HOSPITALITY REPORT | SAUDI ARABIA | FOURTH QUARTER | 2011

> Saudi Arabia Hospitality

Overview Report
WINTER 2011
Colliers International | Accelerating Success | www.colliers-me.com

HOSPITALITY REPORT | SAUDI ARABIA | fourth QUARTER | 2011

Buyer Power
5
4

Hospitality Review

The market area of a hotel is the geographical area that represents the hotels accommodation demand.
In certain countries, demand is generated almost exclusively from the domestic market. In cases where a
significant proportion of total hotel demand emanates from international sources, economic factors outside of
the domestic market must also be evaluated.
An examination of KSAs historical RevPAR and GDP reveals linkages between the countrys hospitality industry
and its economical performance. A correlation nearing 100% suggests that the citys hospitality industry is largely
dependent upon its local economy, whereas a correlation of 50% signals a closer tie with the international
market. Higher than 100% correlation indicates that the hotel market is growing at a faster rate than the economy,
which is likely to occur within premature markets with room for growth such as Jazan, Hofuf, and Hail.
50%

Riyadh RevPAR
Khobar RevPAR

Makkah RevPAR

1 BUYER POWER

Bargaining power of consumers weakens with increasing demand.

However, geopolitical instability and global economic downturns
may negatively impact the hospitality industry, resulting in a
decrease in demand

$200

30%

Medina RevPAR

Jeddah RevPAR
Growth

$150

10%
0%

$100

-10%

Makkah RevPAR
Growth

-20%

Medina RevPAR
Growth

-30%

RevPAR (USD)

Khobar RevPAR
Growth

Percent Change

20%
Riyadh RevPAR
Growth

$50

Differentiation of products and services through branding or the

offering of specialized services can reduce buyer power as substitutes are not easily accessible
Brand recognition together with loyalty schemes may be a catalyst
to attract first time customers as well as repeat business, and can
affect consumers decision making processes
Aside from the high-end market, the majority of buyers are
price sensitive

Supplier
Power

New
Entrants

Substitutes

-40%

2000

2009

The above analysis reveals that hotels in Makkah, Medina,

Riyadh and Khobar are dependent upon their source
markets, while hotels in Jeddah are more contingent on the
performance of the local economy. For Makkah and Medina,
this is due to the fact that a high proportion of visitation
is composed of religious tourism which is not dependent
on external financial forces, while Khobar and Riyadhs low
correlation can be explained by the cities significant proportion of inbound corporate tourism from abroad - particularly
from the GCC region. Jeddah observed the highest RevPAR
to GDP correlation which may be attributed to its status as a
popular leisure destination for Saudi nationals.

2010

City

$0

2011

Correlation between
RevPAR and GDP

Riyadh

-15.0%

Khobar

19.3%

Jeddah

65.2%

Makkah

28.4%

Medina

5.6%

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3 THREAT OF NEW ENTRANTS

Large scale entry into KSAs hotel industry requires substantial

upfront investment in building, specialized equipment, infrastructure
and staff. This high level of required capital investment attracted
international institutions able to benefit from economies of scale.
Consequently, barrier to entry is high
The large number of customers and suppliers make supply chains
and distribution channels easily available, therefore increase the
threat of new entrants
While switching costs in the hospitality industry are negligible, fixed
costs, especially labour, are significant and is dependent on the size
of the business

Low switching costs serve to strengthen buyer power

Increased entry costs resulting from legislation and regulatory

issues may hinder opportunities for new entrants

2 SUPPLIER POWER

4 THREAT OF SUBSTITUTES

Suppliers within the industry refer to hotels, owners, property

and real estate development companies, architectural firms,
engineering companies, etc.

GDP Growth

-50%

Porters five forces include: three forces from

horizontal competition - the threat of substitute
products, the threat of established rivals, and
the threat of new entrants; and two forces from
vertical competition - the bargaining power of
suppliers and the bargaining power of customers.
The following analysis of Saudi Arabia is based on
Porters five forces

$250

40%

Jeddah RevPAR

PORTERS FIVE FORCES ANALYSIS

What shapes the KSA Hospitality Industry

Degree of
Rivalry

Switching costs in the hospitality industry are low to moderate.

However, as the quality and availability of supplier services and
equipment is essential, construction companies tend to have a
particularly strong position. This in turn strengthens supplier power
Training is of vital importance as it has a direct affect on the
performance of the workforce and ultimately on the financial
trading of the company as success within the industry is strongly
influenced by the quality of the service provided
Hotel real estate companies tend to be smaller in size than hotel
operators and as a consequence operate locally rather than globally,
reducing their ability to negotiate favourable supplier contracts.
Hotels can integrate backwards with hotel companies to purchase
and operate their own hotels

A products price elasticity is affected by substitute products.

