Holy Cities: Saudi s Unique Real Estate Markets

June 2010 Holy Cities: Saudi s Unique Real Estate Markets The Muslim Holy Cities of Makkah and Madinah are unique real estate markets, benefitting from effectively unlimited visitor demand from the world s 1.8 billion Muslims. Increasing Hajj and Umrah visitation to the Holy Cities (from the current total of around 7.8 million per annum) is dependent upon relieving the existing infrastructure and other capacity constraints. Given the significant movement between sites associated with the Hajj, the prime constraint relates to the ground transport system within and between the Holy Cities and not broader airport capacities or the ability to provide sufficient accommodation. Our analysis of potential capacity constraints suggests that the total number of Hajj and Umrah pilgrims visiting Makkah and Madinah could almost double to 13.75 million by Hijri year 1440 (2019). Increasing pilgrim numbers will provide significant opportunities for an expansion of the existing hotel room supply, with a total of around 82,000 hotel rooms being required in Makkah by Hijri year 1440 (2019). Image credit: www.islamic-architecture.info

Al Jawf NorTHern Border Kuwait TABUk Ha il Damman/Al-Khobar BAHrAIN Al QasIM Eastern ProvINCe QATAr Madinah Al MadINAH Riyadh UAE Jeddah MakkAH Makkah Ar riyad OMAN Al BAHAH Asir NAJrAN Jizan Yemen km 0 500

On Point Holy Cities City Profile June 2010 3 Introduction Objectives There has been a marked surge in overseas interest in the Saudi Arabian real estate market over the past few years. Most of this interest has been focused on the two largest cities (Riyadh and Jeddah), with Makkah and Madinah being less in the spotlight, at least on the international stage. This report attempts to address this imbalance and highlight the opportunities in the hospitality sector presented by the unique status of Makkah and Madinah as Islam s two most Holy Cities. The hospitality markets of the Holy Cities are unique in benefiting from an effectively unlimited pool of demand. The major constraint on the growth of these markets is, therefore, the ability to accommodate this demand and balance the sometimes conflicting needs of religious pilgrims and local residents. This report: Examines the growth of religious tourism and makes projections of the potential increase in Umrah and Hajj arrivals. Identifies the major capacity constraints that need to be addressed if these forecast visitor arrivals are to be met. Reviews the urban planning initiatives that are being adopted to balance the competing needs of local residents and religious pilgrims in Makkah and Madinah. Discusses the future prospects of the hospitality market in terms of demand / supply and performance of hotel assets. Strongest Performing MENA Real Estate Markets Saudi Arabia in Context While other real estate markets across MENA have seen a slowdown in both development activity and investment over the past 18 months, interest in Saudi Arabia has remained strong from both local and overseas investors. Based upon its unique combination of energy driven capital and a large domestic population, Saudi Arabia emerged as the MENA destination of choice among real estate investors responding to Jones lang lasalle s most recent Real Estate Investor Sentiment Survey. The country of 27 million inhabitants has been experiencing a baby boom in recent years, resulting in a very young and rapidly growing population. The native population is being complemented by a rapid increase in expatriates (which now comprise 28% of the total population), with the large majority of these expatriates coming from other Muslim countries. Saudi Arabia is a society organised around Islamic principles, based on its role as custodian of the Holy Mosques (located in Makkah and Madinah). The distinguishing feature of the Holy Cities is their unique importance as destinations for Muslims from across the world seeking to undertake Hajj and Umrah. The major challenge is how this demand can be balanced with the accommodation and other needs of the growing local population across the Kingdom including the Holy Cities. Although the value of oil exports declined dramatically in 2009, the government has been able to draw on major foreign currency and gold reserves (conservatively estimated at over USD 40 billion) to limit the contraction in GDP and proceed with a hugely ambitious expansion of spending on physical infrastructure and social investments in areas such as education and healthcare. Saudi Arabia 30% UAE Abu Dhabi 25% Egypt 13% Qatar 12% UAE Dubai 9% Bahrain 4% Levant 3% Morocco 3% Oman 1% Source: Jones Lang LaSalle Fourth Real Estate Investor Sentiment Survey, April 2010 The government is increasing spending on infrastructure as part of its economic expansion initiatives with an allocation of Usd 12.2 billion in the 2010 budget (compared to Usd 9.3 billion in 2009). In addition, the government has allocated some Usd 5.8 billion to fund municipality services. A significant amount of the total infrastructure spending has been aimed at increasing the capacity of the Holy Cities to accommodate additional religious tourists through a major expansion of lodging capacity and the air, road, rail and sea networks. Other areas of increased spending have included utilities (electricity and desalination) improving water and sewage networks, wells and dams.

