Saudi smaller cities could give best return on investments

• Tier 2 cities ‘stand out’, says JLL
• Average annual Saudi revpar up 9%
• International tourism up 14% a year

Growth in the hospitality sector of the Middle East and North Africa has outpaced that of other regions, driven by expansion in Saudi Arabia’s tourism market.

The kingdom, which has increased its annual tourism target from 100 million to 150 million visitors by 2030, is undertaking a country-wide $110 billion dollar investment drive. 

While the biggest growth has been in tier one cities, such as Riyadh and Mecca, the biggest opportunities for investors lie in less well-known destinations, according to consultancy JLL.

Since 2019 revenue per available room (revpar) in Saudi Arabia has grown by an average of 9 percent each year. The Middle East and North Africa region as a whole has seen the strongest revpar growth in the world in the same period, JLL says.

While domestic travel remains the primary driver of Saudi Arabia’s tourism industry, international tourism is growing at a faster pace, averaging 14 percent a year.

Until now, much of the market has been dominated by projects led by government organisations or local investment funds, like the $940 billion Public Investment Fund, JLL says.

Opportunities for investors now lie in smaller cities, such as Taif near Mecca and Abha in the south, which account for 23 percent of all visitor numbers and show potential for growth.

“Tier two cities stand out as the new frontier of hospitality investment in Saudi Arabia,” JLL said in a report. 

“These markets not only showcase sizable annual demand but have also witnessed limited development activity over the last five years. This untapped potential, positions tier two cities as attractive prospects for investors.”

While the bulk of investment has up until now been made by government and PIF-backed entities, an opportunity may be emerging for private investors to play a larger role.

“We are witnessing a complete shift,” said Sarah Gasim, head of hotels at JLL, “because PIF wants to be more of a regulator and more of a masterplan owner rather than owning the assets and going into the operation level.”

Gasim predicts that more private companies, both Saudi and international, will increase their investments in the hotel sector.

Over the next nine years, Saudi Arabia is due to host the 2029 Asian Winter Games, the 2030 Riyadh Expo, and the 2034 football World Cup. To meet this demand, it is looking to build more than 360,000 hotel rooms.

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Resorts such as The Red Sea, AlUla and many of other recent developments in the country have been aimed at the upper end of the market. Consultants and officials say that the biggest opportunities now lie in the middle market. 

Last week, the Chinese-owned hotel conglomerate H World International (HWI), which operates the budget IntercityHotel brand, told AGBI it will shortly announce a large-scale investment programme in Saudi Arabia.

Siegfried Nierhaus, HWI’s head of development for the Middle East, said that, apart from China, “Saudi Arabia is the biggest development market that we are targeting in the world.”