JLL releases its Makkah H1 marketplace report showing signs of positivity as quotas are lifted on Hajj pilgrims
Expected increase in visitors will benefit the retail sector
Makkah, Kingdom of Saudi Arabia – July 27, 2017: JLL, the world’s leading real estate investment and advisory firm, today released its H1 2017 Makkah Real Estate Market Overview report which assesses the latest trends in the office, residential, retail and hotels sectors.
The overall sentiment in the Makkah market was boosted during H1 2017 as the government lifted the quota on Hajj pilgrims despite ongoing major infrastructural work on the Holy Mosque. This shift in policy should further benefit retailers in Makkah who typically enjoy above average sales during the Hajj season. Retail rents declined by 7.5% in the central area and over the past 6 months, as owners adjusted rentals to more realistic levels, to the benefit of retailers. Rents are expected to stabilize at current levels over the next 6 months.
Data from the Ministry of Hajj and Umrah highlighted an increase in the number of Umrah pilgrims during H1 as the number of visas issued increased by 5% to reach 6.7 million compared to last year’s Umrah season. The rising number of pilgrims can be attributed to the partial completion of the Holy Mosque expansion, and extending the Umrah season by an additional month. Although the hotel sector witnessed a decline in performances in H1 2017, the expected increase in the number of Hajj pilgrims later this year paves the way for the sector to improve over H2 2017.
“The Makkah market overall witnessed a positive turn with the government now easing policies on the number of Hajj and Umrah pilgrims,” said Craig Plumb, head of research, MENA, JLL.
“With these changes and an increase of Umrah pilgrims in H1, all the real estate sectors are expected to benefit, with a particular focus on the hospitality and retail sectors. The increased efforts by the government to improve the city’s infrastructure and introducing the Makkah Metro, should increase the demand for commercial, residential and hospitality space,” he added.
According to JLL, Makkah is the only major city in Saudi Arabia to have witnessed a significant increase in sales activity in the residential sector over H1 2017. This is due to residential land prices dropping to reasonable rates following a glut in transactions, inducing interest from buyers.
There were three recorded completions in the office sector over H1 2017, which added approximately 7,700 sq m to the market. Unsurprisingly, there is limited supply in the pipeline over the next two years. Despite vacancies decreasing by 3% to reach 16% in H1 2017, rents also decreased by around 5% highlighting the limited demand for office space in Makkah.
Sector summary highlights – Makkah
The Makkah Metro should, to an extent, increase demand for commercial space in Makkah. Still at the early stages, contracts for the first phase (lines B and C) are expected to be awarded next year. The project, including the second phase, is expected to last up to ten years, which is positive for sustaining demand for commercial space and diversifying demand sources for office space in Makkah. The progression of a number of mega mixed-use projects will also help sustain demand from the construction industry.
Three completions over H1 2017 added approximately 7,700 sq m to the market. A further 20,000 sq m is expected to complete by the end of the year with the expected completion of Al Zaydi Commercial Centre. Looking ahead, only 3,000 sq m of office space is expected to be delivered in 2017. Positive news for a market that currently has limited demand to absorb large amounts of office space. New supply is moving towards the 3rd and 4th Ring Roads with recent completions and a number of buildings currently under construction or near completion tracked there.
The majority of stock in Makkah comprises of grade B and C office space, with few grade A quality buildings. Better quality stock is expected to be delivered down the line (3+ years) with the completion of some the mega mixed used projects currently under construction such as King Abdulaziz Road. However, commercial space within such projects make up a small component as they typically focus on developing mainly hospitality and pilgrim accommodation, and to a certain extent, retail and residential components.
Although the supply pipeline is limited, and increasing Hajj and Umrah pilgrims are expected to somewhat improve market conditions for offices, it is unlikely that there will be any marked increase in office rents in the near future. Currently, average office rents in Makkah stand at around SAR 605. A decrease of 5% compared to the H2 2016.
Market wide office vacancies stand at 16% as of H1 2017. Down from 19% in H2 2016. Office buildings located in close proximity to the central area have fared much better with higher occupancies than buildings located further away from the central area, which have suffered lower occupancies. This highlights the close link businesses in Makkah have to Hajj and Umrah services. That said, as more residents in Makkah move further away from the central area and closer to the 3rd and 4th Ring Roads, and once the Haramain Railway Station is complete, demand for commercial space is likely to rise in those areas from tenants in the banking, healthcare and other sectors that serve local residents.
The Ministry of Housing announced the urban boundaries of Makkah in January this year. The boundaries stretch from the Fourth Ring Road in the North to the Fifth Ring Road in the South, and between the Fourth Ring Road from West to East. As part of the first phase, targeting undeveloped land designated for residential and residential / commercial use 10,000 sq m or more in size, lands located within the declared boundaries will be liable for the 2.5% tax. The registration period for the White Land Tax expires at the end of July.
The total supply of residential units in Makkah reached around 379,000 units in the first half of 2017. An increase of approximately 3,000 units since H2 2016. The most notable completion was the second phase of Wahat Makkah, which includes affordable units as part of the development, that delivered 1,300 units. The development, by Al Balad Al Ameen, plans to develop a further 1,600 units over the next several years. The majority of supply in Makkah continues to be in the form of stand-alone units, mostly apartment buildings, with few announced large-scale projects. Those that have been announced, such as Makkah Gate, expected to deliver around 6,000 residential units once completed, are not slated to complete for at least five years.
Notable upcoming supply includes approximately 200 apartments expected to be delivered as part of the Jabal Omar Development over the next several years. Such developments target the upper end of the market and do not alleviate the shortage of affordable housing in the market. Heightened by the expropriation of residential lands and units to make way for mega hospitality and infrastructure projects.
