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Sat 20 Jun 2015 01:10 PM

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Undersupply of budget hotels in Saudi Arabia

Despite demand, the number of three- and four-star hotels in the kingdom remains low, according to report

Undersupply of budget hotels in Saudi Arabia
Action Hotels will develop a three-star hotel in Riyadh, KSA. (Bloomberg)

Despite high demand for the category, the three- and four-star hotel market in Saudi Arabia is under-supplied, opening the door for building new facilities or renovating existing ones in the country, Construction Week Arabia has reported.

STR Global in March 2015 revealed capital city Riyadh has seen a sharp rise in revenue per available room (RevPAR) since 2008, achieving one of the region's highest Average Daily Rates (ADR) during 2014. By the end of 2014, the numbers for Riyadh showed 59 percent occupancy rate, ADR of $235 (SAR884), with REvPAR of $140 (SAR526).

In April 2015, Action Hotels, owner, developer and asset manager of branded three- and four-star hotels in the Middle East and Australia, announced the addition of a three-star hotel in Riyadh. The 130-bedroom property is set in the Olaya district, a fast-growing financial and hospitality hub in the country. It will be developed by converting an existing office building, over a period of twelve months.

“There is a limited supply of quality, internationally-branded economy and midscale hotels in Saudi Arabia," Alain Debare, CEO of Action Hotels tells Construction Week Arabia.

“Although the Riyadh hotel market is mature, there is considerable demand for mid-economy branded hotels from the corporate segment. This segment is currently under supplied."

Debare explains that there was a multitude of five-star hotels across the region, but research shows that many business travellers don’t want to spend $350 a room.

"They’ll find there is little supply in the three- and four-star range," he adds.

When Action Hotels started business in 2005, it went with a niche offering in Jordan, Kuwait, Bahrain and Oman, where there were no branded economic mid-market hotels.

“We are able to develop and divert good returns from good demand, (which would have) not (been) the case if we had been building five-star hotels, whose finances take a lot of time to stabilise," Debare says.

The region’s current announced pipeline of economy and midscale hotels represents less than 20 percent of the overall branded hotel supply, and is below international averages covering similar size real estate. The opportunity to build budget accommodation is a lucrative one in Saudi Arabia, the region's largest country, which is also working on a long-term strategy focused on economic diversification and encouraging business travel.

Action's conversion project in Riyadh is scheduled to open in the second quarter of 2016. The estimated cost of conversion is $8m, which brings the per room cost to $60,000; a hotel built from scratch will cost in the range of $135,000 to $240,000 per room.

“We have 20-year lease with an option to renew,” Debare says about the conversion project. “With leases, we can grow faster and with a lower cost of investment," he continues. Going forward, the company will lease four out of nine hotel projects in its pipeline, and own the rest.

Debare scribing the Olaya opportunity as “rare”, because the building is a superstructure with cladding, but without MEP installations.

“We have elevator lifts and lobby to drive efficiency. This building was very well designed.”

The Olaya building is an unused structure between three and four years old, and 10 months away from completion, with the floor plan being an open shell. Debare confirms that Action Hotels is finalising the terms of a long-term management agreement with a leading hotel brand.

“It’s our first hotel in Riyadh but second in Saudi with our first under construction right now in Jeddah Industrial city,” he adds.

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