The serviced apartment and restaurant business are affected by
the threat of substitutes as residential buildings can serve as
alternatives to serviced apartments while home cooking can replace
the need of dining out
Substitutes to other hotel categories include cheaper lodging
alternatives, accommodation through friends and relatives, fractional
ownership establishments, and second homes
Switching costs vary from negligible to high depending on the
chosen alternative, however, the substitute may not offer the full
range of services typically provided by hotels

5 RIVALRY
The industry is heavily fragmented and the branded stock contributes to a marginal percentage of the industrys overall profitability
Low switching costs and rising numbers of brands and branded
properties led to a commoditization of the hospitality product,
therefore increasing competition
The hospitality industry is capital, human resources, IT and marketing intensive, resulting in increased rivalry amongst incumbents
The global economic uncertainty is impacting revenues and assets
of hotel companies. Hotels can benefit from the increasing
demand for prime locations and demand created through
pricing strategies

HOSPITALITY REPORT | SAUDI ARABIA | fourth QUARTER | 2011

Exhibit 3: ADR Performance

(Jan-Sep 2010 vs. Jan-Sep 2011)
Source: STR Global
Average Daily Rate (SAR)
300
2010

150

Source: Colliers Research, 2011

100

$350

50

Riyadh

$300

Source: STR Global

Makkah

Average Occupancy
80%
2010
2011

Dubai

$150

Saudi Arabia

70%

UAE

$200

60%
$100

50%
40%

$50

30%

41.7%
51.3%

Oman

Kuwait
City

Occupancy Growth %
25%
Growth

50.8%
60.2%

Al Khobar

Exhibit 4: Occupancy Performance

(Jan-Sep 2010 vs. Jan-Sep 2011)

Jeddah

Muscat
$200

Bahrain

60%

65%

70%

75%

35%

45%

55%

65%

75%

85%

KSA AND REGIONAL PERFORMANCE

Saudi Arabias tourism industry is unique in that
despite the countrys limitations on entrance visa
regulations, the industry is observing strong growth
potential. However, regional uncertainty and changes
in the political landscape may heighten security risks
and place downward pressure on Saudi Arabias
tourism arrivals. Forecasts indicate that the number
of tourist arrivals will grow by a YOY average of 6%
until the end of 2015. One of the main drivers for the
industry is religious tourism.
A regional comparison reveals that at an average
occupancy of 59.3% during the first eight months of
2011, Saudi Arabias hospitality industry follows Qatar
at 59.4% and UAE at 69.2%. The data also suggests
the KSAs Average Daily Rate (ADR) of USD 197.93
between January and September 2011 is comparatively lower than the regional standard. This indicates
room for improvement within KSAs hotel industry.

Key Performance Indicators for Major Cities in KSA

Riyadh experienced the highest national ADR over
the first 9 months of 2011 at an average rate of USD
266. This 6% increase from the same period last
year is largely attributable to increases in corporate
tourism. A comparison of regional ADRs reveals that
Riyadh outperformed all other key cities in the Middle
East, with a higher daily rate than Manama, Kuwait
City, Muscat and Dubai.
Jeddahs average occupancy exceeded that of all
other cities in Saudi Arabia. The city was bolstered
by a strong leisure segment between January and
September 2011, exhibiting average occupancy levels
of 69.6% up by 1.4% from the same period in the
previous year. On a regional level, Dubai was the
only city to outperform Jeddah with occupancies
of 73.2%. Riyadh and Makkah observed the second
and third highest national occupancy for the defined
period, at 63.0% and 60.2%, respectively.

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Saudi Arabias overall ADR between January to September 2011 increased by

9.0% from the same period in the previous year. This increase was felt in most
major cities throughout the Kingdom with Jeddah and Riyadh experiencing
moderate ADR growth, and Makkah and Medina experiencing significant YOY
growth. The exception to this trend was Al Khobar, which experienced a fall
of 2.3% in ADR due to the citys increasingly aggressive pricing strategies.
Much of the national growth in occupancy rates was driven by Al Khobar, Makkah,
and smaller emerging cities such as Hail, Abbha, Jazan, and Taif.
Saudi Arabias national Revenue Per Available Room (RevPAR) over the first
9 months in 2011 increased by 19.1% from the same period in 2010 due to a
surge in domestic and international demand. Al Khobar and Makkah exhibited the
highest RevPAR growth, while Jeddah and Riyadh observed the least growth at
8.4% and 12.4%, respectively.