4 On Point Holy Cities City Profile June 2010 Understanding the Holy Cities Makkah and Madinah are the capital cities of two of the 13 provinces of the Kingdom of Saudi Arabia. These cities, which are located approximately 425 km apart, are relatively small by global standards (with resident populations of around 1.8 million and 1.1 million respectively). Their importance far outweighs their size on account of their position as the two Holiest Cities of Islam. At least five times every day, hundreds of millions of Muslims from all parts of the earth turn in the direction of the Holy Ka'aba, (which is located in the Haram or Holy Mosque) in the centre of Makkah (birthplace of the Prophet Mohammad (PBUH)) to pray. Other Muslims perform their prayers in the Prophet's mosque located in Madinah (his home and burial place). The opportunity to visit Makkah and Madinah for either Hajj or Umrah is a highlight for the world's 1.8 billion Muslims. Umrah attracts the most visitors (around 5.3 million in 2008). Although there is a peak season for Umrah (associated with Islam s holy month of Ramadan), the Saudi authorities have recently increased the period for which entry visas for Umrah are granted to 8 months every year. Unlike Umrah, Hajj is one of the five pillars of Islam. Able Muslims are required to perform Hajj (during the 12 th month of the moon sighting based Hijri calendar) at least once in their lifetime. Around the 9 th day of Hajj month, more than 2.5 million Muslims gather in Makkah to perform Hajj. Quotas are in place in all countries for the Hajj visa and even Saudi nationals are required to have a special permit to enter Makkah and perform Hajj. Some of the Hajj rituals take place around and near the Ka'aba in the Holy Mosque. However most of the Hajj phases take place in the Mashaer, three open sites about 5 km south east of Makkah. These key phases involve overnight stays under tented camps. Planning for a gathering of 2.5 million people is a unique challenge. The complexity of this task is compounded by the fact that Hajj involves significant movement between different locations. The ability to accommodate Hajj visitors is therefore not only a matter of stock capacity (rooms) but also a matter of flow capacity. In many ways it is this flow capacity (ground transport within Makkah itself) that imposes the real constraints on the growth of Hajj pilgrims. The Holy Cities are also unique from a real estate perspective. While restrictions on foreign ownership of real estate across Saudi Arabia have been relaxed recently, foreign parties are still prohibited from owning land in Makkah and Madinah. In practice this has not constrained the involvement of GCC and other foreign parties, a number of who have become major players in these markets through joint ventures with local Saudi developers.

On Point Holy Cities City Profile June 2010 5 Religious Tourism There are currently approximately 1.8 billion Muslims globally, with Indonesians, Indians and Chinese accounting for around 32% of this total. Muslims are accounting for an increased percentage of the global population as countries with a significant Muslim population have been experiencing higher population growth rates than other countries over recent years. During the last five years, countries with a significant Muslim population have experienced demographic growth of nearly 2% per year, compared to 1.5% per year for the rest of the world. The global growth in the Muslim population and the declining relative cost of international travel have been the main drivers for the increased number of religious tourists (pilgrims) performing Hajj and Umrah in recent years. Total (Hajj plus Umrah) visitors have increased from 5.3 million to 7.7 million over the past 5 years. The Saudi Ministry of Hajj and Umrah has established a quota system for both Saudi and overseas visitors. The annual Hajj quotas for overseas visitors currently constitute 0.1% (or 1/1000) of the total population of the source nation. With these quotas remaining unchanged in recent years, the increase in pilgrim arrivals is largely due to the growth of the Muslim population. Hajj Visitors 3.0 Umrah Visitors 6.0 2.5 5.0 Hajj Arrivals (millions) 2.0 1.5 1.0 0.59 1.42 0.63 1.53 0.57 1.56 0.75 1.71 0.70 1.71 0.71 1.73 Umrah Arrivals (millions) 4.0 3.0 2.0 1.3 1.6 1.7 1.9 2.0 2.1 0.5 1.0 2.0 2.3 2.5 2.7 2.9 3.2 0.0 1424 1425 1426 1427 1428 1429 0.0 1424 1425 1426 1427 1428 1429 (2003) Hijri Year (2008) (2003) Hijri Year (2008) Non-Saudis Saudis Non-Saudis Saudis Source: Jones Lang LaSalle and the Ministry of Hajj and Umrah Source: Jones Lang LaSalle and the Ministry of Hajj and Umrah

