Centre of activity: Redevelopment is expected to spur growth across a range of sectors

As Islam’s holiest city, Makkah has an economy that enjoys extraordinarily high demand from the many millions of Muslim pilgrims who visit it each year. With pilgrim numbers expected to nearly double between 2008 and 2019, the real estate, infrastructure, hospitality and retail sectors are among those most likely to benefit. All in all, ongoing developments in Makkah were valued at a remarkable SR750bn ($200bn) in early 2012, with much of the activity focused on redeveloping the centre of the city near the Grand Mosque. In addition to expanding the city’s capacity to handle the millions of pilgrims who arrive every year, the government is also working to ensure that adequate housing and facilities are provided to the residents of Makkah, and this is driving the redevelopment of several residential areas in the city, as well as large-scale construction plans for new suburbs on the outskirts.

Pilgrim Arrivals

Given that many of the city’s projects cater largely to pilgrims, investors will clearly keep an eye on their numbers. The Hajj is one of the five pillars of Islam, the performance of which is obligatory for every Muslim once in a lifetime, provided they are able-bodied and have sufficient financial means. According to figures released by the Central Department of Statistics and Information, the numbers of Hajj pilgrims increased from 2.5m in 2009 to 2.8m in 2010 and again to around 2.9m in 2011. This growth follows slight declines experienced in 2008 and 2009. While recent forecasts are difficult to come by, the international real estate services company Jones Lang LaSalle (JLL) estimates that the annual number of Hajj pilgrims will grow to around 3.75m by 2019.

Muslims visiting for the Hajj tend to visit Saudi Arabia within a concentrated two-month period that centres on the six-day pilgrimage itself (which in 2012 took place from October 24-29). This leads to a seasonal surge for the hospitality and retail sectors in Makkah, which are catering almost entirely to a non-Saudi market: in 2011, some 62% of all Hajj pilgrims came from outside the country, and the vast majority of those coming to perform the Hajj from within the Kingdom itself were not Saudi Arabian nationals.

As well as the Hajj, pilgrims come throughout the year to perform the Umrah, although numbers tend to increase markedly during the holy month of Ramadan. Sometimes referred to as the “lesser pilgrimage”, the Umrah is highly recommended for Muslims, but not compulsory. Umrah pilgrims have been increasing in number as well and, like Hajj pilgrims, are primarily non-Saudi. Firm estimates are difficult to come by, but Saudi officials told press that 5.2m Umrah visas were issued in 2011, and that this was expected to increase by 10% to 5.5m in 2012. According to JLL estimates, there will be 10m such pilgrims by 2019.

Development Strategy

As it stands, the city of Makkah has insufficient capacity to accommodate such a large increase in pilgrim numbers, but the government is hoping to stay one step ahead. Capacity at the Masjid Al Haram, the city’s Grand Mosque, has already been expanded from 2.5m worshippers to 2.8m in recent years, say Saudi officials. A $27bn development strategy is being implemented by the Makkah Municipality and its partners that aims to boost the city’s total capacity for pilgrims to nearly 4m by 2040. As of late September 2012, studies undertaken in connection with the plan were being examined by the Makkah Development Authority before being submitted to higher officials.

Grand Mosque

The centrepiece of the development strategy is the Grand Mosque, at the heart of which is the Ka’aba, Islam’s most sacred site. In 2011 a $21.3bn expansion project was launched to allow the Grand Mosque to accommodate up to 2.5m worshippers at any given time, adding an additional 400,000 sq metres of space, as well as new pedestrian bridges and shaded areas for use during prayer.

Overlooking the Grand Mosque is the Makkah Clock Tower, part of the nearly completed $1.6bn Abraj Al Bayt, a mixed-use hotel and residential project which has been developed by the Saudi Binladin Group.

High-Speed Transport

Linking in to the development of the Grand Mosque is another project which should enable greater numbers of pilgrims to visit Makkah each year: a high-speed passenger rail line.

