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Saudi Arabia: the new pilgrimage for hoteliers

Buoyed by the attendance of pilgrims and business travelers, tourism in Saudi Arabia is growing year by year and must adapt its infrastructure to the growing number of tourists who travel to the destination, especially regarding the hotel industry. However, several challenges remain, such as the country’s severe border formalities, which are not very open to foreign clients, and the quality/price relationship of the services that establishments offer.

Key facts

  • Population: 26.5 million
  • Surface area: 2.1 million km2
  • Hotel supply: 1,023 hotels in 2013
  • Tourist arrivals: 13 million
  • Key source markets: Cooperation Council for the Arab States of the Gulf

Saudi Arabia is not only the largest economy in the Middle East, but also the most affluent of the Arab world. Largely based on the oil industry, with 22% of world reserves, the economic and financial situation has evolved with the continuous increase in oil prices over the past several years. In 2012, GDP per capita amounted to 25,700 US dollars, as compared to 23,500 US dollars in 2010, and its growth rate was close to 7%. But the Kingdom is not resting on its laurels and is working to ensure a prosperous future, including the recent introduction of an economic diversification policy to reduce its dependence on the petroleum industry. In 2012, the sector accounted for 41% of GDP, 87% of export earnings and 91% of budgetary revenues. While the sectors of agriculture, food and industry have now become a priority for the Saudi authorities, tourism is also part of the diversification program.

Clearly dominated by tourism, the service sector accounts for nearly 38% of Saudi Arabia's GDP. The tourism industry is particularly important for the prosperity of the Kingdom, which is currently the second largest economic sector in the country in terms of employment, accounting for nearly a million jobs in total. According to the chairman of the Saudi Commission for Tourism and Antiquities, Prince Sultan Bin Salman, the sector is expected to become the primary national employer in the coming years.

Pilgrims on the march for tourism

Saudi Arabia expects to be hosting over 15 million visitors by 2014, with a growth rate of 6.7% per year. This announced increase in attendance to the Kingdom is due to the dynamism of its religious tourism, being the main reason for travel given by domestic and foreign visitors today. During 2012, some 12 million believers have visited the country to make the annual pilgrimage to Mecca (in October) and the Umrah (throughout the year), generating 16.5 billion US dollars in tourism revenue. These numbers are increasing every year and more than six million pilgrims, local for the most part, have already made the trip for Umrah since early 2013, 10% to 20% more than last year.

"The tourism and hotel industry in Saudi Arabia is on a rising curve, as domestic tourism further spreads within the Kingdom. We cannot ignore the weight of religious tourism in the industry, a pillar of the sector. The holy cities of Mecca and Medina are experiencing massive developments to accommodate an increasing number of visitors, attendance is resisting the regional and international economic problems of the world today", says Elie Milky , Business Development Director Middle East & Africa for the Rezidor group.

Today the strength of religious tourism in Saudi Arabia is based mainly on the movement of domestic clientele. The government does not issue tourist visas except for the "Umrah -Plus" visa to foreigners residing in the states of the Gulf Cooperation Council, namely Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates. A recent decision of the authorities to relax the extremely strict rules on visa requirements could still change things and explode the numbers of religious tourists. The Saudi Commission for Tourism and Antiquities has announced its intention to offer "Umrah -Plus" visas for foreigners residing outside of the Gulf Cooperation Council if they participate in visits to Muslim holy places. The implementation of such a measure could revolutionize tourism in the destination by opening its access to all nationalities and allowing pilgrims from around the world to visit the country beyond the traditional holy places, during a possible period for up to one month.

Until then, only business travelers can request a visa from Saudi authorities. This announced measure is pleasing to business professionals, who see it as a first step towards opening the destination for foreign visitors, thus to the greater development of their business, already expanding in recent years. "There is a growing demand in the tourism business , national and international companies jostling in the country to enter into contracts and other business", says Elie Milky . The Saudi government has recently stepped up efforts to become a tourist destination, through the strengthening of its infrastructure. Large sums of money have been invested to increase the capacity of 27 airports in the Kingdom over the next three years and renovate 30 museums and attractions on the topic of Islam in the main cities of the country. Religious tourism is the first segment concerned with the infrastructure improvements, as the authorities decided to temporarily reduce the number of worshipers allowed to perform the pilgrimage in October this year (by 20% for foreign and 50% for Saudis) to carry works on the Mosque of Mecca. The renovation is expected to expand the site by 400,000 square meters and bring its capacity to 3.2 million people, compared to 2 million today. The government's objective is to welcome 88 million people in total by the year 2020.

Among the largest Gulf hotel market

Along with the United Arab Emirates, Saudi Arabia has the largest hotel market in the Gulf region. Given the growing number of visitors who come to the destination each year, which is forecasted to increase in terms of attendance to the country for years to come, the hotel offer must constantly adapt to demand. Between 2004 and 2012, the number of rooms in the Kingdom increased by more than 50%, according to the Vice President of Investment and Tourism Development of the General Authority for Tourism and Antiquities. The Ministry of Tourism points to a 2011 portfolio of 951 hotels, representing 157,430 rooms. The majority of this offer is concentrated in the city of Mecca, with 61,319 rooms, followed by Khobar (12,186 rooms), Jeddah (11,500 rooms), Riyadh (10,514 rooms) and Medina (7,890 rooms). Despite the strengthening of its offer, the Saudi hospitality industry is able to advance its indicators year after year. According to data collected by MKG Hospitality, the trend in the sector's performance has been upwards over the first nine months of 2013: occupancy rates and average daily rates rose by 0.1 point and 6.1% respectively over the period, reaching a 6.3% increase in Revenue per available room.

