Holy Cities on the Road to Re-Development

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KINGDOM OF SAUDI ARABIA HOLY CITIES ON THE ROAD TO RE-DEVELOPMENT

MAY 2014

Accelerating success. 2014 | HOLYHOLY CITIES CITIES I HOSPITALITY | KSA MARKET OVERVIEW TABLE OF CONTENTS

TABLE OF CONTENTS

Introduction 1

Market Focus : Makkah 2

Makkah Future Developments 3

Market Focus : Madinah 4

Madinah Future Developments 5

Holy Cities Opportunities 6

COLLIERS INTERNATIONAL | colliers.com/unitedarabemirates/hotels KSA | 2014 | HOLY CITIES | INTRODUCTION

Introduction

MAKKAH AND MADINAH Recent years have witnessed a prominent rush of foreign awareness PROVINCES in the Saudi Arabian hospitality market, mostly directed towards the two largest cities (Riyadh and Jeddah), with the Holy Cities (Makkah and Madinah) being sidelined on the international front. This research attempts to point out the opportunities presented by the Holy Cities hospitality industry.

Holy Cities hospitality market is considered to be exceptional in terms of enjoying the benefits of an effective indefinite demand.

Madinah Although, one of the major hurdles in front of these market is accommodating this huge demand.

Makkah This research:

• Examines the hospitality market of the Holy Cities and explains scope of any future development opportunities.

Source: Colliers International; 2014 • Investigates the infrastructure developments taking place in the Holy Cities for the coming years.

• Studies the impact of expansion of the Holy Mosques (Haram and HOLY CITIES HOTEL PERFORMANCE Al Masjid An Nabawi) in the the Holy Cities. PERCENTAGE CHANGE YTD Feb 2013 - Makkah 2012 - 2013 YTD Feb 2014 • Reviews the religious visits and investigates its influential factors. Occupancy -1.5% +11.4% ADR (SAR) -0.8% -0.6% RevPAR (SAR) -2.3% +10.7% • Outlines the future outlook and trends in regards to hospitality developments within Holy Cities. YTD Feb 2013 - Madinah 2012 - 2013 YTD Feb 2014 Occupancy -8.4% +13.8% HOLY CITIES BACKGROUND ADR (SAR) +2.9% -0.9% RevPAR (SAR) -5.8% 12.8%

Source: STR Global, 2014; Colliers International, 2014 Islam is the second largest religion and visiting Makkah and Madinah for either Hajj or Umrah (Islamic pilgrimage) is of prime importance for the 1.6 billion Muslims around the globe. These cities host the two sacred places, Holy Ka’aba (located in the Haram) and Al Masjid PROJECTED VISITS TO HOLY CITIES An Nabawi (Prophet’s mosque) respectively. 2014(f)-2025(f) • Restraints on the Hajj pilgrim’s growth – Hajj in particular involves 30 significant movement between different locations and takes place 25 in phases, hence involves overnight stays within tented camps.

20 Concerns relating to Hajj comprise of providing hospitality supply and transportation means. 15

10 • Constrained Foreign Ownership – Foreign parties are prohibited 5 from owning land in Makkah and Madinah. But this has not Religious Visitation (Millions) 0 affected the involvement of GCC and other international parties in establishing their business via joint ventures with local Saudi

Makkah Madinah developers. Source: Madinah Development Authority (MDA), 2014; Ministry of Hajj, 2014; Colliers International, 2014

MAKKAH HOTEL PERFORMANCE PERCENTAGE CHANGE Market Focus : Makkah YTD Feb 2013 - Makkah 2012 - 2013 YTD Feb 2014 Occupancy -1.5% +11.4% HOSPITALITY MARKET ADR (SAR) -0.8% -0.6% RevPAR (SAR) -2.3% +10.7% The hospitality market in Makkah is the largest in Saudi Arabia and is divided in Source: STR Global, 2014; Colliers International, 2014 two sections. EXISTING HOTEL SUPPLY, FEB 2014 • Primary – high quality, internationally branded hotels located around the Masjid Al Haram (Central Area) mostly consists of 5-star hotel market.