One of the major challenges facing Saudi Arabia has been to ensure the smooth flow of pilgrims from their point of entry into the Kingdom – normally the sea port or airport at Jeddah – to the holy sites in Makkah. The growing influx of pilgrims has led to severe congestion, both in Jeddah and on the roads leading from it to Makkah. Mainly for this reason, the government has launched the Al Haramain high-speed rail line, which is due to begin carrying passengers from early 2014 (see Transport chapter).

Although catering to other tourists and businesspeople, Al Haramain is primarily aimed at facilitating easy movement of pilgrims between Makkah and Medina, the latter of which is visited by some following their completion of the Hajj or Umrah. Passing via the King Abdulaziz International Airport and Jeddah, as well as the emerging King Abdullah Economic City (KAEC), the new service is eagerly awaited by those in the pilgrimage business. “Some pilgrims currently have to wait four to five hours in Jeddah airport, but we are expecting the passenger trains to make a real difference here,” Majid Hameedi, the managing director of the Siddiqui Hajj Group, a Hajj tour operator, told OBG.

In an effort to promote knowledge transfer, foreign consultants and contractors are involved in Al Haramain every step of the way, with considerable involvement from the local industry. A Saudi-Franco-Chinese consortium has been executing the civil works (phase 1), while a Saudi-Spanish consortium is soon to begin work on the rolling stock, track, signalling and electrification (phase 2). The transition between phases 1 and 2 has been longer than planned, but such delays are natural for a project of such size, and the 2014 target date remains unchanged.

Light Rail & Metro

Another important addition to Makkah’s transport infrastructure is the light rail system, known as Al Mashaer Al Muqaddassah, a driverless system that can transport some 1m pilgrims around the holy city of Makkah. The system began to operate in 2010 and ran at full capacity for the first time in 2011. “This is an amazing development,” Hameedi told OBG. “The journey from Mina to Arafat used to take as long as six or seven hours, but this has now been reduced to two hours. From the pilgrimage operator’s point of view, the fact that the prices are fixed makes it easier to plan pilgrims’ trips.”

Nonetheless, the service currently caters to only 1m of the total of 2.5m-3m pilgrims who are present during the Hajj season, and the number of visitors is only going to increase. “There are still many pilgrims who have to walk or go by bus, so the system needs to be expanded,” said Hameedi. This view was echoed by Khalid Al Jehani, a former general manager of Al Mukramoon. “The line has definitely made a big difference, but we need to have another line in the northern part of Al mashaer (the holy sites),” he told OBG, adding that he thought the transport system in general was in need of greater flexibility in order to take account of pilgrims who arrive early or late into the Kingdom. The government is looking at linking Al Mashaer Al Muqaddassah to Al Haramain to remove bottlenecks in the system.

Metro Expansion

In a separate development, plans for a new metro system appear to have come closer to realisation in 2012. Not to be confused with the existing Al Mashaer Al Muqaddassah – which is sometimes called the “Makkah metro” – the first phase of a citywide metro is included in a $16.5bn transportation plan approved by the central government in August 2012. Encompassing four metro lines, 88 stations and 182 km of track, the project will link Makkah’s districts to the Grand Mosque and will involve the construction of new roads and a bus network. The mayor of Makkah announced in September 2011 that the project should be completed within four years.

Roads

Road upgrades will be no less vital in reducing congestion and accidents. “We need to have more alternative road routes, since a single accident is currently sufficient to disrupt all the traffic flow between Jeddah and Makkah,” said Al Jehani. The government is continuing to commit to considerable new spending on road projects in Makkah. In September 2012, for example, the transport minister signed contracts for SR213m ($56.8m) worth of projects for the construction of new roads in Makkah Province, including the second ring road in Jeddah, along with the Jabal Sharqi and Jabal Thubair roads in Muzdalifa, where all pilgrims stay overnight on their way back from Arafat to Mina. The plan places particular emphasis on the expressways running between Makkah and Jeddah, as well as those linking Makkah and Medina.

