Keys to the kingdom: Saudi Arabia

This article originally appeared in Hotel Management International magazine

As the kingdom looks to diversify its assets and boost employment, Saudi Arabia’s hotel sector is experiencing unprecedented growth, with the country’s hospitality industry forecast to be valued at $93 billion within the next five years. But where is the demand coming from and what is driving investment? Oliver Hotham speaks to Elie Milky of Carlson Rezidor and Deloitte’s Grant Salter about why the state is catching up with its historically more hospitality-oriented neighbours.

Traditionally, the Hajj is what brings most tourists to the Kingdom of Saudi Arabia. Every year, roughly three million people arrive in Mecca during the month of Dhu al-Hijjah to touch the black stone in the heart of the city, and hundreds of thousands converge on the Grand Mosque to perform a series of rituals, before leaving to celebrate Eid.

Religious pilgrimage has made it the world’s 19th most-visited destination, but despite exalted status at the heart of the Muslim world, as well as being a regional military and economic superpower, the Kingdom of Saudi Arabia has traditionally lagged behind its Gulf neighbours when it comes to branded-hotel development and tourism.

Yet, a boom seems to be in the pipeline. Saudi Arabian destinations now account for two of only four markets in MENA with over 5,000 rooms in the works, with the kingdom’s two largest cities, Jeddah and Riyadh, forecast to see 16,000 new hotel rooms, of which over 50% will be part of five-star developments, spring up by 2018.

The industry is excited, with international players pouring significant amounts of focus into new projects. Starwood is set to double its portfolio in the kingdom, with the upcoming introduction of its Aloft brand in Riyadh and the eastern oil city of Dhaharn, as well as the opening of Le Méridien Riyadh. Accor, which already has 14 hotels in the country, plans to open 26 new properties by 2018, accounting for a total of 10,000 rooms in-country. Hilton is getting in on the action, too, with eight properties already in operation and a pipeline of close to 30 hotels.

Enter, new player

IHG is also making big plans for the market. At May’s Arabian Hotel Investment Conference, the group signed a franchise agreement for the first Holiday Inn in Tabuk with Dur Hospitality, formerly known as Saudi Hotels and Resort Company. It will be the first hotel to be developed under the master development agreement signed between IHG and Dur Hospitality Company in 2014, and more Holiday Inn hotels will be developed across Saudi Arabia over the next five years.

“We have welcomed positive development news by the Saudi Government to maximise the country’s potential as a business and leisure travel destination,” IHG chief operating officer for India, the Middle East and Africa Pascal Gauvin said in January.

“From its aim to position the kingdom as a substantial meetings destination, to a 400% growth forecast in domestic tourism from 128 million to 640 million nights by 2019, the industry has much to do in anticipation of the expected tourism influx in the coming years.”

The objective, said Gauvin, was to up the number of rooms in the pipeline to meet this new demand, and he argued that there is still a pressing need to add more rooms to cater to the expected increase in visitor numbers. In short, the hotel industry isn’t keeping up with demand: “That is why we are continually looking out for growth opportunities to add to the 3,000 rooms in our pipeline, which will open within the next three to five years,” said Gauvin.

The Saudi hotel boom is as much to do with regional politics as it is about the country’s expanding tourism sector. The kingdom’s tightly controlled and centrally planned economy plays a huge role in this, from driving demand for religious and domestic tourism to investing in infrastructure projects.

“Everything the government is doing is for the sake of infrastructure and hospitality in the region,” says Elie Milky, senior director for business development, Middle East and Africa, for Carlson Rezidor.

“The way it is spreading investment across the country is calling for more quality hotels. They’re encouraging investors to build more, and the fact that there is stability in Saudi Arabia makes it easy to keep investment, which is at an all-time high.”

A different state of mind

Historically, there’s been little motivation by business and the state to move away from petroleum, argues Grant Salter, who serves as director at Deloitte’s travel, hospitality and leisure advisory for the Middle East, but the recent fall in oil prices, he says, has spooked many into placing bets on less-unpredictable assets.

“Saudi has not needed, historically, to rely on other sources of revenue outside of the petrochemical industry – the motivation hasn’t been there to drive tourism forward in a meaningful way,” he says. “They’ve needed to refocus efforts on building out other components of their economy.”

Elie Milky echoes this assessment, arguing the kingdom is looking to develop a more diverse economy that can drive job creation in a variety of fields – of which hotels are just one.