13% • Secondary – unbranded hotels and furnished apartments located outside of the Central Area. 5-Star 37% 11% 4-Star These two districts show different dynamics of supply and demand, especially 107,209 Keys 3-Star since the primary market is operational all year round with high room rates, and 2-Star the secondary market sees the majority of its hotels close its doors during low 19% Unclassified season (i.e. March to July, in the last few years). 20% PERFORMANCE INDICATORS Source: Saudi Commission and Tourism Antiquities (SCTA), 2014; Colliers International, 2014 • Essential factor “location” – The average selling price of a hotel room situated in the central area is between SAR 700-1,000 per night, while hotel rooms PROJECTED ADDITIONAL SUPPY BY outside the central area are in the range of SAR 400-600 per night. YEAR 2014(f) – 2018(f) 14,000 • Sensitive market – Makkah’s hospitality market is mainly reliant on the number of pilgrims visiting the city and there are many factors which can significantly 12,000 affect the arrivals of these pilgrims ranging from global recessions to a change

10,000 in pilgrim visa quotas. No.of Keys 8,000 • The latest occupancy drop in 2013, is largely due to the construction activity taking place around the Masjid Al Haram and MERS virus outbreak. 6,000

4,000 MARKETWIDE HOSPITALITY SUPPLY (EXISTING AND FORTHCOMING)

2,000 • Dominance of Hotels – Hotels represent 96% of the hospitality supply, while 0 furnished apartments represent only 4% of the total supply. Such strong 2014f 2015f 2016f 2017f 2018f presence of hotels can be credited to pilgrim’s short length of stay in the city Source: Colliers International, 2014 owing to short Hajj and Umrah rituals and limited permit period to reside in the city. MONTHLY SEASONALITY OF DEMAND 2013 (NO. OF TOURIST TRIPS) • Future Prime Location – The sheer density of developments around the 200% Haram are pushing larger developments outwards and Al Aziziyah is 161% 150% considered a prime district for future intake of more hospitality supply.

100% DEMAND TRENDS 55% 50% 6% • Low Season – The low season in Makkah lasts for an average of 155 days 0% and many properties in the secondary hospitality market tend to close their -9% -9% -7%

Variance Variance fromthe Mean -13% -50% -33% -29% doors during this period. -40% -40% -43%

-100% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec • High Season – Hajj pilgrimage took place in October 2013, with 2 million tourist trips during this period. However, there was a drop of 35% in tourist Source: Tourism Information and Research Centre (MAS), 2014 trips from October 2012.

HISTORICAL EVOLUTION OF NUMBER HISTORICAL PILGRIM VISITS OF HAJJ PILGRIMS 2003 - 2013 Visa • Strong religious visits – Hajj visit numbers are expected to continue to grow 3.5 restrictions and fear of to 5.2 million by 2025 from 2 million in 2013. 3.0 MERS virus Millions 2.5 • Building strong tourism foundation – Increasing pilgrim visit numbers are 2.0 partly dependent on the increasing infrastructure such as the expansion of 1.5 Jeddah’s airport which is expected to increase its capacity to 80 million pax 1.0 by 2035. 0.5 0.0 • Hajj is a critical demand generator – Tourism revenue in Saudi Arabia amounted to SAR 75 million for 2013, out of which 40% (SAR 30 million) was

No. of Pilgrims generated during the Hajj season (October). Source: Ministry of Hajj, 2014

Makkah Future Developments

• Al Masjid Al Haram Expansion – The mosque has a total area of 356,000m² and a capacity of 700,000 worshippers. Current plans to expand the mosque 1 - AL SHAMYAH 4 - JABAL OMAR to the northwest and northeast will increase the size of the mosque by over 456,000m² to 812,000m², and increase its holding capacity to over 2.5 million