Besides the imbalance between hotel supply and demand, which has led to a lack of rooms in some parts of the country during many times of the year, one of the current gaps in the sector is the low level of services offered in a large number of establishments. To remedy this, the government has implemented a plan for the promotion and development of tourist accommodations in the country. It thus focuses on the lack of high quality services in an attempt to attract more investment and bridge the gap between the services offered and their prices. Hotel projects will therefore be examined closely during the next three years by a number of local businesses in cooperation with international groups.

New supply under construction

It must be said that the numerous hotel development projects in the Kingdom are currently witnessing an unprecedented shift in terms of investment volumes. "Saudi Arabia is a locomotive for the rest of the world, being one of the richest economies under continued development. A wide range of rooms are needed in the Kingdom to meet the growing demand for tourism. It now seems logical to make Saudi Arabia a priority for our development and to seize the opportunities it offers today", says Elie Milky. The authorities of the country talk about an additional 50,000 rooms within the next three years, in the country's major cities and economic centers. Mecca and Medina are the main locations for investment in the Kingdom and the hotel room supply there should increase by 18% and 14% respectively over the next few years. With 10 towers under construction, the hotel supply in Mecca will soon expand to 24,480 rooms, with investments estimated at around 4 billion euro. There are several projects of epic dimension, such as Jabal Al Kabah hotel which will have 8,500 rooms in six towers. A second Jabal Omar complex is spread over 15 acres with 38 hotels of different categories on the same site, totaling 13,000 rooms. The total planned investment in the industry for the year 2020 is estimated at 144 billion Saudi riyals (about 28 billion euro).

In view of the opportunities offered by the tourism and hospitality market of Saudi Arabia, a large number of international hotel groups have made or plan to make their entry into the destination. Chain hotels account for more than 85 projects under development in Saudi territory, representing the addition of more than 27,000 hotel rooms to the Kingdom's supply: more than 30 establishments in Riyadh, more than 17 in Jeddah, and more than 16 in Mecca. Among hotel groups already present in the destination, Carlson Rezidor has a substantial network of six hotels for 1,200 rooms in operation there. "Given the increasing traffic on the destination, which is foreign or domestic , authorities, investors , consultants and operators observe a growing need to meet the demand by developing hotels, not only in major cities like Riyadh , Jeddah , Mecca or Medina, but also in the secondary cities such as the East cities: Jizan , Taif , Yanbu... We also want to diversify our offer with more midscale and upscale establishments, but also with products ranging from traditional hotels to resorts and residences", says Elie Milky, Business Development Director Middle East & Africa for Rezidor. The group wants to strengthen its presence in the market and has announced the development of two new establishments: the Park Inn Riyadh for 170 rooms planned for the year 2016 and the Radisson Blu Hotel Jeddah Al Salamah for 142 rooms, scheduled to the year 2015. These two new developments complement a pipeline of nine hotels, representing 1,700 rooms.

Surfing on a wave of religious tourism and large-scale developments, the InterContinental group is also reinforcing its network in the destination, having announced the opening of a Holiday Inn in Mecca in 2016. It is not just any establishment, but the largest of the brand in the world with no less than 1,238 rooms. Today, Saudi Arabia is the second largest market for Starwood Hotels & Resorts in the Middle East after the United Arab Emirates. The group has recently signed an agreement with Jabal Omar Development Company for three establishments in Saudi Arabia, under the Sheraton, Westin and Four Points by Sheraton brands. With these three new hotels scheduled to open their doors in the city of Mecca in 2015, the group will have a network of 1,496 rooms in the city and more than 3,000 rooms in the region. Other hotel groups have made their development in Saudi Arabia a priority as well; Accor plans to open its third Sofitel hotel in the country in 2015 in Jeddah with 189 rooms and Meliá Hotels International has announced the signing of an agreement for the development of its first hotel in the country, the Grand Meliá Riyadh for 252 rooms.

While the tourism industry in the Saudi market still faces several challenges, such as "the process of Saudization, the employment of more Saudi citizens in the service industry, and improving visa procedures at the borders ( for work as well as tourism)", the authorities are on the right track and have "made significant efforts in recent years, such as the simplification of administrative procedures and the establishment of a policy of encouraging Saudis to work in the hospitality industry", says Elie Milky. At the end of October 2013, the country's Council of Ministers approved a new law on tourism, which aims to give more power to the Saudi Commission for Tourism and Antiquities. It will thus be responsible for the management of all public tourist centers of the Kingdom and have more leeway to develop the sector. Its main objective is to provide consumers with the best service at affordable prices, thus to be transparent on hotel rates, tourist accommodation facilities, and the quality of services.

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