JLL, the world's leading real estate investment and advisory firm, released its first report on ‘Makkah, A City within a City' which assesses the real estate market in Saudi Arabia's most globally notable city given its status as Islam's most holy city. With the world's 1.8 billion Muslims required to perform the Hajj pilgrimage in Makkah at least once in their lifetime the report addresses the trends and opportunities this presents across the city's hotel, office, residential and retail sectors. Earlier this year JLL signed a Memorandum of Understanding (MoU) with the Makkah Chamber of Commerce & Industry to help improve transparency in the Saudi real estate market. As part of the collaboration, JLL worked with key players and stakeholders in Makkah to release this first comprehensive report on the city's real estate market. The report addresses an almost unlimited global demand for hotel and other tourist facilities in Makkah due to the continued growth of religious tourism, creating huge opportunities for both developers and investors to upgrade existing properties and create new ones. The pace at which the potential growth can be tapped into will rely on overcoming constraints including pilgrim quotas and investment in supporting transport infrastructure. Makkah is by far the largest hospitality market in Saudi, with around 27,000 quality rooms (compared to 11,000 in Riyadh and 9,400 in Jeddah). It is estimated that around 75% of the demand from pilgrims is accommodated in hotels (with the remaining 25% in other forms of accommodation). Around 60% of the current stock of hotel rooms are classified as ‘budget accommodation' a much higher proportion than in other cities in Saudi. The extreme seasonality of the market has meant that many hotels in Makkah have traditionally only operated during peak months. With the entry of more international operators, this pattern is now changing, with more hotels operating throughout the year. Hotels in Makkah typically achieve 100% occupancy during the Hajj period and the Umrah high season. The highly seasonal nature of demand results in occupancies falling to just 30% - 40% during off peak seasons immediately after Ramadan and Hajj. Pilgrim Accommodation: Although Makkah has a substantial number of hotel rooms, this supply is insufficient to accommodate all the demand from religious pilgrims. This has resulted in the creation of a unique sector of the market not seen in other major cities in the region. Pilgrim accommodation comprises rooms in hostels, and apartment buildings that are rented to pilgrims seeking lower cost accommodation than recognized hotels. As with other major cities in Saudi, Makkah is facing an acute shortage of affordable housing. Particularly as the expansion of the Holy Mosque, the growing need for seasonal accommodation, and extreme land values, the Markazia has transitioned into an area almost exclusively servicing religious pilgrims with permanent residents being largely priced out of the central city. This trend is expected to continue with further redevelopment of the areas around the Holy Mosque, increasing land values still higher. The expansion of the Makkah metro network and the construction of a number of mega projects in the outskirts of the City (especially along the Fourth Ring Road), will further enhance this trend for the Markazia area to become something of a ‘city within a city' JLL estimates the number of residential units in Makkah is currently around 338,000. Much of the quality retail space in Makkah is centred in the Markazia area and is targeted at pilgrims rather than permanent residents of the city. Spending is therefore extremely seasonal. Despite the current climate of weaker spending power in Saudi and the restrictions on pilgrim quotas, Hajj sales have resulted in some retailers in Makkah enjoying positive growth in sales ranging between 12% - 20% according to Euromonitor International. Jabal Omar, Hilton Commercial Center and Abraj Al Beit achieve some of the highest lease rates in the region, if not the world, due to their proximity to the Holy Mosque. All of these malls benefit from high occupancy rates of between 90% and 100%. Office: Unlike neighbouring Jeddah, which has a thriving port and a cosmopolitan business community, Makkah's office sector is relatively limited and largely focussed on businesses servicing Hajj and Umrah visitors. Once the expansion of the Holy Mosque is complete and the capacity for pilgrims increases, demand for office space from travel advisories and licensed Umrah and Hajj service providers should increase, but this is not likely to support a large amount of additional office space. Rentals in Makkah are relatively low compared to Riyadh and Jeddah, with only modest rental growth recorded in recent years. The injection of future supply is likely to ensure that any future increase is restricted to the better quality projects The Saudi 2030 Vision recognizes the crucial role religious tourism can play in diversifying the economy away from dependence upon the oil and gas sector with religious pilgrims currently contributing 2% - 3% of Saudi's GDP. There are plans to roughly double the capacity to accommodate both Umrah and Hajj visitors to around 15 million and 5 million respectively by 2020. The entry of international hotel brands into Makkah continues to reflect market confidence with brands such as Conrad selecting Makkah for entry into the Saudi market, Marriott and Best Western announcing expansion in the city and Carlson Rezidor entering with a pipeline which includes the Park Inn by Radisson Al Naseem Makkah (2016) and Park Inn by Radisson Aziziyah Makkah (2017). Mr Jamil Ghaznawi, National Director and Country Head of JLL Saudi Arabia said: "Increasing religious tourism in line with ‘Saudi Vision 2030' will create huge opportunities in the retail, hotel and broader accommodation sectors in Makkah. The long term prospects for the hotel sector are extremely positive given the reliance on accommodation providers to support the global unlimited demand of religious pilgrims to Makkah. "More than ever, the key to capitalising on growth of the real estate market is the strong cooperation between public and private sectors to invest in new and existing accommodation. An added benefit is the maxim of ‘build it and they will come' which applies more aptly to the Makkah market than any other city in the region. "In addition to increasing accommodation, the success of the Saudi Government's plans to expand the number of religious visitors also relies heavily on the ability to address transportation capacity. While there have been significant investments to improve the networks serving Makkah, many of the projects have been affected by the stringent 2016 budget." Although there is a great opportunity for Makkah's real estate sector to flourish from increasing the number of pilgrims, there is currently a restraint on the number of pilgrims due to a cap on the number of quotas for each country. Beyond the buoyant hotel and accommodation sector, Makkah's retail sector is also heavily dependent upon trade from religious pilgrims particularly during a period of weakening spending power among residents. Despite this, retail lease rates in the Markazia remain substantially higher than in other parts of the city. The traditional residential sector continues to suffer from a shortage of affordable homes and poor quality infrastructure projects. Compared to other major cities in Saudi, the office sector remains a relatively minor market which is reflected in lease rates which are considerably lower when compared to Jeddah and Riyadh. — SG
