White Paper Makkah | Retail 2018
Kingdom of Saudi Arabia Evolving Dynamics Makkah Retail Overview Summary The holy city of Makkah is currently going through a major strategic development phase to improve connectivity, Ian Albert increase capacity, and enhance the experience of Umrah Regional Director and Hajj pilgrims throughout their stay. Middle East & North Africa
This is reflected in the execution of several strategic infrastructure and transportation projects, which have a clear focus on increasing pilgrim capacity and improving connectivity with key projects, including the Holy Haram Expansion, Haramain High- Speed Railway, and King Abdulaziz International Airport.
These projects, alongside Vision 2030, are shaping the city’s real estate landscape and stimulating the development of several large real estate projects in their surrounding areas, including King Abdulaziz Road (KAAR), Jabal Omar, Thakher City and Ru’a Al Haram. These projects are creating opportunities for the development of various retail Imad Damrah formats that target pilgrims. Managing Director | Saudi Arabia Makkah has the lowest retail density relative to other primary cities; Riyadh, Jeddah, Dammam Al Khobar and Madinah. With a retail density of c.140 sqm / 1,000 population this is 32% below Madinah which shares the same demographics profile.
Upon completion of major transport infrastructure and real estate projects the number of pilgrims is projected to grow by almost 223% from 12.1 million in 2017 up to 39.1 million in 2030 in line with Vision 2030 targets.
Importantly the majority of international Pilgrims originate from countries with low purchasing power. Approximately 59% of Hajj and Umrah pilgrims come from countries with GDP/capita below USD 5,000 (equivalent to SAR 18,750). This translates directly into Fouad Abou Rafeh the central area tenant mix which comprises value to mid-range brands concentrated in Director | Saudi Arabia jewellery & accessories and apparel collectively accounting for c. 57% of the central area mall GLA.
Outside of the central area the City lacks regional/super regional malls with the existing supply mainly comprised of traditional retail centres averaging 16,000 sqm. Tenant mix in the resident malls is mainly focused on fashion (51%), health & beauty (8%), and entertainment (12%). Limited new brand exposure combined with the aging quality of existing entertainment and experience offerings in these malls is one of the draws motivating Makkah’s residents to shop and dine in Jeddah.
It’s important to note that the magnitude and the scale of retail opportunities are subject to developers/retailers ability to balance the formula of both pilgrims and residents. New Mhd-Haydar Kouzbari developments must also compete with mixed used projects in the neighboring cities: Manager | Development Solutions Jeddah, King Abdullah Economic City (KAEC), and Madinah. In this paper, we will shed light on the evolving market dynamics of Makkah’s retail sector, which covers changes in the structure of the retail landscape, supply and demand dynamics, potential opportunities and challenges ahead, and the outlook of the sector.
2 Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 3rd Ring Rd. 2nd Ring Rd. Masjid Al Haram Rd. Omar Al Qadi St.
Abdullah Areif St.
Umm Al Qura St.
King Abdulaziz Rd. Taif Rd. Thakher City Ru’a Al Haram
Jabal Omar & KAAR projects
Jamarat
1st Ring Rd. Mina
Muzdalifah Haramain High-Speed Railway Station
Dr. Abdulqadir Koshak St. Ibrahim Al Juffali St.
Ibrahim Al Khalil Rd.
Sources: Mapbox, 2017; Colliers Analysis, 2018
DAK Riyadh Jeddah Makkah MAKKAH Introduction
Retail Landscape Node – Pilgrims
Makkah’s local economy is highly dependent on seasonal pilgrim visitations and modest local industries. Therefore, retail demand is generated from two distinct segments: Node - Residents 1) Makkah residents 2) Hajj and Umrah pilgrims This has shaped the retail landscape of the city into the following: Al Mashaer Al Muqadassah >> Shopping centers mainly serving pilgrims concentrated in the vicinity of the Holy Haram (between the First and Second Ring Roads) and Mashaer Al Muqadassah (Mina and Jamarat) along Forthcoming Al Masjid Al Haram Road. pockets >> Retail centers serving Makkah’s residents are mostly scattered outside Third Ring Road, in northwest and south Makkah, and close to well-established residential areas.
Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 3 Nascent Market Shopping Mall Density Makkah vs. Primary Saudi Cities
Makkah has a shopping mall supply of 500 140 sqm per 1,000 persons. This is 476 1.8 M significantly lower than other primary Dammam cities considering that the holy city 400 380 4.0 M received c.8.5 million international & Al Khobar pilgrims in 2017 (c.6.8 million Umrah 344 6.4 M pilgrims and 1.7 Hajj pilgrims). 300 Jeddah
The city has considerably lower shopping Madinah PRIMARY CITIES Riyadh mall density than Madinah (-32%), Population (Sqm)/1,000 GLA Retail Density 200 207 1.4 M even though Makkah has a larger HOLY CITIES population base (43%), a higher number 140 2.0 M of international pilgrim visitations, and 100 shares similar demographic and income Makkah level structure.
Makkah’s market is nascent and lagging 0 behind, suggesting that there is either 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Shopping Mall Based Supply (Sqm) untapped potential for the development Retail GLA Density Population Sources: of shopping centers or market conditions (Sqm/1,000 population) in 2017 CDSI, 2017 are challenging to support supply growth. Colliers Analysis, 2017 140 2.0 M 4.0 M 6.0 M
Makkah’s mall density is 32% lower than that of Madinah, despite sharing the same demographic profile.
4 Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia Supply Structure Structure of Retail Supply 77% of Makkah’s retail supply is fragmented, comprising traditional souqs and line shops, Fragmented Organized whereas showrooms and organized retail (i.e. Retail Retail shopping malls) account for the remaining 23%. 77% 23% Ownership Structure
Makkah’s top 5 developers account for 49% of Community Regional the city’s total mall-based supply. We expect to Centers Malls see more consolidation in the future (akin to the potential merger between Jabal Omar and 85% 15% Umm Al Qura), and large-scale developers will likely continue to develop a sizable portion of the future supply. Source: Colliers Analysis, 2018 Breakdown of Shopping Malls Shopping Mall Breakdown by Size by Category 15% 30,000–40,000 sqm The majority of Makkah’s small shopping malls comprise mostly community centers, ranging in size 32% Less than between 10,000 and 30,000 sqm. Regional malls 20% 10,000 sqm represent only 15% of Makkah’s total organized retail supply, while the remaining 85% is provided by community centers. Riyadh, Jeddah, 20,000–30,000 34% and Dammam / Al Khobar’s retail supply is sqm weighted more toward larger centers. Source: Colliers Analysis, 2018 10,000–20,000 sqm
Key Challenges Breakdown of Shopping Malls by Category Mainly attributed to the following factors: 1. Shortage of suitable land plots for mall Makkah 85% 15% developments, 2. High land prices relative to other cities; hence less DAK 25% 27% 48% commercial viability of horizontal regional and super-regional malls, Riyadh 39% 29% 32% 3. High infrastructure cost given Makkah’s mountainous topography, and Jeddah 44% 18% 38% 4. Residents’ preference towards shopping in Jeddah. 0% 20% 40% 60% 80% 100%
Community Centers Regional Malls Super Regional Malls
Source: Colliers Analysis, 2018
Plenty of Space in the Pipeline Increasing pilgrim visitations coupled with the completion coming years. Shopping mall supply is expected to increase of major infrastructure projects are expected to drive the from approximately 280,000 sqm to 338,000 sqm in 2020, to development of shopping malls in Makkah city, mainly within reach 804,000 sqm by 2025. Major projects accounting for close proximity to the Holy Haram. We expect this trend to a significant share of this future supply include the remaining intensify in the medium to long-term, as key retail projects phases of Jabal Omar, shopping malls within KAAR project, in the planning stages are scheduled for construction in the Muzdifah Mall by ACCL (Al-Hokair Group), and Abraj Kudai.
Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 5 Breakdown of Hajj & Umrah Visitations Consumer Profile 30% 72% – Pilgrim Segment 70% Top ten market feeders for international Hajj and Umrah visitation in 2017 was c. 6.1 million, equating 72% of 28% total international visitation (c. 8.5 million in 2017) and 47% of total domestic and international pilgrims (c. 12.1 Domestic & GCC Top Ten Feeders Market million). International Other Sources: Saudi Vision 2030, 2017; Colliers Analysis, 2017 The majority of international pilgrims originate from countries with low purchasing power. 66% of international Hajj & Umrah pilgrims come from countries with GDP/capita below USD 10,000 GDP/Capita (USD) (equivalent to SAR 37,500) and 59% with GDP/capita 25 000 below USD 5,000 (equivalent to SAR 18,750). Avg. Domestic & GCC
20 000 Consumer Focus Iraq India
Egypt Shopping behavior and income profile of international 15 000 Turkey Pakistan Malaysia visitors have greatly influenced the tenant mix in Indonesia the central area. It is strongly focused on traditional 10 000 offerings comprises value to mid-range brands concentrated on jewelry & accessories and apparel,
5 000 which collectively account for 57% of the central area mall GLA. Avg. Top Ten 0 On the other hand, domestic and GCC visitors accounted for 30% of the total visiting pilgrims in 2017. These pilgrims have stronger purchasing power compared to their international peers and have an average GDP/Capita of c. USD 23,773 (SAR 89,147). Merchandise Mix - Central Area Shopping Centers: Brands with higher positioning (premium and luxury) Jewelry Health& are within the affordability range of domestic and GCC Others Apparel & Accessories Beauty pilgrims. However, luring this pilgrim group to shop in Makkah is challenging as they prefer their home countries/cities, which has more diverse and innovative retail offerings. 32% 31% 26% 11% Domestic and GCC pilgrims spend more on gifts, souvenirs, and F&B. The latter is underserved in Makkah and mainly focuses on moderately priced
40 express F&B concepts and expensive hotel restaurants 39.1 Projected Increase with a lack of casual dining concepts. in Pilgrims 30 Looking Forward Hajj 34.1 Umrah Millions Total Significant increase in pilgrim visitation is expected 20.7 20 to fuel growth in pilgrim spending, therefore creating opportunities for retailers and developers. However, 18.2 12.1 developers and retailers need to be aware of the 11.2 10 increasing competition from alternative options in 5.0 9.8 destinations such as Jeddah, Madinah, and potentially 9.3 2.5 1.9 2.4 KAEC, which also offer retail components targeted 0 toward pilgrims. Regional competition is expected 2016(a) 2017(a) 2020(NTP) 2030(Vision) to intensify when the Haramain High-Speed Railway Sources: Saudi Vision 2030, 2017; Colliers Analysis, 2018 becomes fully operational.
6 Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia Consumer Profile “Makkah’s residents prefer to –Resident Segment shop in Jeddah due to the city’s Lowest Shopping Mall Density retail quality and diversity. Relative to Primary Cities & Madinah However, the city’s shoppers could be retained if their needs With the Holy City’s smaller population, worker base and spending are fulfilled.” power, its residents’ retail spending is lower than that of other major cities (Riyadh, Jeddah, and DAK (Damam Al Khobar). Makkah’s lower retail density suggests that the city is underserved and has not realized its full potential. However it could also be an indication of the Makkah Population & Households lack of retail choice driving consumer spend elsewhere. 2.5 500 Millions 2 417 400 Retail Mix 381 Thousands 342 348 324 330 336 Fashion accounts for approximately 51% of the total merchandise mix 1.5 300 in shopping malls, followed by indoor family entertainment (12%) and 1 200 health & beauty (8%). Fashion stores in Makkah are mainly positioned around value to mid-range brands, with the later mostly available in 0.5 100 well-established malls such as Makkah Mall and Hijaz Mall. 1.9 1.9 2.0 2.0 2.1 2.3 2.5 0 0 Additionally, there’s a limited presence of local emerging brands as 2016 2017 2018 2019 2020 2025 2030 well as fresh concepts that are starting to build a strong client base in Population Households major cities such as Jeddah and Riyadh. However, Makkah’s market is dominated by mainstream brands which often do not fully cater to the Merchandise Mix – Resident aspirations and needs of the younger generation. Shopping Centers – Makkah:
Makkah has a lack of large and modern retail shopping centers that offer a balanced mix of retail categories. The city’s existing supply Apparel Others Entertain- Health ment & primarily comprises traditional retail centers with an average size of Beauty c. 16,000 sqm. Entertainment offerings in the existing malls lack fresh and unique entertainment experience which could strongly motivate residents to shop and dine in Jeddah.
