Saudi Arabia leads hotel pipeline

27 March 2013

Confidence in the region’s hospitality sector is high, despite uncertainty resulting from the Arab uprisings. A wave of hotel construction is under way and the kingdom is a key market

Despite the challenges of the past two years brought about by the political unrest that swept the Middle East and North Africa (Mena) from December 2010, confidence in the region’s hotel industry is high. A wave of hotel construction is under way that will see some of the world’s leading hotel operators double their portfolio in the region over the next three to four years.

Strong economic growth, expanding middle classes and improved transport connections with the rest of the world are driving investment in the Mena region’s hotel industry. Hospitality industry tracker STR Global estimates there are 491 hotels with 120,524 rooms planned or under way (excluding pre-planning) in the Middle East and wider Africa region.

In March, MEED surveyed international hotel groups about their existing portfolios in the Mena region and their project pipelines. The findings confirm the immense programme of hotel construction planned for the region and show that the biggest markets for hotel construction activity are Saudi Arabia and the UAE.

Development pipeline

Of the respondents, Hilton Worldwide has the largest hotel development pipeline, with 45 properties and more than 15,845 rooms planned for the Mena region. The openings will more than double its existing portfolio of 44 properties and 13,696 rooms. At present, Hilton’s largest footprint is in Egypt, where it has 19 hotels and 6,710 rooms, following the opening of the Hilton Alexandria Corniche on 25 March. But the size of its portfolio in Saudi Arabia will overtake this in the next few years.

The demand in the luxury market [in Saudi Arabia] has been very strong

Kapil Aggarwal, Hyatt International

Marriott International has the second-biggest pipeline, with 38 properties and 9,801 rooms. Starwood Hotels & Resorts Worldwide and Rotana Hotel Management are equal third with 34 hotels planned for the Mena region. These are not necessarily the largest pipelines in the region, as several of the world’s largest hotel operators did not respond to the survey including Accor, Intercontinental Hotels Group and Carlson Rezidor, each of which have a sizeable portfolio in the Mena region. The market with the most number of openings planned is Saudi Arabia, with a pipeline of 46 hotels. It is followed by the UAE, with 44 hotels. The findings are borne out by STR Global’s latest pipeline report that says Saudi Arabia is expected to see the highest supply growth, followed by the UAE.

Of those surveyed, the operator with the largest pipeline for Saudi Arabia is Hilton, which has 16 properties planned with 7,127 rooms across its brands including Hilton Garden Inn, Double Tree by Hilton, Conrad Hotels & Resorts and Hilton Hotels & Resorts.

Marriott, has the second-largest pipeline;  it plans to open 2,233 rooms across seven properties in Riyadh, Mecca and Jizan by 2015. Hyatt International also has seven hotels in the making, with 2,200 rooms in Riyadh, Mecca and Jeddah. Starwood, meanwhile, has six properties due to open in the kingdom by 2015.

Nearly all the companies surveyed cited Saudi Arabia as a key market for development. “For the past couple of years, the demand in the luxury market [in Saudi Arabia] has been very strong. Business travellers are facing challenges in reserving branded accommodation,” says Kapil Aggarwal, vice-president sales and marketing for Southwest Asia at Hyatt. “Our two main openings this year within the Mena region will be in Saudi Arabia.”

The current limited options for accommodation mean the kingdom has some of the highest room rates in the Middle East. Jeddah in particular has high occupancy rates of nearly 80 per cent. Hotel operators are keen to expand their presence in Saudi Arabia, as it is experiencing strong economic growth. Riyadh is looking to expand the tourism industry significantly in the years ahead, increasing visitor numbers from 10 million a year to 20 million by 2020.

Target market

“Saudi Arabia has the most robust economy in the region, but at the same time, it is slowly diversifying into other areas like real estate, consumer products and tourism,” says a spokesperson for Hilton. “Due to the oil trade and up-and-coming infrastructure projects around the country, the kingdom has attracted a number of business travellers, creating a demand for hospitality options that range from upscale brands, such as Hilton Hotels & Resorts, to mid-market brands, like Hilton Garden Inn.

We are … recruiting key candidates and are trying to stay ahead of the curve in the competition for talent

Spokesperson for Hilton Worldwide

“Also, as the seat of two of the holiest sites in Islam – Mecca and Medina – the kingdom attracts thousands of pilgrims on Umrah or Hajj all year round. This ensures a non-seasonal destination with a strong global target market. We also have the chance to support Saudi Arabia’s fledgling leisure tourist segment as it works towards attracting larger numbers of visitors to its historical and cultural attractions.”