Al at the cost of SAR 80 billion. Shamyah1

Haram Jabal al Expansion8 NEW LARGE SCALE DEVELOPMENT (MASJIDKaaba2 AL HARAM CENTRAL AREA) King Abdul Aziz3 Road 2 - JABAL AL KAABA 5 - DRB AL KHALEEL 1 - AL SHAMYAH 2 - JABAL AL KAABA 3 - KING ABDULAZIZ ROAD 4 - JABAL OMAR

Jabal 8 Khandama7 1 Jabal4 Omar

Drb Al Khalel5 Rabawi 2 Abraj al6 Bait

3 7

3 - 5KING - DRB ABDUL AL KHALEEL-AZIZ ROAD 6 -6ABRAJ - ABRAJAL ALBAIT BAIT 77 --JABALJABALKHANDAMA KHANDAMA 88 - HolyHARAM Haram EXPANSIONExpansion

5 6 1 km

Source: Colliers International, 2014 UPCOMING DEVELOPMENTS

PROJECTS UNDER DEVELOPMENT IN • Jabal Al Kaaba – This upcoming mixed-use development will cover MAKKAH 1,380,000m² and will include villas, apartments, hotels, business facilities, retail areas, schools and hospitals. Approximately 42,000m² of land area, will deliver 8,500 hotel rooms over the next few years. Expected No. of Projects Size (sqm) Establishment Type Keys Villas, Apartments, Jabal Al Kaaba 1.3 million 8,500 Hotels, Business • Jabal Omar Project – Spread across 2,200,000m² of land, this project is Facilities and Retail being developed in five phases at a cost of 20 billion riyals ($5.3 billion) and

Jabal Omar 2.2 million 13,500 37 Hotel Towers includes 37 hotel towers with 13,500 rooms and 45,000 total guest capacity.

Hotels, Apartments, and King Abdul Aziz Road N/A 28,000 Commercial • King Abdul Aziz Road – This project is anticipated to include hotels, apartments, commercial, and recreational areas. The expected capacity of Hotels, Furnished Drb Al Khaleel Project 57,725 TBC Apartments and the project is approximately 197,000 residents and 28,000 hotel rooms. Residential Commercial, Medical, Hotels, Furnished Abraj Al Bait 35,000 22,000 Apartments and • Drb Al Khaleel Project – Located on a land area of 57,725m² and a capacity Residential of 7,965, this project is expected to comprise of 40% hospitality, 30% Hotels, Furnished Jabal Khandam 2 million TBC Apartments, Residential residential and 30% serviced residential apartments units. and Commercial • Abraj Al Bait – Located on a site area of 35,000m² with holding capacity of Source: Colliers International, 2014 65,000 people, this palatial complex is expected to include 7 towers comprising of a commercial mall, 22,000 hotel rooms, 4,000 parking spaces, a medical center, 7,134 residential units and a prayer hall. Additionally the PROJECTED VISITS TO MAKKAH residential spaces will include 10,000 accommodation units, ranging from 2014(f) - 2025(f) apartments and suites to studios.

18 • Jabal Khandama – This project consists of 2,000,000m² of BUA, and is a 16 mixed-use development which is expected to feature permanent residences, 14

Millions seasonal residences, hotels, prayer spaces and commercial areas. This 12 development will host approximately 90,000 inhabitants, about 24,000 of 10 whom will be permanent residents. 8 6 4 GOVERNMENT EFFORTS 2 0 • The government is making constant efforts to improve their working process via incorporating technological means. For instance electronic communication systems have been provided in buses, which enables bus drivers to anticipate and handle large crowds. Source: Colliers International, 2014; Ministry of Hajj, 2014