Looking Ahead 51% 29% 12% 8% The number of pilgrims is expected to rise over the next few years, reflecting the Saudi Vision 2030’s goal to increase the contribution of non- oil sectors to GDP. The completion of key infrastructure and masterplan projects, coupled with the expected increase in pilgrim visitations, will “Key infrastructure and masterplan likely act as a catalyst in driving job growth in Makkah, translating into projects in the construction pipeline higher retail spending and future demand by residents. Furthermore, resident population is set to grow by 25% over the coming 15 years which are expected to give a substantial will further support retail spending and demand in the future. boost to the local economy upon
However, to compete with existing regional destinations developers will completion, which will in turn need to offer a shopping destination with fresh tenant mix and exciting strengthen the purchasing power entertainment concepts that addresses the needs and aspirations of young of Makkah’s residents.” and dynamic shoppers.
Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 7 Shopping Mall Key Metrices Central Area Market PILGRIM Performance Occupancy 95% on shopping malls in Q1/2018 The strength of the Saudi Riyal against other currencies, a drop in the number The blended lease rate of shopping malls of pilgrims, and ensuing reduction in the Central Area is in the region of c. SAR 8,000/sqm to SAR 15,000/sqm, in retail spending combined to play with an average of SAR 11,500/sqm a central role in modest drop in rates within the Central Area. SQM 90,000 Pilgrim Malls is the total supply of shopping mall GLA in the Central Area, which accounts for nearly The devaluation of currencies in major feeder markets 32% of mall based GLA supply in Makkah. shrunk the purchasing power of pilgrims from those markets (such as Egypt and Turkey), resulting in lower retail spending. The fall has affected the performance of shopping malls situated within the Central Area, leading to a modest decrease in rental rates in the last year. Shopping Mall Key Metrices This concurrent trend should ease in the coming years, Outside Central Area as the number of religious visitors is expected to RESIDENT increase from c.12 million in 2017 to 16 million in 2020, ultimately reaching c.30 million by 2030. As such, existing participants may benefit of demand growth potential in the Occupancy short-term and retailers may be willing to pay escalating 80% on shopping malls in Q1/2018 rents given that over the short term, only limited supply will enter the market within the Central Area.
Lease rate of line shops ranges between However the dynamics could change with the arrival of SAR1,400/ sqm to SAR 4,000/sqm, new supply which is expected to enter the market by with an average of SAR 2,500/sqm. 2025 leading to intensified competition Resident Malls
Line Shops vs. Anchor Makkah’s resident mall market is facing several Tenants Lease Rate headwinds, including rising inflationary pressure and increased competition from Jeddah, translating into 14,000 downward pressure on rents and occupancy. However, 13,000 Line Shops regional shopping centers are in short supply, and their
SAR/SQM 12,000 demand outstrips supply, and have maintained a leading
10,000 Anchors position with stable rents and occupancy.
8,000 In the medium to long term even larger exiting malls may be susceptible to changing dynamics as new malls will 6,000 likely induce demand from existing old malls, creating downward pressure on rents and occupancy level. 4,000 3,500 2,500 2,000 1,300 0 Resident Malls Pilgrim Malls
8 Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 3rd Ring Rd. 2nd Ring Rd. Masjid Al Haram Rd. Omar Al Qadi St.
Abdullah Areif St.
Umm Al Qura St.
Taif Rd.
Jamarat
Mina
Muzdalifah 1st Ring Rd.
Dr. Abdulqadir Koshak St. Ibrahim Al Juffali St.
Ibrahim Al Khalil Rd. Makkah Upcoming Retail Areas
Node – Pilgrims HHSR
Node - Residents Forthcoming pockets Road Network KAAR Al Mashaer Al Muqadassah Major Trends Expansion Toward the Edges & Opportunities of the City
The Saudi Government plans to reduce pressure on the Central Emergence of New Pockets Suitable Area by relocating residential districts to the Bawabat Makkah for Mall Developments Grand Masterplan (in western Makkah), which has stimulated the development of new masterplans in the area. Furthermore, Upcoming masterplans in the Central Area, such as KAAR several new masterplans in the west and south have been and Thakher City, are currently in the infrastructure stage and recently completed. These projects are expected to offer large expected to unlock new land supply. Upon completion, they will and reasonably priced lands suitable for mall developments. be well connected to the Holy Haram and major transportation projects, including the HHSR (Haramain High Speed Railway) However, these masterplans are still vacant and are not expected to and the proposed metro network (currently in planning). This witness any major development activity in the short-term, as such is expected to create an opportunity for the development of this opportunity will become more relevant once the critical mass is shopping malls that cater to on-site residents and pilgrims. built over the medium to long-term.
Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 9 Strong Preference for Mall Positioning: Makkah vs. Local & Regional Cities
Horizontal Malls Dubai High The majority of Makkah’s shopping malls are vertical structures comprised of three to five floors, with small floor plates given Jeddah & Riyadh the city’s mountainous nature and high land prices, which have always been a setback for horizontal malls. However, shoppers Makkah and tenants alike are drawn to malls with horizontal layouts, large floor plates and wide corridors, with easy circulation and enhanced
shopping experience. Shopping mall’s BRAND AWARENESS horizontal configurations can also differentiate their offerings from the competition. Therefore, with the emergence of reasonably priced lands introduced by upcoming masterplans, there will be strong opportunities in the development of Low horizontal malls. Traditional RETAIL OFFERING Contemporary
A Wider Variety of Offerings Source: Colliers Analysis, 2018
Given the varying shopping patterns between pilgrims and residents, strong emphasis is recommended to be placed on positioning to Entertainment & Leisure cultivate a tenant mix that caters to the needs of the target market. Pilgrims mostly prefer a New Differentiation Strategy local brands with unique product offerings, including health & beauty (e.g. oud), gold & The majority of Makkah’s shopping malls feature food court space, but only jewellery, and souvenirs. Meanwhile, residents a few malls feature casual dining restaurants. Additionally, the market lacks favor contemporary offerings by prominent international retailers in fashion, electronics fresh F&B concepts that are gaining popularity in Jeddah. Furthermore, and technology. Therefore, shopping malls are indoor family entertainment areas generally have a homogenous feel with advised to have a combination of traditional little innovation. and contemporary offerings alongside local and international brands to cater to both segments. Given the government’s emphasis on promoting leisure and entertainment The mix, however, will vary depending on the activities as part of the Saudi Vision 2030, more space could be dedicated to mall location to their target market. express F&B outlets, casual dining restaurants, and unique family-oriented entertainment concepts. The combination of these factors is essential to differentiate new shopping malls from traditional centers, to fend off competition from Jeddah, and to retain Makkah’s resident shoppers.
10 Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia Outlook
Short-term Outlook
>> Makkah’s elevated pilgrim capacity and completion of major infrastructure projects will likely stimulate retail spending. >> Existing developers will likely reap the benefit from easing of visa quotas as major retail projects in the pipeline are expected to take a number of years to enter the market, which will likely translate into higher sales density in properties near the Holy Haram and Mashar Al Muqaddasa. >> Jeddah, however, will continue to capture a significant portion of Makkah’s resident retail spending, given the diversity and scale of its offering. Still, rental rates of prominent resident shopping malls in Makkah are expected to hold up and to increase modestly in the short-term.
Medium to Long-term Outlook
>> Competition will likely intensify as a large supply of shopping malls is expected to enter the pilgrim market, thus developers/landlords are expected to reduce rental rates. >> Several large-scale projects, including regional/super regional malls, are planned to enter the market. These developments are expected to feature retail offerings that focus on creating a destination for shopping and family entertainment, where people not only shop but also dine, socialize and have fun in a way that responds to the needs of the local community while respecting its culture and values. >> However, projects of this scale and magnitude in Makkah remain untested. As such, they are expected to be released over phases to gauge market capacity.
Evolving Dynamics | Makkah Retail Overview | 2018 | Saudi Arabia 11 For further information, please contact:
Operating from Ian Albert Regional Director | Middle East and North Africa 69 countries [email protected] MAIN +971 55 899 6070 on Imad Damrah Managing Director | Saudi Arabia MAIN +966 11 273 7775 6 continents MOBILE +966 50 417 2178 [email protected]
Fouad Abou Rafeh $2.7 billion Director | Saudi Arabia MAIN +966 11 273 7775 annual revenue [email protected]
Mhd-Haydar Kouzbari 2 billion Manager | Development Solutions square feet under management MAIN +966 11 217 9997 MOBILE +966 50 7322277 15,400 [email protected] professionals and staff
Colliers International
Al Faisalah Tower Riyadh | Kingdom of Saudi Arabia MAIN +966 11 273 7775
Jameel Square Jeddah | Kingdom of Saudi Arabia MAIN +966 12 610 5900
Colliers International Saudi Arabia
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