_How is the Mekkah hospitality market adapting to changes?
In order to facilitate religious tourist inflows, there have been longstanding plans to upgrade the existing infrastructure. While most are still under development, the most recent of these to come to market is the Haramain High Speed Railway which was inaugurated in September 2018.
The 450 km line will improve travel times within the Western Region, and help to alleviate the capacity constraints of Makkah. Initiatives such as these are a positive signal that the government is investing in the infrastructure required to facilitate the goal of increasing visitor quotas.
"Increasing visitor quotas from approximately 10 million currently to 15 million in 2020 and 30 million in 2030."
The hospitality supply across Makkah is dominated by low quality, standalone properties, with 50% of the total room supply classified two star or below. While official records indicate that there are 264,000 hotel and serviced apartment rooms across the city, only 22,000 can be classified as quality supply - which not only highlights the need for quality hospitality accommodation, but also serves as a reflection of the guest profile given that affordability is a primary concern for most pilgrims.
The pipeline of quality hotel offerings are dominated by 4-Star properties, which account for 55% of the forthcoming 21,806 quality keys estimated to enter the market by 2021.
Trading performance
Performance in Makkah’s hotel market has been softening in recent years, with RevPAR levels falling to SAR 431 in 2017, representing a decline of 15% from the previous year.
In the short-term, overall occupancy and average daily rates are anticipated to face continued pressure, and hotels in primary locations will prove to be the most resilient. Given historic precedence, performance declines disproportionally impact properties that are not on the front line in times of subdued demand, and as a result such properties are far more susceptible to market shifts. As such, it is not uncommon for properties in these locations to run at annual occupancy levels in the range of 30%-40% compared to 70%-80% on the front line.
While YTD August hotel performance in Makkah appeared to indicate that performance declines had bottomed out, this was not the case. The improvement was attributable to differences between the Gregorian and Hijri Calendars.
Conclusion
Like most major GCC cities, the hospitality sector in Makkah has faced headwinds in recent years due to a variety of factors. The opening of the Haramain High Speed rail and significant progress with the enhancement works at King Abdulaziz International airport are strong signals that the infrastructure is catching up to governmental ambitions for the city, but ultimately legislative and financial constraints still need to be fine-tuned in order to fully maximise the potential of inbound visitation.
As mega developments continue to be announced and executed, we expect the government to relax visa quotas and increase tourist flows sharply in the short to medium term. In turn, as the city becomes more developed, the expectation is that the values of prime real estate - particularly on the front line of the Haram - will increase at a disproportional rate in relation to stock further from the Haram.