MADINAH HOTEL PERFORMANCE Market Focus : Madinah PERCENTAGE CHANGE YTD Feb 2013 - HOSPITALITY MARKET Madinah 2012 - 2013 YTD Feb 2014 Occupancy -8.4% +13.8% The Madinah hospitality landscape is the second largest in Saudi Arabia after ADR (SAR) +2.9% -0.9% the Makkah province. It offered over 46,000 hotel rooms and 4,000 furnished RevPAR (SAR) -5.8% 12.8% apartment rooms in 2013, as per the latest licensed hotel figures. The Source: STR Global, 2014; Colliers International, 2014 hospitality market in general has been volatile due to the reclassification standards that SCTA has undergone in recent years EXISTING HOTEL SUPPLY, FEB 2014 • Strong Correlation – Madinah and Makkah’s hospitality market are closely correlated as a large share of pilgrims execute Hajj or Umrah in Makkah and 17% then travel towards Madinah to visit Al Masjid An Nabawi (Prophet’s 5-Star mosque). 6% 4-Star 45% 46,536 Keys 3-Star PERFORMANCE INDICATORS 2-Star Decreasing Occupancy – The drop in occupancy levels in 2013 can be Unclassified • 23% hugely credited to the MERS virus outbreak and the major demolition

8% process taking place around the mosque, hence limiting the number of visas being granted. Source: SCTA, 2014; Colliers International, 2014 • Recovering Market – Signs of market growth with YTD February 2014 growth of 13.8% occupancy indicate overall hotel market is not yet mature PROJECTED ADDITIONAL SUPPLY and opportunities for further development may exist. BY YEAR 2014(f) – 2018(f)

4,000 • Key Takeaway – Strong hotel demand suggests that the market would be able to absorb additional supply. 3,500

3,000

No.of Keys 2,500 MARKETWIDE HOSPITALITY SUPPLY (EXISTING AND FORTHCOMING)

2,000 • Hotels Supremacy – Hotels outnumber furnished apartments and dominate 1,500 the overall hospitality landscape in Madinah with 217 properties. 1,000 • Dominance of low quality hotels – The hotel market is mainly dominated by 500 unclassified (i.e. 1 & 2-Star hotels) with approximately 45% of the overall 0 supply; while the 3-Star hotels represent 23%. The majority of these hotels 2014f 2015f 2016f 2017f 2018f are unbranded, of low quality and locally managed. Source: Colliers International, 2014 • Market Gap – Currently only 30% of hotel supply is branded by international MONTHLY SEASONALITY OF DEMAND 2013 operators. With regards to furnished apartments, there is a large absence of (NO. OF TOURIST TRIPS) internationally branded furnished apartment. 80% 61% 60% • Opportunities for Internationally branded hotels – Due to the low presence of internationally branded operators, there is a high possibility that the market 40% 27% 27% 23% 26% 18% can be outperformed by international operators with existing brand 13% 20% standards and an established distribution chain. 0%

-20% -19% • Some major international hotel companies are expected to make their first -40% -27%

Variance Variance fromthe Mean entrance in the next few years, namely Accor, Millennium; while Starwood is -60% -47% -47% -57% expected to increase its number of keys, with the opening of a Sheraton with -80% 356 keys. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Colliers International, 2014 • Distribution Channels – Hotels mostly use online distribution systems and their own reservation networks. Target market mostly includes HISTORICAL EVOLUTION OF NO. OF approximately 60% free independent travelers and 40% groups. 6 TOURISTS

5 DEMAND TRENDS

4 • Domestic Demand during low season – The hospitality market is supported 3 by short stay visits on the weekends and holidays by the domestic market throughout the year. 2

1 • High Season – The last 10 days of Ramdan represent a sacred part of the

No. of Tourists (Millions) Tourists of No. month for Muslims due to Laylat Al Qadr prayers and Eid Alfitr. During this 0 period, occupancy rates are comparative to those during Hajj season, with 2010 2011 2012 2013 many hotels requiring early booking. Source: MAS, 2014; Colliers International, 2014

