KSA hospitality Fourth Quarter 2011.pdf


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The above analysis reveals that hotels in Makkah, Medina,

Riyadh and Khobar are dependent upon their sourcemarkets, while hotels in Jeddah are more contingent on theperformance of the local economy. For Makkah and Medina,this is due to the fact that a high proportion of visitationis composed of religious tourism which is not dependenton external nancial forces, while Khobar and Riyadh’s lowcorrelation can be explained by the cities’ signicant propor-tion of inbound corporate tourism from abroad - particularlyfrom the GCC region. Jeddah observed the highest RevPARto GDP correlation which may be attributed to its status as apopular leisure destination for Saudi nationals.

Hospitality ReviewThe market area of a hotel is the geographical area that represents the hotel’s accommodation demand.In certain countries, demand is generated almost exclusively from the domestic market. In cases where asignicant proportion of total hotel demand emanates from international sources, economic factors outside ofthe domestic market must also be evaluated.

An examination of KSA’s historical RevPAR and GDP reveals linkages between the country’s hospitality industryand its economical performance. A correlation nearing 100% suggests that the city’s hospitality industry is largelydependent upon its local economy, whereas a correlation of ≤50% signals a closer tie with the internationalmarket. 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.

1 BUYER POWER• Bargaining power of consumers weakens with increasing demand.

However, geopolitical instability and global economic downturnsmay negatively impact the hospitality industry, resulting in adecrease in demand

• Differentiation of products and service s through branding or theoffering of specialized services can reduce buyer power as substi-tutes are not easily accessible

• Brand recognition together with loyalty schemes may be a catalystto attract rst time customers as well as repeat business, and canaffect consumers’ decision making processes

• Aside from the high-end market, the majority of buyers areprice sensitive

• Low switching costs serve to strengthen buyer power

2 SUPPLIER POWER• Suppliers within the industry refer to hotels , owners, property

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

• Switching costs in the hospitality ind ustry are low to moderate.However, as the quality and availability of supplier services andequipment is essential, construction companies tend to have aparticularly strong position. This in turn strengthens supplier power

•

Training is of vital importance as it has a direct affect on theperformance of the workforce and ultimately on the nancialtrading of the company as success within the industry is stronglyinuenced by the quality of the service provided

• Hotel real estate companies tend to be smaller in size than hoteloperators 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 purchaseand operate their own hotels

3 THREAT OF NEW ENTRANTS• Large scale entry into KSA’s hotel industry requires s ubstantial

upfront investment in building, specialized equipment, infrastructureand staff. This high level of required capital investment attractedinternational institutions able to benet from economies of scale.Consequently, barrier to entry is high

• The large number of customers and suppliers make supply chainsand distribution channels easily available, therefore increase thethreat of new entrants

• While switching costs in the hospitality industry are negligible, xedcosts, especially labour, are signicant and is dependent on the sizeof the business

• Increased entry costs resulting from legislation and regulatoryissues may hinder opportunities for new entrants

4 THREAT OF SUBSTITUTES• A product’s price elasticity is affected by substitute products.

The serviced apartment and restaurant business are affected bythe threat of substitutes as residential buildings can serve asalternatives to serviced apartments while home cooking can replacethe need of dining out

• Substitutes to other hotel categories include cheaper lodgingalternatives, accommodation through friends and relatives, fractionalownership establishments, and second homes

• Switching costs vary from negligible to high depending on thechosen alternative, however, the substitute may not offer the fullrange of services typically provided by hotels

5 RIVALRY• The industry is heavily fragmented and the branded stock contrib-

utes to a marginal percentage of the industry’s overall protability• 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 market-ing intensive, resulting in increased rivalry amongst incumbents

• The global economic uncertainty is impacting revenues and assetsof hotel companies. Hotels can benet from the increasingdemand for prime locations and demand created throughpricing strategies

Buyer Power

Degree ofRivalry

SupplierPower

SubstitutesNewEntrants

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R e v

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t C h a n g e

2000 2009 2010 2011

Riyadh RevPAR

Khobar RevPAR

Jeddah RevPAR

Makkah RevPAR

Medina RevPAR

Riyadh RevPARGrowth

Khobar RevPARGrowth

Jeddah RevPARGrowth

Makkah RevPARGrowth

Medina RevPARGrowth

GDP Growth

PORTER’S FIVE FORCES ANALYSIS What shapes the KSA Hospitality IndustryPorter’s ve forces include: three forces from‘horizontal’ competition - the threat of substituteproducts, the threat of established rivals, andthe threat of new entrants; and two forces from‘vertical’ competition - the bargaining power ofsuppliers and the bargaining power of customers.The following analysis of Saudi Arabia is based onPorter’s ve forces

CityCorrelation between

RevPAR and GDP

Riyadh -15.0%

Khobar 19.3%

Jeddah 65.2%

Makkah 28.4%

Medina 5.6%


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$250

$225

$200

$175

35% 40% 45% 50% 55% 60% 65% 70% 75%

Bahrain

Oman

UAE

Saudi Arabia

Kuwait

Qatar

$350

$300

$250

$200

$150

$100

$50

$-

35% 45% 55% 65% 75% 85%

Al Khobar

Muscat

KuwaitCity

Makkah

Manama

Riyadh

Jeddah

Dubai

KSA AND REGIONAL PERFORMANCESaudi Arabia’s tourism industry is unique in thatdespite the country’s limitations on entrance visaregulations, the industry is observing strong growth

potential. However, regional uncertainty and changesin the political landscape may heighten security risksand place downward pressure on Saudi Arabia’stourism arrivals. Forecasts indicate that the numberof tourist arrivals will grow by a YOY average of 6%until the end of 2015. One of the main drivers for theindustry is religious tourism.