Dealing With The Crowds

Despite the enormous and concentrated influx of pilgrims into Makkah, the pilgrims visiting the city in 2012 will be substantially better off than their predecessors were just a decade ago. Expansion works at the Jamaraat, which were completed in 2010, have reduced congestion at one of the most critical points in the Hajj, when pilgrims walk to stone the symbol of the devil in Mina.

Further relief should be provided soon upon completion of new projects, including the construction of the widest pedestrian tunnel in the world, which will link Al Aziziyah neighbourhood and the second floor of Al Jamaraat Bridge, as well as a second tunnel that will allow 500,000 pilgrims to complete the stoning ritual without having to pass through the crowded Mina.

“The government has very successfully reduced the numbers of casualties caused by overcrowding during the Hajj. A handful have occurred in the past several years, but it’s not like the hundreds who died on several occasions during the 1990s and early 2000s,” said Hameedi. Effective crowd control remains a challenge, but new additions such as the Al Mashaer Al Muqaddassah rail and the upcoming metro project should improve the situation further.

However, the need to upgrade the hygiene in and around the location where animals are slaughtered in Mina was raised by more than one Hajj tour operator. “I think the government could do more to provide cleaner pens for the animals, greater organisation for the sacrificial procedure itself, and more refrigerators for the meat,” Al Jehani told OBG. To address this issue, a current municipal project involves the construction of new slaughterhouses at Muaisem.

Housing Options

Expanding capacity for pilgrims is perhaps the primary goal of the Makkah development plan, but by no means the only one. Another major component is the construction of a new suburb called Bawabat Makkah (“Makkah Gate”) on the outskirts of the city. As well as providing 600,000 new housing units, the project is to include many of the features that one would expect in a self-sufficient suburb, such as a university, a park, a hospital and clinics. In addition, there are plans for an entertainment and educational complex, a water park and a theme park, among others. The project is under development by the Bawabat Makkah Company, a subsidiary of the municipality’s investment arm, Al Balad Al Ameen.

“The primary target buyers for the new housing units are Saudi Arabian nationals. These could be residents who have moved out of central Makkah, or perhaps people now living in Jeddah and wishing to commute from Makkah instead. Due to its position on the Jeddah-Makkah highway, the new suburb should provide easy access to both cities,” Saleem Bukhari, the senior technical coordinator at the Bawabat Makkah Company, told OBG.

In 2012 the official launch of the Bawabat Makkah’s first project took place. A joint venture with Saudi-based Sumou Real Estate on a space of around 1.5 sq km of a total 86 km, the Sumou Suburb Project is in its final phase and set to be completed within five years. Plans are also fairly well advanced for collaboration between Al Balad Al Ameen and the Ministry of Housing on the creation of new housing units for Saudi nationals, and suggestion has also been made for the construction of a camp for the use of workers involved in Makkah’s developments.

At a time when the whole of Saudi Arabia and the Makkah region in particular are in urgent need of new housing supply to meet rising demand, Bawabat Makkah’s housing units are likely to be eagerly anticipated. Given the scale of the development taking place in central Makkah, there is also a considerable need for replacement units.

Local press reported in early 2012 that the government anticipates having to pay out around SR120bn ($32bn) in compensation for expropriated real estate, especially that in the centre of the city.

What is more, additional supplies of housing will ultimately be produced by the redevelopment of existing residential areas in the centre of the city, including a number of slums and unplanned settlements, some of which are located very close to the Grand Mosque. In September 2012 the municipality gave the go-ahead for plans to redevelop the Gooz Al Nakasah, Al Kedwah, Al Zuhoor and Al Sharashif neighbourhoods, the local press reported.

Hotel Developments

International hotel brands are making enormous profits on their business ventures in Makkah, benefitting from a surge in trade from increasingly affluent Muslim pilgrims as well as government support. Several massive developments are set to increase the number of hotel rooms in the city from around 50,000 to some 75,000. Most of the existing and upcoming hotel capacity will be catering to the higher end of the market, but there are significant opportunities for growth of two-star and three-star accommodation, as well as for furnished apartments. The market is not without its challenges, but the outlook for continued growth in the sector seems very positive indeed (see analysis).