Al Khobar Jeddah Makkah Medina Riyadh

0%

Exhibit 5: RevPAR Performance

(Jan-Sep 2010 vs. Jan-Sep 2011)
Source: STR Global
Average RevPAR (SAR)
180
2010
160
140

2011
Growth

120
100
80
60
40

RevPAR Growth %
40%
251.6
266.2

55%

30%

20%
15%
10%
5%

20
0

35%

25%

100.9
118.3

50%

212.0

45%

183.7

40%

5%

192.5
204.5

35%

15%

10%

193.3
188.8

$-

20%

10%

20%
$175

-5%

Manama

$250

Kuwait

0%

Al Khobar Jeddah Makkah Medina Riyadh

68.2%
69.6%

Qatar
$225

5%

59.4%
63.0%

$250

56.5%
56.9%

Source: Colliers Research, 2011

15%
10%

100.9
118.3

Exhibit 2: Key City Performance Analysis

183.7
212.0

Exhibit 1: Regional Performance Analysis

193.3
188.8

200

251.6
266.2

2011
Growth
192.5
204.5

250

ADR Growth Rate %

20%

Al Khobar Jeddah Makkah Medina Riyadh

0%

HOSPITALITY REPORT | SAUDI ARABIA | fourth QUARTER | 2011

With 61,319 hotel rooms, Makkah features the most hotel accommodation in the region.
This dwarfs that of other major cities in Saudi Arabia with Khobar, Medina, Jeddah and
Riyadh offering 12,186, 7,890, 11,500, and 10,514 rooms respectively.
Makkah will likely observe more hotel expansion than its counterparts as an additional
13,200 rooms come into the market over the next three years, representing an 18%
increase in supply. It is anticipated for Medina to see an injection of 5,436 rooms into
the market over the same period, representing a 41% increase in supply.

Riyadh

Market Outlook Emerging Markets

Al Ahsa

Jeddah

Named after the Al Ahsa-Oasis, Al Ahsa is the largest governorate in the Eastern
Province, covering more than 25% of KSAs land area. It is primarily a leisure destination, with major attractions including Juwatha Mosque, Ibrahim Castle, Al Uqair Fort,
King Abdulla Park, Gara Mountain, Ahsa Heritage Museum, and Uqair Beach Resort.
Al Ahsas summer festivals are also major demand generators, the most prominent of
which is the Al Ahsa Summer Festival, which attracted 125,451 tourists to the region
in 2011.

Jeddah outperformed all cities in occupancy levels on the backdrop of a strong

domestic leisure segment which will be compounded in the future by the redevelopment of the Corniche area. This leisure demand profile will be further
augmented by Makkahs expansion plans which will have a knock on effect to
Jeddah as the gateway to the holy city. Jeddahs lack of quality serviced apartments represents an under-served segment within the real estate industry.

Hail

With the major redevelopment projects around the Haram area such as Jebel
Omar, Jebel Khandama, the infrastructure development programs, and the King
Abdul Aziz Road Project, it is clear the government is preparing Makkah for
increased religious visitation.

Al Hofuf

Hofuf lies in the Eastern Province of Saudi Arabia at the center of the Al-Ahsa Oasis.
The districts economic significance is largely due to its proximity to Ghawar Oil Field,
one of the largest land based oil fields in the world. The most significant tourist attraction in Hofuf is the Qasr Ibrahim, a fort of historical importance.

Abha

Located 3,200 above sea level in southwest KSA, Abha is known for its attractive
mountainous landscape. Abha is a popular vacation destination for people across the
region, due to its moderate climate and major tourist attractions such as the Al Miftaha
Art Village at the King Fahad Cultural Center, Aseer National Park, and Shada Archeological Palace. Only 4% of Abhas visitation is business related, while approximately
94% visit the region for VFR, leisure and shopping.

Jazan

Situated on the Red Sea, Jazan is a major shipping port in the southwest region of
Saudi Arabia. Approximately 95% of the regions tourism is VFR, shopping or leisure
related; with corporate tourism representing 3% of the citys total visitation. According
to the SCTA, Jazan offers only 3 hotels while the citys 47 furnished apartment establishments are largely characterized as unbranded stand alone assets.

Taif

Largely a leisure destination, Taifs major tourist attractions include The King Fahd
Park, Taif Gardens, Shubra Palace, Wahab Crater, the Turkish Fort, Souq Okaz, Al Qua
Mosque, Okaz Museum, The Ekrima Dam, Kakki Palace and Al Katib Palaces. Only 2%
of Taifs visitation are business related while 95% visit for VFR, shopping or leisure
purposes.