“They need to diversify investments because oil may run out in a hundred years, and the recent fall in prices is leading a lot of investors to speed up diversifying investments into the non-oil sector,” he says. “Many cities in Saudi Arabia are specialising in the non-oil industry, and they need to continue developing that.”

The state also has ways of indirectly boosting demand for hotel rooms. The visas that the Ministry of Foreign Affairs elects to issue every year, for example, essentially dictate how many people can, and will, come to the kingdom. Grant Salter says the state is becoming increasingly generous: the number of pilgrims is expected to double in the coming years and it set to reach five million by the end of 2015.

“The build-out of hotels and growth of tourism is directly related to the number of visas they issue, or plan to issue,” he says. “And, as a consequence, the number of keys in Meccah, Medina and Jeddah to a lesser extent, are directly influenced by the numbers of visas that they seek to issue. Those numbers have grown somewhere around 5-7% year on year going back for the past eight or nine years.”

Visa changes and implications

The new Umrah Plus visa, launched in 2013, is also giving religious tourists from over 65 nations more flexibility, allowing increased freedom to travel to other religious sites across the kingdom in tandem with the pilgrimage to Mecca.

But to see this as driven by religious pilgrimage is to see only part of what’s causing the boom. Of course, it’s key to the Saudi leisure business, but as Salter points out, the vast majority of people coming to Saudi Arabia for Hajj might not be looking to spend big money on a mid-scale hotel for a week or two.

“For them, when they scrape together money with family and everywhere else to make the journey, they’re doing it on sixpence,” he says. “These kinds of travellers often don’t have the capacity, of time or funds, to do anything other than get in on an Umrah package, do their thing and leave.”

State investment can only help build hotels, and crucial to guaranteeing the long-term viability of the Saudi hotel sector is boosting demand and tourism across the country, not just in religious centres. Milky admits that the boom is, in many cases, supply driven, spurred by ambitious hotel-building and infrastructure projects.

The question is where the customers are going to come from. The answer to this lies closer to home, with the country’s burgeoning middle class. As Saudis become richer, the country’s already thriving domestic tourism industry is rapidly growing, says Milky, and as demand grows for more resorts across more destinations in the kingdom, more hotels are needed.

“It’s a big country,” he says. “Saudis love to travel abroad, but sometimes they love to stay within the country, especially when they’re with their families, they don’t want to go to too many, let’s say, ‘liberal’ places like Dubai or Beirut, London or Paris.”

Not too far

The instability of the wider Middle East, too, is making Saudis more cautious about travelling to traditional destinations, pushing in-country demand for the kinds of resorts and hotels that might have historically been found abroad. Maintaining internal political stability is also central to the government’s push to invest in its hospitality infrastructure – making sure wealth is distributed evenly among all its provinces is key to guaranteeing the kingdom does not go the way of many of its neighbours.

“There’s caution from those who would have gone to places like Syria, Lebanon, Jordan or Egypt, to a lesser extent,” says Salter. “They now have quite legitimate concerns in terms of wanting to go to those destinations.”

“A lot of this is for political reasons,” agrees Milky, who believes the state is keen to make sure that the country’s wealth is distributed across the country in a range of investments, to keep its social services and education well funded, as well as to reduce unemployment.

These Saudis want to stay in luxury hotels when they travel across the country, and might also want to invest themselves, according to Milky. The kingdom is wealthy, with a GDP per capita of $52,183, and many citizens might want to invest themselves – it’s a circular process, in other words, with middle-class Saudis boosting demand for a glamorous sector that they are also keen to invest in it.

“You have a lot of high-investment individuals, a lot of companies,” say Milky. “They want to diversify their investments, from construction to retail, oil and gas, real estate and hospitality, to complement the infrastructure development from the government.”

With the growth of international brands more accustomed to working in Monaco than in Mecca, the kingdom’s hotel boom certainly comes as a surprise, and with its staunch conservative and traditionalist culture – as well as restrictions on tourism visas – it seems unlikely that it will become a tourism hotspot any time soon. But many are convinced its hotel sector is a good bet, with a young and upwardly mobile population driving demand (and investment) for a wide range of brands and developments across the country, and building an offering beyond religious tourism.

“It’s already a big trend, and it’s going to continue to grow, and there will be more supply-driven demand moving forward,” says Milky. “These Saudis are wealthy enough to travel around, and as they decide to stay in Saudi, more [will] want an option in the country.”

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