KNOWLEDGE ECONOMIC CITY Madinah Future Developments • Al Masjid An Nabawi Expansion – A massive expansion of the Prophets Mosque was announced by King Abdullah in 2012 with an aim to have a holding capacity of 1.6 million worshipers by 2040. • Increasing Capacity – The Mosque’s holding capacity (indoors and out) will be increased from 600,000 to 1,600,000 upon completion of the expansion by 2040. • The initial phase of the expansion calls for the addition of an additional 12.5 hectares to the Al Masjid An Nabawi’s current area of 38.3 hectares. • Demolition Plans – In order to achieve additional mosque capacity, specific demolition plans are set by the Madinah Development Authority. These plans Source: Knowledge Economic City (KEC), 2014 will witness the demolition of residential properties, hotels, and furnished apartments surrounding the Prophet’s mosque.

HARAMAIN HIGH SPEED RAIL MADINAH CENTRAL Ar Rayah Al Masani Bani Abdul Ashhal AREA 818 Keys 781 Keys Makkah Al Masani Al Fath 1,230 Keys Bani Muawiyah 234 Keys 366 Keys Badaah 65 km / Areas Remaining Untouched 20,225 Keys 20 min Areas Being Al Al Haram Razed As Sih Manakha 386 Keys ++ Al Masjid 324 Keys 798 Keys Jeddah Airport Sacred Areas An Nabawi

Planned Al Baqia Demolition 25km / Bani Dhafar Bani Khidra 29 Keys 10 min As Suqya 770 Keys Qurban 12 Keys KAEC Al Mughaisilah

Source: Madinah Development Authority (MDA), 2014 105km / 28 min • Out of the existing 50,619 keys, a total of 22,716 hotel keys and 3,334 furnished apartment keys are expected to be demolished by the end of this expansion.

Madinah • Untouched Districts – The only areas not undergoing any changes as per the master plan are Bani Khidra (5,281 hospitality keys) and An Naqa (8,327 255km / hospitality keys). 75 min • Demolition Effect – At year-end 2013, 80% of the Al Haram district was razed to the ground, along with 386 hotel keys. • The final phase of demolition will see 7,225 keys exit the market. As a result of the lower supply, Colliers expects year-end 2016 to reach 69.5%. Source: Colliers International, 2014 UPCOMING DEVELOPMENTS • Knowledge Economic City (KEC) – It is one of the five economic cities launched in Saudi Arabia. KEC is focused around knowledge based industries and is 4.8 PROJECTED VISITS TO MADINAH million sqm in size. 2014(f) - 2025(f) This project is worth USD 30 billion investment. Additionally KEC is expected to 12 offer 20,000 jobs and accommodate 150,000 people once completed by 2020. 10 • Pilgrim City – This mixed-development is meant to cater for Hajj and Umrah 8 pilgrims. It is 1.6 million sqm in area and is expected to accommodate 6 approximately 200,000 people.

4 This project will feature hotels, one 400-bed hospital, government offices, bus station and a train station.

2 No. of Visitors (Millions)Visitors of No. 0 • Haramain High Speed Rail – This is a key nation-wide transportation strategy that will connect the Holy Cities of Makkah and Madinah to Jeddah with the potential to expand to Riyadh. • Speed and Travel Distance – The new trains will be able to reach a top speed of Source: MDA, 2014 330km/h, cutting the travel time between Madinah and Makkah to 2 hours.

Holy Cities : Opportunities PROJECTED VISITS TO HOLY CITIES • Visits in Madinah – Based on the planned expansion of the Prophet’s Mosque, the total number of pilgrims is expected to reach 8.3 million in 2014, and 10 million by 2025 as announced by Madinah Development Authority (MDA). PROJECTED VISITS TO HOLY CITIES • During 2014-2016, a slight dip in the number of pilgrims is anticipated as a 2014(f) - 2025(f) result of demolition of hotel rooms over that time period.