6 On Point Holy Cities City Profile June 2010 Hajj Visitors Main Foreign Source Markets 1428 (2007) Growth in Religious Tourism The growth in Hajj and Umrah visitors is currently constrained by a number of infrastructure issues, including lodging capacity in Makkah and Madinah, transportation bottle necks and government regulations regarding visas. With total visitors (7.74 million in 1429 (2008) representing just 2% of the global Muslim population, there are few constraints in respect of total potential demand. A number of major initiatives are underway to alleviate the current infrastructure constraints (these are discussed in more detail in the following section of this report) and allow the Holy Cities to efficiently accommodate a larger number of pilgrims. Based on data from the Hajj & Umrah Research Institute and discussions with other leading stakeholders, it is estimated that the planned developments and other infrastructure initiatives will increase the potential number of Other 38% Other Arab 24% Subcontinent 24% Africa 10% GCC 4% pilgrims visiting the Holy Cities to around 13.75 million by Hijri Year 1440 (2019). Umrah 1429 (2008) A figure of 12 Millions Umrah visitors, during the 8 month Umrah season, is often mentioned. Given the cautious and prudent approach the Saudi government has adopted to the issuance of Umrah visas and the other potential capacity constraints, we do not foresee an average growth rate of more than 7% per annum. This would result in the number of Umrah visitors increasing from 5.3 million last year to around 10 million by the start or beginning of the Hijri year 1440 (2019). Other 39% Other Arab 22% Subcontinent 25% Africa 10% GCC 4% Hijri Year 1429 1428 Share % Growth % Hajj The more concentrated timeframe involved with Hajj means there are more significant capacity constraints, bottle necks and challenges involved. We therefore expect the number of Muslims performing Hajj to increase less rapidly than those performing Umrah. Our assessment of the likely constraints suggests the maximum rate of growth achievable is unlikely to exceed 4.5% per annum, which would result in around 3.75 million Hajj visitors by the start or beginning of the Hijri year 1440 (2019). GCC (excluding Saudis) 69,533 64,221 4% 8.3% Other Arab 386,423 406,457 22% -5.0% Future Growth of Hajj & Umrah Visitors Africa 166,580 164,276 10% 1.4% Subcontinent 426,763 406,131 25% 5.0% Other 683,483 670,776 39% 1.8% Total 1,732,782 1,711,861 100% 1.2% 1429 (2008) 1440 (2019) Umrah 5,300,000 10,000,000 Hajj 2,440,000 3,750,000 Total 7,740,000 13,750,000 Source: Jones Lang LaSalle, Ministry of Hajj and Umrah, 2009 Source: Jones Lang LaSalle

On Point Holy Cities City Profile June 2010 7 Infrastructure Capacity Many new infrastructure developments are planned and some have already obtained the royal decree to start construction work, which will help alleviate lodging during peak seasons. The combination of these large scale development projects, the planned major transportation initiatives and government initiatives to streamline visa regulations, will significantly increase the capacity of Makkah and Madinah to efficiently accommodate a larger number of pilgrims. The following section of this report outlines a number of the major transportation, real estate and regulatory initiatives. Transportation Initiatives King Abdulaziz International Airport, Jeddah As part of a plan to revitalise and modernise the Kingdom s airports, Jeddah s King Abdulaziz International Airport is undergoing substantial expansion and upgrading which will allow it to handle up to 80 million passengers per annum. The first phase of this work entails the construction of a new passenger terminal (replacing the existing outmoded Saudia and International terminals), boosting capacity from the present 15 million passengers to 30 million. The crescent shaped new terminal (designed by Aeroport de Paris International), will rival any facility in the region in efficiency and style when completed in 2014. At the same time, improvements are also being made to the existing Hajj terminal, to improve passenger processing and increase efficiency. The Hajj terminal currently accounts for nearly one-third of the airport's total traffic. The General Authority of Civil Aviation forecasts that traffic through the Hajj Terminal will increase from 4.5 million passengers in 2004 to 9.2 million by 2025. The terminal expansions will be matched by plans to greatly improve ground transportation, with new road networks and interchanges, a light rail system linking the airport with central Jeddah and a proposed station on the high speed Al Haramain Rail Link, connecting the airport directly with Makkah and Madinah. In addition to air side expansion, the airport has invited developers to create an Airport City on approximately 100 hectares of land adjacent to the airport. Detailed plans for the Airport City have yet to be announced but it is envisaged that it will include a wide range of facilities including hotels and serviced apartments, retail, a business park and exhibition / conference facilities. Image credit: www.farm2.static.flickr.com/1108/714387384_454ab54927_o.jpg