Sales prices for apartments in Makkah increased by around 3.1% over the first half of 2017. Sales prices for villas also increased by 5%. This is consistent with data from the Ministry of Justice which showed a general increase in residential prices in Makkah compared to the previous year. The data from the MOJ also showed an increase in residential transactions over the first half of the year by about 12% compared to the first half of 2016. The rise can transactions can largely be attributed to the drop in land prices in Makkah following a market glut. Sparking increased interest from buyers and spurring demand from residential lands. Rental data for apartments also increased by 6% over H1 2017, while villa rents remained relatively unchanged.
Although the Hotel sector is expected to be the main beneficiary of lifting the Hajj quotas, the retail sector is also likely to benefit. Particularly as the Hajj season is the high season for the sector. The effect of the completion of parts of the expansion (the Mas’a Gallery and Mataf), in addition to the Ministry of Hajj and Umrah’s decision to extend the Umrah season by an additional month this year, have had a notable effect on the number of Umrah pilgrims. According to the Ministry, 6.7 million Umrah visas were issued this year. An increase of approximately 5% compared to last year. This should also see improved retail sales outside of the Hajj season.
The majority of shopping center supply in Makkah currently comprises of community and neighborhood centers. In contrast to its neighboring city Jeddah where much of the supply consists of regional and super-regional centers. Makkah Mall and Abraj Al Bait are the only two centers classified as regional, and there are currently no super-regional centers in the market. There are no signs to show that this trend is likely to change with most of the announced upcoming supply consisting of neighborhood and community centers. The next largest expected completion is Muzdalifa Mall by Arabian Centers. Expected to complete in 2019 / 2020, the center is the only regional center in the pipeline and will be their second property in Makkah. Other notable future completions currently under construction include the retail components of the remaining phases (3 – 7) of Jabal Omar.
Approximately 7,000 sq m of retail GLA entered the market over the first half of 2017, and the only further completion expected this year is Al Zaydi Commercial Center which will add approximately 10,000 sq m of retail space to the market.
Although strip retail does not typically count towards quality retail supply, given its significance and popularity in Makkah, which has a large amount of unorganized, open-air souq style retail that appeals to many pilgrims, it contributes considerably to the total GLA in the city. Particularly in areas close to the Holy Mosque such as Masjid Al Haram Road, Ibrahim Al Khalil Street and Ajyad Street.
With limited stock entering the market, performance rates for shopping centers outside of the central area have remained stable. Centers, even dated ones, have been able to charge high rents due to the lack of competition in the market. Given the limited supply in the pipeline over the next couple of years, rents are expected to remain stable for the foreseeable future. Rents for regional and neighbourhood shopping centers remained unchanged in H1 2017, while rents for community centers increased marginally by 1%. Rents in the central area (Markazia), however, decreased by 7.5%. This is largely due to inflated prices that made the prospect of renting in the area less appealing for renters.
Vacancies increased to about 6%, up by 2% compared to H2 2016. Again, the increase is also due to an increase in vacancies within the central area as recent completions were not fully absorbed. This is expected to decrease as take up increases due to retailers adjusting asking rents to more reasonable rates.
The increase of visa fees for Umrah and second time Hajj pilgrims to SAR 2,000, combined with the liberalization of the Egyptian Pound against a strengthening Saudi Riyal, has made the prospect of performing a pilgrimage virtually unaffordable for many Egyptians. Egyptian nationals are the number one source market for Umrah pilgrims, and their decline may have a negative impact on market performances outside of the Hajj season.
Although there is strong demand from both Hajj and Umrah pilgrims, until major infrastructure projects such as the Haramain High Speed Railway and the New King Abdulaziz International Airport complete to support additional visitors, it will be challenging for major hospitality developers to determine how much demand to cater for.
In spite of the fact that Makkah is a fundamentally religious destination, the recent opening of the Hilton Makkah Convention Hotel highlights hoteliers’ willingness to tap into corporate demand. The purpose behind that is to compensate for the market’s heavy reliance on Umrah and Hajj visitors fluctuations.
Approximately 1,900 keys entered the market over the first half of 2017 bringing the total quality room supply to 35,100. The largest completion was the Hilton Makkah Convention Hotel that added 783 keys. The Hilton currently has a fourth property under development: the DoubleTree by Hilton (668 keys) expected to operate in 2018. The ibis Styles Hotel and the Park Inn by Radisson Makkah Al Naseem also opened in H1 2017 adding 286 and 459 keys respectively. A further 8,200 keys are expected to operate by the end of the year. Most of the keys will be delivered by the opening of the Holiday Inn Abraj Al Tayseer (5,152 keys). Other notable completions expected this year include the Sheraton Makkah Jabal Al Kaaba Hotel (412 keys) and Shaza Hotel Makkah (251 keys).
JODC signed with Emaar Hospitality Group to open the Jabal Omar Address Makkah Hotel and Resort (1,490 keys) expected to be operational in 2019. The property will be the brands first in Saudi, confirming Makkah as a continued strong contender in Saudi for hotel operators. JODC is expected to deliver approximately 8,000 hotel keys. Lower than the 15,000 keys originally announced. This is primarily due to current market conditions and surrounding mega projects currently under construction or announced.
YT May 2017 occupancies decreased by 9% compared to the same period last year to reach 64%. ADRs remained relatively stable in comparison having decreased marginally by 2% to reach USD 141 YT May 2017. YT May RevPAR decreased more substantially by 10% to USD 90, compared to the same period last year when it stood at USD 101.
The hotel sector in Makkah is expected to pick up momentum later this year during the 2017 Hajj season. The removal of the 20% reduction on Hajj pilgrims per country should offer relief to hotel operators in Makkah from the market glut following the introduction of the reduction several years ago.