldwide Inc., owned by Blackstone Group LP, plans to more than double the number of hotels it operates in the country to 14, including six in Mecca. It currently runs six in Saudi Arabia. U.K.-based InterContinental will increase its room numbers by about 50 percent to 7,300 in the next three to five years. Hyatt, whose only Saudi hotel opened in 2009, expects to have eight more in five years.

Starwood Expands

Starwood, the Stamford, Connecticut-based owner of the luxury St. Regis and W brands, has plans to manage five more hotels, adding about 1,300 rooms. It currently has 10 hotels with about 3,000 rooms.

The boom in Saudi Arabia will increase the number of branded hotel beds available by 58 percent in the next few years, research company STR Global estimates. While international companies can operate hotels in Saudi Arabia, they are not allowed to own property in the country.

“The tourism industry in Saudi is rapidly expanding and our development plans reflect the growing demand for high-quality hotels in that market,” said Christophe Landais, Middle East managing director for Paris-based Accor SA. “The kingdom constitutes a strategic base for us.”

Accor, Europe’s largest hotel operator, will open a 1,315-room Pullman hotel in Mecca and another property in the south of the kingdom, Landais said. The Paris-based company plans to increase its properties in Saudi Arabia to 17 by 2015 from 12 today.

Clock Tower

The Abraj Al-Bait Towers, a hotel complex across from Mecca’s Grand Mosque, transformed the ancient city’s skyline when it was completed in 2010. The 601-meter (1,972-foot) clock tower at its center houses an 858-room Fairmont Hotel. Swissotel plans to open a 1,562-room hotel in the complex this year, according to the company’s website. Both hotel operators are part of Colony Capital LLC’s FRHI Holdings Ltd.

Local companies are tapping the growing market as well. Saudi Hotels and Resorts Co. has 10 hotels across the kingdom and plans to add four in Mecca, Jeddah and Medina within a year. Makarim Group, which manages the hotels, isn’t worried about competition from foreign operators, marketing director Majdi Saqer said by e-mail. “There will always be demand for local-flavor five-star hotels,” he said.

Average daily rates in Mecca hotels rose 15 percent to 631.79 riyals ($168) in the first three months of 2012 while falling 2.7 percent in Riyadh. Revenue per available room in Mecca jumped 43 percent to 403 riyals in the first quarter compared with a 10 percent drop to 638 riyals in Riyadh, according to STR Global.

State Investment

Rising wealth in parts of the 1.57 billion-strong Muslim world isn’t the only force driving hotel growth in Saudi Arabia. A $500 billion Saudi government spending program on homes and infrastructure is lifting demand for short-term accommodation from foreign consultants, engineers and other professionals who stay in cities such as Riyadh and Damam, according to real estate broker Jones Lang LaSalle Inc.

Resort-style tourism of the type offered in neighboring United Arab Emirates is shunned by Saudi Arabia, a conservative kingdom that strictly enforces Islamic laws such as a segregation of men and women and a ban on alcohol.

About 53,000 branded hotel rooms are currently available across the kingdom, about the same as the city of Dubai, according to STR Global. Those mostly provide five-star rooms with a few in the four-star bracket. About 19,000 are in Mecca and another 13,000 in Medina.

Furnished Apartments

Most pilgrims stay in furnished apartments, mainly supplied by individuals and small businesses, said Chiheb Ben Mahmoud, head of hotel advisory for the Middle East and Africa at Jones Lang LaSalle. That’s also the most common type of accommodation for professionals in cities like Riyadh and Jeddah and holiday travelers in the south of the country.

“The practice of camping and unauthorized accommodation does exist,” he said. “Every year, the Saudi authorities crack down on it while trying to be sensitive because of the religious motive for the trips.”

Religious visits including the Hajj and Umrah pilgrimages and trips to Medina, the resting place of the Prophet Mohammed, still dominate Saudi Arabia’s tourism industry. Last year, the country hosted 10.6 million pilgrims and religious visitors out of 15.4 million foreign arrivals overall, according to Business Monitor International. BMI estimates arrivals will increase by an average 6 percent annually until 2016.

Record Hajj

The Saudi Ministry of Hajj says it expects a record number of pilgrims this year. In 2011, 2.5 million passed through Jeddah’s airport on 10,650 flights.

“There is some kind of a catch-up in terms of capacity building,” Jarmo Kotilaine, the Jeddah-based chief economist at National Commercial Bank, said by phone on June 14. “There has been a long period when there was very little addition.”

Rising visitor numbers only tell part of the story. The government’s drive to improve health and safety standards in Mecca and Medina during the Hajj is triggering demand for hotels by discouraging the centuries-old practice of accommodating pilgrims in people’s homes, said Jones Lang’s Ben Mahmoud.

“Branded hotels, regional or global, currently form the backbone of inventory in Mecca,” Ben Mahmoud said. “The trend will continue as stricter guidelines for health and safety are implemented and because a higher standard of comfort is being demanded by pilgrims.”

Muslim Wealth

The market for a better class of accommodation is being fuelled by economic growth in Muslim-majority countries. Turkey’s economy expanded 8.5 percent last year, the third-most among Group of 20 nations after China and Argentina. Indonesia, the world’s most populous Muslim nation, grew by 6.5 percent, the most since the Asian financial crisis that ended in 1998.

“While most of the high-quality hotel supply has been five-star and four-star, Accor is seeing the emergence of real demand for other products like the economy three-star segment,” Landais said. “For the moment, that’s only fulfilled by local and unbranded hotel supply that lacks high quality standards most of the time.”

International hoteliers are also seeing opportunities in smaller cities such as Jizan, Yanbu, Khobar, Jubail and Hofuf, he said.

Mecca was a destination for religious devotion for centuries before the Prophet Mohammed’s birth in the 6th century. The Hajj is one of the five pillars of Islam and every able bodied Muslim in the world is obliged to make the journey at least once in their lives, performing rituals like circling the cube-shaped Kaaba and sprinting between the hills of Al Safa and Al Marwa seven times. Pilgrims must spend a day on Mount Arafat and sleep a night at Muzdalafa along with millions of others.

‘Unique Market’

“I wish I could have more hotels in Mecca,” said Jan Smits, InterContinental’s chief executive officer for Asia, Middle East and Africa. “In four months, you make 70 percent of your income. It’s a really strong market and it’s one of the most unique in the world.” The company has been in the country since the 1970s and operates one the hotels closest to the Grand Mosque.

Staffing tends to be the biggest challenge for hotel companies expanding in Saudi Arabia, according to Moustafa Said, a lawyer for Clyde & Co. who advises operators and owners in the kingdom. Securing visas for hotel workers can be a long and laborious process and government quotas for hiring Saudi nationals are hard to meet because many see the work as menial, he said. Non-Muslims are barred from entering Mecca and Medina.

“There are obviously very qualified general managers and staff who are Muslim, but the fact that you are limited to a single religion makes things more difficult,” said Said, who is based in Abu Dhabi.

Pricing Cap

The Saudi Commission for Tourism & Antiquities, which regulates the industry, has also introduced unpopular rules such as pricing caps that may damp investment by limiting return, according to Said.

The obstacles aren’t deterring hotel operators so far as slowing economic growth stifles expansion in other countries. Saudi Arabia, holder of the world’s second-largest oil reserves, has the capacity to spend to expand its economy even after crude prices slid this year.

“The economic fundamentals look pretty good,” National Commercial Bank’s Kotilaine said. “There are good growth prospects and economic resilience. Although it may seem like a more challenging market from the prospective of a new entrant, I think it’s a more receptive market.”

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