A regional comparison reveals that at an averageoccupancy of 59.3% during the rst eight months of2011, Saudi Arabia’s hospitality industry follows Qatarat 59.4% and UAE at 69.2%. The data also suggeststhe KSA’s Average Daily Rate (ADR) of USD 197.93between January and September 2011 is compara-tively lower than the regional standard. This indicatesroom for improvement within KSA’s hotel industry.

Riyadh experienced the highest national ADR overthe rst 9 months of 2011 at an average rate of USD266. This 6% increase from the same period last

year is largely attributable to increases in corporatetourism. A comparison of regional ADRs reveals thatRiyadh outperformed all other key cities in the MiddleEast, with a higher daily rate than Manama, KuwaitCity, Muscat and Dubai.

Jeddah’s average occupancy exceeded that of allother cities in Saudi Arabia. The city was bolsteredby a strong leisure segment between January andSeptember 2011, exhibiting average occupancy levelsof 69.6% – up by 1.4% from the same period in theprevious year. On a regional level, Dubai was theonly city to outperform Jeddah with occupanciesof 73.2%. Riyadh and Makkah observed the secondand third highest national occupancy for the denedperiod, at 63.0% and 60.2%, respectively.

Key Performance Indicators for Major Cities in KSASaudi Arabia’s overall ADR between January to September 2011 increased by9.0% from the same period in the previous year. This increase was felt in mostmajor cities throughout the Kingdom with Jeddah and Riyadh experiencing

moderate ADR growth, and Makkah and Medina experiencing signicant YOYgrowth. The exception to this trend was Al Khobar, which experienced a fallof 2.3% in ADR due to the city’s 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 Arabia’s national Revenue Per Available Room (RevPAR) over the rst9 months in 2011 increased by 19.1% from the same period in 2010 due to asurge in domestic and international demand. Al Khobar and Makkah exhibited thehighest RevPAR growth, while Jeddah and Riyadh observed the least growth at8.4% and 12.4%, respectively.

300

250

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20%

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Average Daily Rate (SAR) ADR Growth Rate %

Al Khobar Jeddah Makkah Medina Riyadh

20102011Growth

80%

70%

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2010 2011 Growth

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Average RevPAR (SAR) RevPAR Growth %


20102011Growth

Exhibit 1: Regional Performance AnalysisSource: Colliers Research, 2011

Exhibit 2: Key City Performance AnalysisSource: Colliers Research, 2011

Exhibit 3: ADR Performance(Jan-Sep 2010 vs. Jan-Sep 2011)Source: STR Global

Exhibit 4: Occupancy Performance(Jan-Sep 2010 vs. Jan-Sep 2011)Source: STR Global

Exhibit 5: RevPAR Performance(Jan-Sep 2010 vs. Jan-Sep 2011)Source: STR Global


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HOTEL SUPPLYWith 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 andRiyadh offering 12,186, 7,890, 11,500, and 10,514 rooms respectively.

Makkah will likely observe more hotel expansion than its counterparts as an additional13,200 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 intothe market over the same period, representing a 41% increase in supply.

Market Outlook – Emerging MarketsAl AhsaNamed after the Al Ahsa-Oasis, Al Ahsa is the largest governorate in the EasternProvince, covering more than 25% of KSA’s land area. It is primarily a leisure destina-tion, with major attractions including Juwatha Mosque, Ibrahim Castle, Al Uqair Fort,

King Abdulla Park, Gara Mountain, Ahsa Heritage Museum, and Uqair Beach Resort.Al Ahsa’s summer festivals are also major demand generators, the most prominent ofwhich is the Al Ahsa Summer Festival, which attracted 125,451 tourists to the regionin 2011.

HailLocated in the north of Saudi Arabia in close proximity to Madinah and Qaseem, HailProvince covers approximately 6% of the Kingdom’s land area. VFR, leisure and shop-ping encompass approximately 77% of total visitation to Hail, conrming the province’ssignicance as a major leisure destination.

Al HofufHofuf lies in the Eastern Province of Saudi Arabia at the center of the Al-Ahsa Oasis.The district’s economic signicance is largely due to its proximity to Ghawar Oil Field,one of the largest land based oil elds in the world. The most signicant tourist attrac-tion in Hofuf is the Q asr Ibrahim, a fort of historical importance.

