In the past year, Saudi Arabia has emerged as a major hospitality market in the Middle East and North Africa region. By all accounts, its tourism sector is set for bullish growth over the next few years, with the World Travel and Tourism Council (WTTC) expecting a flow of 22.1 million international visitors by 2025. Travel and tourism currently accounts for 9.4 per cent of the country’s total GDP, with traveller expenditure growing by 10.5 per cent annually.

Tourism’s contribution to GDP is meanwhile projected to stabilise at an average of 7 per cent for the next five years, reaching SR138bn ($36.8bn) by 2023, according to Simon Townsend, head of valuation, advisory and consulting for the Middle East, North Africa and Turkey at CBRE.

He comments: “The kingdom’s strong focus on advancing the entertainment and tourism sectors will continue to have an overwhelmingly positive effect on the nation’s real estate industry and a trickling-down effect on a number of sectors, including infrastructure, logistics, hospitality and retail.”

Unprecedented scale

All this activity is a direct result of Saudi Arabia’s mandate to diversify its economy away from oil. Megaprojects are one of the most prominent ways in which Riyadh hopes to achieve this diversification. To that end, the Public Investment Fund has launched developments of unprecedented scale, including Neom, the Red Sea development project, Amaala, Qiddiya District, the Wadi al-Disah development project and Al-Ula.

A hospitality offering is an integral part of these developments. The first phase of the Red Sea project, for example, includes 14 hotels with 3,000 rooms across five islands and two inland resorts. When fully completed in 2030, 10,000 hotels rooms will be on offer.

However, it will take just over a decade for these projects to be realised. Until then, there are plenty of opportunities that the kingdom’s tourism sector can take advantage of. Real estate services provider Savills’ latest report notes that recent tourism growth in Saudi Arabia has been driven by three key demand pools: leisure, pilgrimage and corporate visitors.

Hajj and umrah visitors are expected to reach 30 million by 2030, according to Savills, and the launch of the e-visa scheme in 2018 has made access easier for potential visitors. Furthermore, the Sharek e-visa portal – which was initially restricted to visitors attending specific events – is expected to be opened to general leisure visitors in 2019, further increasing accessibility to the kingdom.

Hotel performance

Hotel occupancy levels have also been boosted, with the average length of stay of foreign travellers climbing from 9.7 days to 11.3 days during 2018. Savills attributed this to the 30-day visa extension available for umrah visitors. The increase is not just due to cultural and religious tourism, however. WTTC’s 2018 report revealed that 52.8 per cent of tourist spending in Riyadh is accounted for by corporate visitors.

Carlos Khneisser, vice-president of development in the Middle East and North Africa for Hilton, says: “The country has for years been the economic powerhouse of the GCC and the wider Middle East region, and has huge potential for both domestic and international travel. Obviously religious travel has been a significant driver of tourist arrivals into the country, but with the loosening of some visa laws to allow visitors in for a variety of events and activities, we expect to see visitor numbers to the kingdom grow over the medium to long-term.”

In addition to the growth in visitor numbers, the kingdom also witnessed a 13 per cent increase in the number of hotel rooms during 2017, with an extra 48,000 under construction, according to market tracker STR.

These under-construction rooms represent a 51.4 per cent portfolio increase for Saudi Arabia. As of October 2018, STR reported that these accounted for a 37.9 per cent share of all rooms being constructed across the Middle East.

Growth forecast

CBRE predicts positive growth for the hotel sector. As Townsend comments: “Hotel developers are hoping to benefit from the planned expansion of tourism in the capital by delivering an additional 39,700 additional room keys across the kingdom, with Riyadh experiencing a 4 per cent growth in occupancy.”

Over the past few years, international hotel companies have continued to make inroads into Saudi Arabia, with a number of operators keen to sign partnerships across the country.

Currently, Hilton and Accor count Saudi Arabia as their largest pipeline in the region, with more than 10,000 and 12,000 keys in development over the next few years, respectively. Khneisser says: “Saudi Arabia has long been the region’s most important market and largest economy, and anyone doing business in this part of the world knows that they need to be doing business in Saudi Arabia.”

Future vision

Opening properties is not an activity reserved solely for established companies – newer operators are also keen to lock in deals in the kingdom. Mixed-use operator Kerten Hospitality, for example, will be debuting its first Saudi Arabia project in the third quarter of 2019: the House Hotel, Jeddah.

Kerten Hospitality’s CEO, Marloes Knippenberg, says that when the company first started its expansion more than two years ago, Saudi Arabia was not a major focus, but reforms in the country – including Vision 2030 and its focus on mega-developments – changed that. “We got connected with some visionary owners, who were not simply looking for a five-star, big brand, but were looking to enter a particular niche and different brands,” she adds.

“Our visions instantly clicked and we launched our Saudi journey together, and started creatively collaborating for a positive impact together.”

Another positive impact of the tourism and hospitality growth is its expected effect on the job market. The Red Sea Development Company’s CEO, John Pagano, explains that the project will create jobs, cultivate entrepreneurial activity and drive economic development in line with the objectives of Vision 2030. He adds: “By completion, the destination will directly employ about 35,000 people and support an equivalent number of jobs in the wider community by creating opportunities for local businesses, entrepreneurs and supporting industries.”

CBRE’s Townsend adds that the increasing number of investments from the public and private sectors overall will translate into 300,000 jobs by 2020.

Hilton’s Khneisser says the able and existing workforce is a strong reason to do business in the kingdom as well. He notes: “With a population of some 35 million people, it has by far the largest workforce in the region, and combine this with the fact that it is a young and educated workforce and you have a very compelling reason for wanting to do business in Saudi Arabia.”

Khneisser continues: “This allows us to support the wider National Transformation Programme and Vision 2030 goals as we will look to recruit thousands of people to work in our hotels across the country, including the Avenues-Riyadh, and some 50 per cent of these people will be Saudi Arabian nationals.”

Potential obstacles

According to a recent report from management consultant TRI Consulting, there are several potential challenges that will need to be addressed if a smooth and sustainable growth in the tourism and entertainment sectors is to be ensured. These include competition from neighbouring countries, safety and security, visa regulations, ease of access and private sector investment.

Saudi Arabia has been confronting these obstacles with a range of initiatives and campaigns, and while the kingdom may be later to the tourism game compared to neighbouring countries, it is more than making up for this with its serious approach to the investment needed to diversify the economy.

By Devina Divecha

Hospitality report