A Look at Real Estate in the Holy

City of MakkahDr. Ehsan Bayat

A Look at Real Estate in the Holy City of Makkah• Due to its history as the birthplace of Muhammad, its designation as a

pilgrimage destination, and the presence of the Holy Mosque, the city of Makkah plays a significant role in the tourism and hospitality sectors in Saudi Arabia. The mosque is situated at the center point of the city, and the surrounding area features a burgeoning hotel market that constitutes a significant percentage of the local economy. Given the prominence of tourism, other segments of the Makkah real estate market tend to be overlooked.

• The outer circle of Makkah is home to most of the city’s nearly 2 million residents, and almost half of the working class holds jobs in the public sector. Employment and income have been significant topics of interest lately, as the government has been searching for ways to bolster the private sector, and affordable housing is hard to come by. Measures such as the White Land Tax and the National Transformation Program, each of which have real estate implications, are in place to help address the current economic challenges.

• In a large-scale report on real estate in Makkah, JLL outlines key developments in the market landscape in 2016 and offers a few insights for the future. Here are a few highlights of the residential, retail, and office segments:

Shortages in the residential market

• Perhaps the main factor influencing the supply and pricing of housing in Makkah is the expansion of the Holy Mosque. The place of worship has undergone various periods of growth, and this next phase, which should reach completion by 2018, will allow it to accommodate more than 1 million individuals. In order to create space for this additional structure, the number of residential properties has been reduced, and JLL reports that this has increased the shortage of homes.

• The expansion of the Holy Mosque has created rising land values in the area, making it more competitive for builders and creating difficulties for those wanting to construct anything other than hotels and retail centers. New housing activity is therefore occurring almost exclusively on the outer edges of the city. Even so, the residents of Makkah are facing a significant shortage of quality supply when it comes to housing.

• Estimates place the supply of residential real estate in Makkah at roughly 368,000 units as of the end of 2016. Looking ahead, about 6,000 homes will enter the market in 2017 and another 8,000 the following year. Most of these properties will likely be midrise apartment buildings, since the topography of the outer parts of the city doesn’t allow for the villas traditionally built in Saudi Arabia. Yet despite the increase in supply, demand will remain unmet over the next few years.

Retail prospects looking bright in Makkah• In conjunction with the Saudi 2030 Vision announced by the government early in 2016, the

plan to increase accommodations for visitors by 100 percent will feature a push to strengthen the retail sector. Developers and investors, in turn, are expected to introduce new properties and renovate older ones.

• While religious tourism is integral to retail in Makkah, the industry, like hospitality, has a seasonal dynamic, which makes Hajj and Umrah crucial times for businesses each year. In order to cater to the annual influx of tourists, much of the retail inventory is located near the Holy Mosque. Although this leaves times during the year with little to no consumer activity, businesses have found ways to turn a profit. In fact, several shopping centers near the mosque have achieved consistently high lease rates comparable to top markets around the world.

• As of 2016, the retail supply in Makkah reached more than 1.4 million square meters. By the end of 2018, this number should rise by approximately 43,000 square meters. In addition to the concentration on prime locations at the center of the city, developers have begun building more frequently on the outskirts, creating a little more balance for both local and visiting shoppers throughout Makkah.

Office real estate to remain relatively steady• Compared to the other three segments of the market—hotel, residential, and

retail—the office category has a small role in Makkah. The increase in hotel and retail space, as well as travel agencies, will likely generate additional office space demand for managerial purposes. However, aside from that trend, analysts at JLL expect the total inventory to remain stable in the foreseeable future. It is possible, though, that as Makkah pushes for a stronger private sector that businesses will seek out more office space.

• The amount of office space in Makkah reached roughly 225,700 square meters in 2016, a number that is expected to grow by a little more than 18,000 by 2018. As a result of these low figures, a majority of property owners are expected to achieve favorable occupancy rates in the 90th percentile. As developers continue to add to the overall supply, they will need to infuse the sector with more modern architecture and higher-quality technology capabilities in order to compete with larger surrounding markets, such as Jeddah.