Retail

Makkah’s retail sector is seen to have real potential for growth. While a large portion of activity is still conducted at roadside stalls, organised retail has also taken off in the city. Retailers by and large tend to target lower- and middle-income consumers.

“We are talking about a B-grade market in Makkah,” said Khalil Al Arab, the manager of retail and corporate solutions at JLL in Jeddah. “This is because the market is primarily focused on visiting pilgrims, who tend to be less wealthy than resident Saudis. However, the increasing number of pilgrims here is keeping demand high, and as such we are seeing very strong leasing rates for retail tenants. The main target area for retail is central Makkah, close to the Grand Mosque,” he said.

International brands, such as H&M and Debenhams, have established a presence here, but well-known labels in pilgrims’ countries of origin have also proven successful. “We see a lot of Pakistani brands doing well in Makkah,” Fayyaz Ahmad, the head of research at JLL in Riyadh, told OBG. The residents of Makkah, by contrast, frequent different retail venues. “People who live permanently in Makkah like to avoid the crowds of pilgrims by doing their shopping on the outskirts of the city,” said Anas Darwish, a leasing manager for the Al Khosama Management Company, which has investments in Makkah, Jeddah, Medina and Riyadh. “Yet even the residents tend to have limited purchasing power when you compare them to those in Jeddah and especially Riyadh.” Retailers in Makkah are looking at a very particular kind of market, in which certain products are in very high demand. Religious items are especially popular, and statistics suggest that prayer beads, antiques, handicrafts and prayer mats are among the souvenirs most commonly chosen.

Other purchases are also popular. “Items like oud (perfume) and dates are also very popular among religious pilgrims. In the mall owned by Jabal Omar, for example, Arabian Oud Rasasi has as many as seven outlets,” said JLL’s manager of retail and corporate solutions in Jeddah, Al Arab. Gold and precious stones are also much sought after. “Pilgrims coming to Saudi Arabia are able to purchase 21-karat gold, which is prohibitively expensive in many places in the world. There are no direct taxes on such items here, making them a better value,” said Al Arab.

Solar Solutions

While Makkah’s ongoing and upcoming developments are primarily focused in the real estate sector, the city is also leading national efforts to promote the greater use of solar power. After a report was released in late 2012 by Citigroup suggesting that Saudi Arabia could become a net importer of energy by 2030 (provided domestic oil consumption rises in line with peak power demand), there has been added impetus for the Kingdom to act upon existing promises to invest a total of some $109bn in solar power projects by 2032.

According to reports in September 2012, Makkah Municipality will select from a group of at least 20 bidders for the construction of a power plant that is to include 100 MW of solar power by January 2013. Given the centrality of Makkah to the Muslim world, the completion of such a project here could have a knock-on effect, helping to galvanise further solar projects in the region and beyond.

Outlook

Strong demand in Makkah’s real estate, construction, hospitality and retail sectors is hardly in question, supported as it is by a rapidly growing influx of pilgrims, as well as pent-up demand among the local population for new housing and transportation facilities. Realising the Makkah development strategy will not be without its challenges, however.

As with other regions of the country, land ownership and land speculation represent major challenges for developers. Some in the sector also highlighted a shortage of quantitative information on Makkah’s economy; given its central importance to the Islamic faith, it is sometimes assumed that the demand for new projects in Makkah is beyond all doubt, and this can discourage data collection.

The Saudi Arabian government has recognised that delays to public sector projects are a serious challenge, and the governor of Makkah, Prince Khaled Al Faisal, in 2012 explicitly called for projects to be expedited. Funding, however, does not seem to be an issue. Following a significant increase in the Kingdom’s public spending committed to housing and infrastructure projects since 2011, there is good reason to expect that the pace of development in Makkah will continue to gather momentum in the years to come.

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The Report: Saudi Arabia 2013

Makkah chapter from The Report: Saudi Arabia 2013

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