8 On Point Holy Cities City Profile June 2010 Madinah Airport The General Authority of Civil Aviation (GACA) also has plans to upgrade the existing terminals and develop new facilities at Madinah airport. This expansion is designed to stimulate domestic tourism and increase the ability to deliver pilgrims to the Holy Cities. It is estimated that up to 50% of the pilgrims visiting the Holy Cities will use the proposed new train, with a significant number of these travelling directly from the expanded King Abdulaziz International Airport in Jeddah. The route will be exclusively for passenger traffic and will not carry any freight. The station locations have been agreed at: The proposed expansion of the Prince Mohammed bin Abdulaziz International Airport in Madinah will be financed through a public private partnership (PPP) structure. It has been reported that 49 bidders have expressed interest during the pre-qualification stage. The project is designed to increase annual passenger traffic from 4 million passengers in 2009 to 14 million by 2030. The airport sits within easy transfer distance to the new Knowledge Economic City and the terminus of the proposed high speed railway. KAEC Seaport There are also plans to develop a new seaport within the King Abdullah Economic City (KAEC) north of Jeddah. This terminal is being designed to handle up to 500,000 pilgrims during the Hajj season. Saudi bin Laden Group is the investment partner for the new port. The world s largest dredging vessel is on its way from the Netherlands to start work, and phase one of the port should be operational by 2012. Dubai World was the original port operator but is no longer involved with the project, which will now be operated by a new unit within Emaar Economic City. It is proposed that pilgrims will be able to transfer onto the Makkah Madinah Railway at the KAEC station and reach either of the Holy Cities in less than 90 minutes. Haramain High Speed Railway The Saudi Railway Organisation has started work on the Haramain High Speed Railway between Makkah and Madinah. Civil works are now being undertaken by a consortium led by Al Rajhi. The stations have been designed by Foster + Partners and tenders have recently been issued for their construction. The 450 km line will be fully electric, with train speeds of up to 320 km per hour being achieved. Makkah Central Jeddah Central Jeddah Airport King Abdullah Economic City, Rabigh Knowledge Economic City, Madinah Madinah Station The Madinah Railway Station will be a terminus station for the Haramain High Speed Railway. Current projections suggest that the station will handle 6.2 million passengers per annum by 2015. Saudi Railways Organisation will build the station while Knowledge Economic City Developers Co. are developing the surrounding land parcels. Foster + Partners has been appointed for the architectural design of the developments. The station is planned to create a modern, multi-modal transportation centre, surrounded by a high-density, mixed use development. Makkah MRT A new monorail is currently being constructed within Makkah, providing a mass rapid transit (MRT) system linking the centre of the city with the holy sites at Mina, Arafat and Muzdalifah. Around 12,000 workers are currently working on this project, which is being developed by the China Railway Corporation. Saudi authorities have indicated that 35% of the Usd 1.8 billion Makkah monorail project will be completed during the course of this year, with the entire project scheduled for completion in 2011.

