The missing middle - the opportunity in Makkah's hospitality sector

Everyone knows Makkah's hotel prices can be strikingly high. Those on the ground also know that some hotels can be astoundingly low.

It all comes down to location.

This should not come as a particular surprise. In most real estate markets across the world, location is key and everything else is secondary.

However, most locations in the world don't host Islam's holiest site, nor do they entertain 18 million international visitors each year.

Makkah's dynamic is particularly unique. A single anchor drawing in mass tourism volumes, coupled with a hospitality industry chasing to catch up.

Following the COVID pandemic, Makkah has witnessed a remarkable 114% rise in tourism numbers, surpassing nearly every other city across the world.

The hospitality industry cannot respond immediately. Naturally, occupancy rates rise as rooms start filling up. After which, there are only two levers remaining: increase price or increase volume.

Increasing price is the short-term lever, easily actioned and repeatedly so. Our Hotel Price Index reveals that prices in peak Ramadan season can reach 3 times the average daily rates in summer, for the same rooms in the same hotels.

Increasing volume takes time. We are witnessing a revolution in Makkah's real estate sector, with new projects being announced at a frequency the city has not experienced before.

Given the recent announcement of the foreign ownership law coming into effect, interest in the city's real estate is only expected to increase.

However, increasing supply takes time. The land purchase, infrastructure provisions and superstructure construction follow a set process which can take years - and in the case of larger projects, sometimes decades.

So what does this mean for the hospitality sector in Makkah, and where is the opportunity?

Our monthly Hotel Price Index tracks pricing across 30 of the major hotel brands operating in Makkah. The seasonality effect is clear when consolidating the pricing data by month.

Seasonality is only one angle to Makkah's hospitality industry - admittedly, the obvious one. Any visitor to Makkah can speak to the hike in prices as the winter season comes along, or more so in the month of Ramadan.

Less obvious is the pricing bands against which Makkah's hotels offer packages. There are four noticeable bands, ranging from budget to luxury hotels. Sparse at the lower end and even more sparse at the upper end.

What was most striking was when this pricing data was put up against the hotel location, accounting for proximity to Masjid al-Haram.

Naturally, there is an expectation of a negative correlation between price and distance: as distance increases, price decreases. The data confirmed this.

But in creating this comparison, the missing middle becomes evident, and reveals one of the biggest opportunities for investors in Makkah.

There is a 500 SAR (£100) segment which no major branded hotel in Makkah is serving.

It goes without saying that these are average prices and therefore vary by month. However, regardless of the seasonal variances, there is clearly a segment of visitors not being served by the major hotel brands in Makkah today.

You may be wondering why this gap exists across Makkah. What is driving this sizeable missing segment, and why has no one caught onto the opportunity?

The opportunity is driven by Makkah's spatial layout.

Anyone searching for a place to stay in Makkah has two options: close or far. You're either in Jabal Omar or the Clock Tower, or you are forced into the more distant hotels dispersed further afield - the cluster of budget hotels near Masjid Al Rajhi being one such example.

And in between those two extremes, there is not much to offer.

Upcoming projects in Makkah are partially tackling this issue. Take Masar as an example. A 3.6 km stretch from Jabal Omar through to the Haramain rail station. This would resolve the missing middle segment along the western cluster.

However, to the north, south and east, the opportunity remains.

It is less so an opportunity for the hospitality sector and more so an opportunity for real estate developers first. The hotel brand operators will fill out what is built. It is the building that needs to come first.

As projects such as Masar, or the more recently announced Masar Gardens, come online, we can expect to see significant uptake in their offering. After all, there's an opportunity to price in an audience that has previously been excluded.

Creating an offering that better matches demand with supply will benefit the consumer, the suppliers and the city overall. The sooner this can materialise, the sooner everyone will benefit.