30 • Limited Absorption Capacity – Holding capacity will be temporarily restricted

25 due to availability of limited rooms and the construction work taking place around the sacred areas. 20 15 • Visits in Makkah – The Ministry of Hajj forecasts that the total number of 10 religious visits (including Hajj and Umrah) in Makkah is expected to reach 17

5 million by 2025.

Religious Visitation (Millions) 0 • Projected Visits to Holy Cities – With the completion of the expansion of both the mosques in the Holy Cities, anticipated relaxation of visa restrictions by the government and strong infrastructure, visits to these cities is expected to Makkah Madinah reach 27 million (including Hajj and Umrah visits) by 2025. Source: MDA, 2014; Ministry of Hajj, 2014; Colliers FACTORS INFLUENCING VISITS International, 2014 It is important to understand the key drivers behind the increase in visits to the holy cities. Therefore we have examined the development indicators of the top five Muslim source markets for both Makkah and Madinah. The following have GROWTH INDICATORS OF MUSLIM been identified as the key influential visit factors: POPULATED COUNTRIES • Growing Muslim Population – Since Makkah and Madinah hold strong importance for Muslims, the increasing population will in turn increase visits Population CAGR to the Holy Cities. % Muslim Population (2014- • Strong Economic Growth – Good economic growth in the country boosts Population 2020) better employment conditions. Hence an increasing number of people can Indonasia 87.2 2% afford to travel. India 13.4 1% • Strong Gross National Income (GNI) per capita – It is a clear indication of Pakistan 96.4 1% increasing income growth in Muslim populated countries and as income Egypt 95.0 2% levels increase we expect more people can afford to travel to the Holy Cities. Turkey 98.0 1% Economic Indicators (CAGR) FUTURE OUTLOOK Real GDP GNI per capita Growth (2014- (2008-2013) • Hotel Design Trends – Religious tourism is the primary demand driver in the 2018) Holy Cities, hence provisions must be made to cater for this market. Indonasia 4% 6% India 7% 8% • Important details need to be considered such as large check-in/check-out Pakistan 6% 3% capacity and separate entrances, check-in desks for individuals and groups. Egypt 4% 2% Turkey 4% 5% • Rooms should offer enough floor space to accommodate prayer mats, prayer and ablution areas, etc. Source: International Monetary Fund (IMF), 2014; World Development Indicators (WDI), 2014 • Brand Essence – In a competitive market, a strong brand is essential to maintain the competitiveness of any development. International hotel brands would cater to the religious and price sensitive domestic travelers who are familiar with international hotel companies in their countries of residence.

• Prime Locations – The only areas not undergoing any changes as per the Madinah demolition master plan are Bani Khidra (5,281 hospitality keys) and An Naqa (8,327 hospitality keys). Additionally Al Aziziyah in Makkah is considered to be the future hospitality hotspot.

• Tourism Revenue – Saudi Arabia achieved revenues of SAR 75 million for 2013, out of which 40% (SAR 30 million) was generated during the Hajj season (October). This positive trend is likely to continue in the future with the large scale infrastructural developments in the Holy Cities.

6 | COLLIERS INTERNATIONAL | colliers.com/unitedarabemirates/hotels KSA | 2014 | COLLIERS INTERNATIONAL HOTELS

COLLIERS INTERNATIONAL MENA REGION 485 offices in Colliers International has been providing leading advisory services in the Middle East 63 countries on and North Africa region since 1996, and Saudi Arabia since 2004. Regarded as the largest and most experienced firm in the region, Colliers International’s expertise covers 6 continents Hotels, Residential, Commercial, Retail, Education and Healthcare sectors together with master planning solutions, serviced from the five regional offices.

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Filippo Sona SERVICES AT A GLANCE Director | Head of Hotels | MENA Region MAIN +971 4 453 7400 The team can advise throughout the key phases and lifecycle of a project: MOBILE +971 55 899 6102 EMAIL [email protected] • Destination/Tourism/Resort/Brand Strategy

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