Saudi Vision 2030 makes Makkah hotels profit engine

There is no other property segment anywhere in the Middle East that can remotely offer investors annual cash dividends of 16-20 per cent than in Saudi Arabia's religious tourism market.

The recent Saudi Vision 2030 strategy inaugurates most extensive economic transformation of Saudi Arabia since the post-October 1973 petrodollar bonanza that turned the kingdom into the financial superpower of the Arab world. Religious tourism, a mere 2.7 per cent of Saudi GDP now, will play a critical role in helping to diversify Saudi Arabia's economic base from dependence on oil and gas as well as generate billions of dollars in incremental government revenues and job opportunities for Saudi nationals. While Wall Street is obsessed with the potential IPO of Saudi Aramco and the privatisation windfall on the Tadawul index, Vision 2030 and the new royal decree that created the Ministry of Haj and Umrah vindicates my recommended investment strategy on investing in four-star hotels in the holy city of Makkah with a vengeance. There is no other property segment anywhere in the Middle East that can remotely offer investors annual cash dividends of 16-20 per cent. Why?
One, the Saudi Council for Economic and Development Affairs projects religious pilgrims will rise from eight million in 2016 to 20 million in 2020 and 30 million in 2030. This means an exponential growth in Umrah visa issuances in the next five years.
Two, Makkah is unquestionably the most profitable hotel market in the world, let alone the GCC or the Arab world. As the site of the Grand Mosque and the holy Kaaba in Makkah has attracted untold millions of pilgrims from across the world for fifteen centuries. Net population growth and compounded wealth creation in the Islamic world alone mean the number of Umrah pilgrims arriving in the kingdom will rise four-fold by 2020. This is a hospitality demand curve that is unique in the history of the Middle East. The Vision 2030 quest will only accelerate the growth in Makkah's unlimited demand curve.
Three, Saudi government data estimates the current $12 billion religious tourism market will rise to $20 billion in 2020. This scale of exponential growth was witnessed in the Arab hospitality market only by Dubai in 2004-06 and pre-civil war Beirut, when the Lebanese capital was the reve d'Orient (dream of the Orient).
Four, Makkah hotels boast gross operating profits in the 60-65 per cent range, exceptionally high by global standards. The Makkah Intercontinental hotel is the single most profitable hotel in the world. This is due to the configuration in Makkah four-star hotels, which need no swimming pools, spa-saunas or pay TV. A four-star hotel can have only one restaurant and can add four beds to a room during Haj season. As long as an investor has access to a 20-year lease with no inflation clause, the financial metrics of Makkah hotel ownership dwarf anything else in the GCC hospitality market.
Five, Saudi Arabia, with 22 million citizens, urgently needs to create high-value jobs for its younger citizens, the majority of the kingdom's population. The crash in crude oil prices, 85 per cent of government revenues and the 14 per cent budget deficit makes job creation for locals the preeminent strategic economic priority for the senior princes of the House of Saud. Religious tourism, due to its labour-intensive nature and private sector multiplier impact, achieves this strategic objective.
Six, Saudi Arabia has spent $80 billion in colossal infrastructure and transport projects to vastly expand Makkah's capacity to host pilgrims for the Haj and Umrah. This includes the expansion of the Grand Mosque perimeter to accommodate 2.2 million pilgrims, the expansion of Jeddah's King Abdulaziz Airport to handle 30 million passengers, and the opening of the Haramain high-speed train linking the Makkah and the holy city of Madinah with Jeddah. The financial and strategic impact on Makkah's four-star hotel market will be a game-changer, since a city set to host an extra 12 million Umrah visitors in the next five years has a current inventory of a mere 12,700 international branded four-star hotel rooms. This has got to be the most attractive growth opportunity in hotel investing in the history of Arab tourism.
Seven, recurrent stampedes have led to the demolitions of hundreds of older buildings in Makkah and the loss of 25,000 hotel rooms. This is the "Baron Haussmann's Paris" moment for those Makkah hoteliers who can scale, build or lease assets.
Eight, three-month Libor is 0.52 basis points yet three-month Sibor, the funding benchmark for Saudi banks, is 214 basis points. Saudi Arabia faces a contractor cash crunch that will limit supply despite the scale of the Vision 2030 demand shock. Makkah will boost the world's most attractive supply - demand gap metrics in the next four years and the four-star hotel asset class is uncorrelated to even Saudi equities and debt. This asset class is a no-brainer.