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75

The Riyadh hospitality market is the strongest in the Kingdom with inbound
corporate tourism comprising the bulk of the citys total visitation. High average
room rates for all segments in Riyadh have lead to occupancy thresholds which
are supportable by the market.
Due to the high number of quality hotels in the pipeline, upscale hotels should
be considered only for prime and exclusive locations within the city centre. Full
service and midscale hotel may be considered for strategic sites or as dual brand
combinations.

Located in the north of Saudi Arabia in close proximity to Madinah and Qaseem, Hail
Province covers approximately 6% of the Kingdoms land area. VFR, leisure and shopping encompass approximately 77% of total visitation to Hail, confirming the provinces
significance as a major leisure destination.

Exhibit 6: Hotel Supply

Market GAP

70

65

Makkah

The Haram area is underserved by upscale and full service hotels offering
quality F&B, and health and fitness facilities while there remains a market gap for
midscale hotels and serviced apartments within walking distance of the Haram.
There is ample opportunity for the development of mid market, modern hotels
throughout Makkah and on available land within 2km of Haram, given the hotels
are to be constructed as a part of a mixed use scheme offering good quality retail
outlets and/or shopping arcades.

60
Thousands 000s

HOTEL SUPPLY

15

Medina

Similar to that of Makkah, Haram and its surrounding areas are undergoing
significant redevelopment and expansion. The land north of Haram is a prime
location for hospitality developments due to its existing infrastructure and ease
of access to the Holy Mosque, whereas the land south of the Haram is an important secondary market.

10

Upscale and full-service hotels may be introduced to northern Haram while

branded serviced apartments could be viable south of the Haram.

Dammam / Al Khobar

The Dammam/Al Khobar market experienced strong occupancy rates and

RevPAR growth between 2010 and 2011, which is a trend likely to continue
throughout 2012. With a strong corporate profile, the oil industry will continue
to bring significant corporate demand to the region for the foreseeable future.
Upscale hotels may be considered along the Corniche with strong supporting
health and recreation activities while high-end branded serviced apartments
could be considered on or in close proximity to the Corniche.

Al Khobar Medina Jeddah Riyadh Makkah

2011 Existing Supply
2012 Additional Supply

2013 Additional Supply

2014 Additional Supply

Conclusion
Over the last 12 months, the KSA market observed a high level of capital
injection into the hospitality industry by domestic investors. Many projects
recommenced as domestic investors moved their Assets back to Saudi Arabia
as a result of the recent global economic uncertainty. Although unprecedented
expansions are expected as the industry matures, the quality branded serviced
apartments segment is still underserved by the countrys hospitality sector.
The KSA hospitality market continues to represent opportunity for modern,
branded mid market hotels. Branded boutique hotels located in key cities such
doms Generation Y. This generation currently constitutes circa 50% of the

OUR TEAM
lifecycles:
Destination / Tourism / Resort Strategies
Market and Financial Feasibility Study
Development Consultancy and
Highest and Best-Use Analysis
Operator Search and
Contract Negotiation

About Colliers International Hospitality

Project Monitoring

Colliers Internationals hospitality division is a global network of specialist

consultants in hotel, resort, marina, golf, leisure and spa sectors, dedicated to
providing strategic advisory services to owners, developers, governments and
institutions, and to extract optimal values from projects and assets. The founda tion of our service is the hands-on experience of our team combined with the
intelligence and resources of a global practice.

Asset Management / Operational

and Financial Performance Review

ment of the hospitality process. Our regionally based hospitality centre of excel lence combines our understanding of the local cultural and business dynamics

Key Highlights
Strategic Advisory and Hospitality Capital Valuation for more than
20,000 keys with a total asset value in excess of SAR 15 Billion
Hotel Operator Search, Selection and Contract Negotiation in excess
of 2,500 keys with client savings averaging SAR 11 million

Site and Asset Investment

Strategy / Brokerage
RICS Valuations /
Corporate Finance / IPOs
Concept Developments
Mystery Guest / Brand Auditing
Investment Memorandum
Product Mix and Pitch Specifcation
Capital Expenditure Review /
FF&E Procurement

In excess of 4,200 keys proposed within Highest & Best Use and
Market & Financial Feasibility Studies for Hotels & Serviced Apartments
Highest & Best Use, Market & Financial Feasibility Studies for Hotels
& Serviced Apartments with a total estimated net asset value in excess
of SAR 16 Billion
Largest Investor Database in the region with more than 3,000
active investors
Extensive Database of hotels in the Kingdom of Saudi Arabia
For further information please contact:
Imad Damrah
Country Director, Saudi Arabia
idamrah@colliers-me.com
Filippo Sona
Head of Hotels and Resorts
fsona@colliers-me.com
Colliers International
PO Box 5678 Riyadh 11432 | KSA
Main: +966 1 217 9997
Mobile: +966 50 417 2178