More pain expected for Saudi hotels amid ‘massive supply expansion’

Saudi hotels can expect more pressure on rates to come as a massive pipeline of new rooms prepares to come online in the coming years, according to market research firm STR.

The company said in a report that the country’s hotels recorded a 5.2 per cent decline in occupancy and 4.4 per cent drop in average daily rate last year, resulting in a 9.3 per cent decline in revenue per available room (RevPAR).

This trend is likely to continue, according to the report, with enough new inventory on the horizon to account for 76 per cent of the 84,500 rooms currently available in the kingdom.

STR data showed 64,000 Saudi hotel rooms in various stages of development in January led by Makkah with 23,000 in construction and 32,000 in the pipeline and Jeddah and Riyadh with 10,000 each in the pipeline respectively.

“Saudi Arabia’s hotel market is going through a period of massive supply expansion,” said STR’s area director for the Middle East and Africa Philip Wooller.

“In the short term, we’ve already seen this growth affect performance levels, and this trend should continue as more and more properties start to come online.”

However, he suggested that the large number of new rooms on the horizon should be considered part of a longer-term plan to accommodate millions of annual visitors through both new tourism attractions and religious pilgrimages under the kingdom’s Vision 2030.

Read: Saudi Vision 2030 aims to double tourism sector by 2020

Saudi Arabia has revealed huge new tourism projects including plans to develop a 30,000 square kilometre stretch of islands, beaches and other attractions on the Red Sea in partnership with hotel companies.

Read: Saudi unveils major Maldives-inspired tourism project on the Red Sea

It is also preparing to ease restrictions on travel to the country for foreigners interested in visiting heritage sites and other areas.

Read: Saudi tourist visa rules to be announced by end of Q1

But the new supply is still not coming at an ideal time for existing hotels, which have dealt with reduced demand linked to lower oil prices over the last three years.

A new 5 per cent tax on occupied room nights recently introduced by the Ministry of Municipal and Rural Affairs is also likely to force hotels to raise rates having already been hit by the introduction of a 5 per cent value added tax in January.

Read: Saudi introduces new hotel tax

“As oil prices continue to rise, we should see performance levels start to recuperate over time,” Wooller said.

“Although there will likely be a delayed effect, in the long run Saudi Arabia’s investment in tourism infrastructure should help protect the market’s hotel sector during future periods of lower oil prices and help boost performance growth when oil prices are high.”

Hotels have seen some signs of improving performance in January with occupancy up 6.4 per cent but the average daily rate down 5.2 per cent. This resulted in a year-on-year RevPAR increase of 0.9 per cent.