AbhaLocated 3,200 above sea level in southwest KSA, Abha is known for its attractivemountainous landscape. Abha is a popular vacation destination for people across theregion, due to its moderate climate and major tourist attractions such as the Al MiftahaArt Village at the King Fahad Cultural Center, Aseer National Park, and Shada Archeo-logical Palace. Only 4% of Abha’s visitation is business related, while approximately94% visit the region for VFR, leisure and shopping.

JazanSituated on the Red Sea, Jazan is a major shipping port in the southwest region ofSaudi Arabia. Approximately 95% of the region’s tourism is VFR, shopping or leisurerelated; with corporate tourism representing 3% of the city’s total visitation. Accordingto the SCTA, Jazan offers only 3 hotels while the city’s 47 furnished apartment estab-lishments are largely characterized as unbranded stand alone assets.

TaifLargely a leisure destination, Taif’s major tourist attractions include The King FahdPark, Taif Gardens, Shubra Palace, Wahab Crater, the Turkish Fort, Souq Okaz, Al QuaMosque, Okaz Museum, The Ekrima Dam, Kakki Palace and Al Katib Palaces. Only 2%of Taif’s visitation are business related while 95% visit for VFR, shopping or leisurepurposes.

Market GAPRiyadhThe Riyadh hospitality market is the strongest in the Kingdom with inboundcorporate tourism comprising the bulk of the city’s total visitation. High averageroom rates for all segments in Riyadh have lead to occupancy thresholds whichare supportable by the market.

Due to the high number of quality hotels in the pipeline, upscale hotels shouldbe considered only for prime and exclusive locations within the city centre. Fullservice and midscale hotel may be considered for strategic sites or as dual brandcombinations.

JeddahJeddah outperformed all cities in occupancy levels on the backdrop of a strongdomestic leisure segment which will be compounded in the future by the rede-velopment of the Corniche area. This leisure demand prole will be further

augmented by Makkah’s expansion plans which will have a knock on effect toJeddah as the ‘gateway to the holy city.’ Jeddah’s lack of quality serviced apart-ments represents an under-served segment within the real estate industry.

MakkahWith the major redevelopment projects around the Haram area such as JebelOmar, Jebel Khandama, the infrastructure development programs, and the KingAbdul Aziz Road Project, it is clear the government is preparing Makkah forincreased religious visitation.

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

MedinaSimilar to that of Makkah, Haram and its surrounding areas are undergoingsignicant redevelopment and expansion. The land north of Haram is a primelocation for hospitality developments due to its existing infrastructure and easeof access to the Holy Mosque, whereas the land south of the Haram is an impor-tant secondary market.

Upscale and full-service hotels may be introduced to northern Haram whilebranded serviced apartments could be viable south of the Haram.

Dammam / Al KhobarThe Dammam/Al Khobar market experienced strong occupancy rates andRevPAR growth between 2010 and 2011, which is a trend likely to continuethroughout 2012. With a strong corporate prole, the oil industry will continueto bring signicant corporate demand to the region for the foreseeable future.

Upscale hotels may be considered along the Corniche with strong supportinghealth and recreation activities while high-end branded serviced apartmentscould be considered on or in close proximity to the Corniche.

75

70

65

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15

10

5

T h

o u s a n

d s

0 0 0 ’ s

0Al Khobar Jeddah MakkahMedina Riyadh

2011 Existing Supply2012 Additional Supply

2013 Additional Supply2014 Additional Supply

Exhibit 6: Hotel Supply


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For further information please contact:

Imad Damrah Country Director, Saudi [email protected]

Filippo Sona Head of Hotels and [email protected]

Colliers International PO Box 5678 Riyadh 11432 | KSA

Main: +966 1 217 9997Mobile: +966 50 417 2178

ConclusionOver the last 12 months, the KSA market observed a high level of capital

injection into the hospitality industry by domestic investors. Many projectsrecommenced as domestic investors moved their Assets back to Saudi Arabiaas a result of the recent global economic uncertainty. Although unprecedentedexpansions are expected as the industry matures, the quality branded servicedapartments segment is still underserved by the country’s hospitality sector.The KSA hospitality market continues to represent opportunity for modern,branded mid market hotels. Branded boutique hotels located in key cities such

-dom’s Generation Y. This generation currently constitutes circa 50% of the

About Colliers International Hospitality

Colliers International’s hospitality division is a global network of specialistconsultants in hotel, resort, marina, golf, leisure and spa sectors, dedicated toproviding strategic advisory services to owners, developers, governments andinstitutions, 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 theintelligence and resources of a global practice.

-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• 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 excessof SAR 16 Billion

•

Largest Investor Database in the region with more than 3,000active investors• Extensive Database of hotels in the Kingdom of Saudi Arabia

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lifecycles:Destination / Tourism / Resort Strategies

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Operator Search andContract Negotiation

Project Monitoring

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RICS Valuations /Corporate Finance / IPO’s

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KSA hospitality Fourth Quarter 2011.pdf

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