In the UAE, it is Starwood that has the largest hotel development pipeline, with 12 hotels scheduled to open, offering a combined 4,499 rooms. Six of these are in Dubai. Hilton has the second-largest pipeline, with nine hotels scheduled to open with 2,904 rooms, across brands including Waldorf Astoria and Double Tree by Hilton, adding to its 11 properties already in the country.

That the UAE has the second-largest hotel development pipeline shows that hotel operators and owners are unconcerned by the threat of overcapacity, despite the huge numbers of rooms that have entered the market in recent years.

Regional spillover

After struggling during the global financial crisis, the main tourism markets of Dubai and Abu Dhabi are recovering, aided by the spillover effect from social unrest elsewhere in the region. Although supply is currently ahead of demand in Abu Dhabi, visitor numbers are continually rising driven by the expansion of Etihad Airways. Dubai’s economy, meanwhile, has rebounded strongly after flirting with bankruptcy in 2009 and hotel operators are reporting stellar performances.

Starwood says average occupancy in its 14 hotels in Dubai during 2012 was 83 per cent, with several above 90 per cent. Rotana, meanwhile, says its properties in Dubai are currently close to 100 per cent occupancy.

Other significant markets were Egypt with 14 hotels planned, Qatar with 13 hotels, Jordan with 12 and Iraq, which had a pipeline of 11 properties. The interest in these markets reflects the long-term confidence in Egypt as a tourism destination with its rich cultural heritage, despite the current political turmoil deterring visitors to the country. Average occupancy in 2012 was just 47 per cent in Cairo. The coastal resort of Sharm el-Sheikh, which has largely avoided unrest, enjoyed a much better performance with nearly 70 per cent occupancy.

Iraq projects

The focus for hotel investment in Iraq is the northern Kurdistan region, which has forged itself a role as the country’s commercial centre. The hotel openings planned for Erbil include the 264-room Kempinski hotel due to open in 2016, the 200-room Erbil Marriott hotel (2015), the 200-room Karbala Rayhaan by Rotana due to open this year, and two hotels from Hilton, which will add 500 rooms. Starwood has also signed deals for three hotels in Erbil to open in 2015-16. Continued security concerns are dampening enthusiasm to open properties elsewhere in Iraq, however. 

“We are watching other major markets in Iraq,” says Simon Turner, president of global development and acquisitions for Starwood. “One of the things we pride ourselves on is not only the quantity of our growth, but the quality of our growth and we are very careful when we go into those kind of markets to make sure it is the right asset in the right location with the right owner, and we haven’t found the right set of circumstances in Baghdad yet.”

Qatar’s hotel market is witnessing increasing investment as it prepares to host football’s Fifa World Cup in 2022. The country has to build about 60,000 hotel rooms to meet the commitments in its bid documents. Its hotel pipeline is expected to expand considerably in the years ahead, although some operators are cautious over the long-term sustainability of the country as a travel market.

The flood of new hotels into the Mena tourism market is having two inevitable consequences. The first being increased competition for custom. Competition is particularly an issue in Abu Dhabi and Qatar, where demand is growing slower than supply. But in future, as the pipeline of projects in Saudi Arabia is completed it too will become a more competitive market.

“2012 was a year in which all properties were tested against one another, tested primarily on guest experience but also location and value for money,” says Hyatt’s Aggarwal. “The increase in supply across the region creates a very competitive market, which is good for the industry and good for the consumer.”

The second consequence of such a vast building programme is increased competition for staff to run the properties. The hundreds of hotels planned and under construction in the region will require hundreds of employees, from backroom operators and cleaning staff to food and beverage managers and skilled restaurateurs.

Talent shortage

“In terms of [the biggest] challenges, it continues to be recruitment, “ says the Hilton spokesperson. “We have 45 properties in the pipeline at the moment, which effectively means we will double our presence within the region in the next few years. We have the largest active pipeline in this region as well, so have properties en route to completion. This means we are already recruiting key candidates and are trying to stay ahead of the curve in the competition for good talent.”

To prepare for the growing talent shortage in the Mena hospitality sector, Dubai’s Jumeirah Group established the Emirates Academy of Hospitality in 2001. It offers undergraduate and postgraduate degrees in hotel management and the strongest graduates are guaranteed employment with the Jumeirah Group.

Despite such challenges, the Mena region forms a huge part of the portfolio of international hotel operators and its importance is growing. With the number of people travelling to the region expected to reach 195 million by 2030, the future is bright.

Key fact

The market with the most number of hotel openings planned is Saudi Arabia, with a pipeline of 46  hotels

Source: MEED

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