On Point Holy Cities City Profile June 2010 9 Real Estate Initiatives Makkah Expansion of the Holy Mosque One of the key capacity constraints relates to the Holy Mosque itself. The Mosque has been expanded several times through history across its three components, which are related to the main Hajj and Umrah rituals, namely the praying areas, the Tawaf areas and the Say area. The extensions were initiated in 1985, have effectively doubled its capacity to allow up to 1.5 million worshippers to pray at the Holy Mosque at any one time. The recent expansion has included an increase in the size of the Mosque itself and the establishment of prayer sites on the roof of the facility. To protect worshippers from the heat, the largest air conditioning plant in the world has been established at the mosque and special tiles that dissipate heat have been used to cover the prayer grounds in the open areas. The Haram has recently been significantly expanded with the completion of the Masa a (Sa y area) project, which involved the Masa a area being expanded from 29,400 sq m to 87,000 sq m. As well as the Masa a area, other projects have recently been completed which provide space to accommodate 500,000 pilgrims at any point of time. A further major expansion is currently taking place to expand the Northern plazas of the Mosque towards the Shamiya area to provide additional praying space. Because of its configuration, it is difficult to expand the Mosque further in a conventional manner. As an alternative approach, multi storied praying halls are therefore being included in many of the major development projects being built close to the Haram, as a form of remote extension to the Haram. Lodging Capacity The city of Makkah currently provides approximately 50,000 hotel rooms (representing nearly 40% of the total hotel room stock in the Kingdom). Around 9,000 rooms in Makkah and 4,800 rooms in Madinah are classified as excellent quality by SCTA. The supply of truly international standard / up scale hotels is however, more limited and estimated to be in the order of 5,300 rooms in Makkah. Current Stock of Hotel Rooms (Makkah) Current Stock of Hotel Rooms (Madinah) Total of 50,000 Rooms Total of 20,000 Rooms Excellent Hotels 18% First Class Hotels 34% Second Class Hotels 30% Third Class Hotels 18% First Class Hotels 35% Excellent Hotels 24% Second Class Hotels 23% Third Class Hotels 6% Un-classified 12% Source: Saudi Committee for Tourism & Antiquities (SCTA), Jones Lang LaSalle Hotels Source: Saudi Committee for Tourism & Antiquities (SCTA), Jones Lang LaSalle Hotels

10 On Point Holy Cities City Profile June 2010 The stock of hotel rooms in Makkah could double over the next 10 years, with as many as 50,000 additional rooms proposed within the major new redevelopment areas (e.g. Al Shamiyah, Jabal Omar, Jabal Al Khandamah, Waqf 2). These projects include the proposed Fairmont, Raffles and Movenpick hotels within the Abraj Al Beit project. Regulatory Initiatives The importance of regulatory constraints is highlighted by the additional restrictions that the Saudi government imposed in 2009 in response to the H1N1 pandemic. Visas were not issued to many pilgrims for health safety reasons, hereby reducing the number of religious tourists visiting the Holy Cities last year. It should be noted that few of these projects are yet under construction and not all of this potential supply is likely to be delivered. Phase one of Jabal Al K aba (located in the Haram vicinity) will deliver some 2,000 new hotel rooms by the end of 2010 (with an additional 5,000 rooms proposed to follow in the coming three years). The only other projects that have obtained the royal decree are Jabal Omar, which is in its execution stage and the proposed King Abdulaziz Road development. Madinah Madinah has a smaller stock of hotel rooms than Makkah, units around 20,000 existing rooms (19% of the national total). SCTA classifies 4,800 of these to be of 'excellent' quality but Jones Lang LaSalle Hotels estimate the current stock of truely international quality rooms to be around 3,200. The Saudi Government has plans to increase both the number of religious tourists undertaking Hajj and Umrah and also encourage pilgrims to stay for longer breaks. The Saudi Committee for Tourism and Antiquities (SCTA) is expecting an increase of revenues from Umrah visitors through its strategy of "Umrah-plus", which aims to encourage middle- and upper-income Umrah pilgrims to extend their stay and visit other regions of the Kingdom. Key target markets include Malaysia, Egypt, Oman, Morocco and the UAE. Foreign tour operators have expressed concern that the process of obtaining Umrah visas can sometimes be slow. The current system is constrained by the requirement that visas for any visits during Hajj can only be issued if the trip is arranged by a registered travel agent in liaison with another organiser located in Saudi Arabia. There have been far fewer new hotels announced in Madinah, with less than 3,000 additional rooms in projects close to the Holy Mosque expected to be delivered over the next 3 years. Most of the new supply is in the area to the south of the Holy Mosque as this area is currently less developed than the area to the north of the Mosque, which is built out and therefore only offers redevelopment opportunities. Outside of the central area, the greatest addition to hotel stock in Madinah will be within Knowledge Economic City. This major new development, located on the western outskirts of Madinah, has the potential to deliver between 2,500 and 3,000 rooms over the next 10 years. During Umrah and non-hajj periods, travel agents from source markets may acquire visas, but there are tight restrictions on the number of pilgrims they can bring. Third party distributors have a significant impact on the hospitality market within the Holy Cities. Agents and tour operators serve to direct travellers towards specific hotels and participate heavily in the issuance of visas and other on-site logistics. Increasing the number of visas issued and speeding up the visa issuance process represents a key step towards increasing the number of pilgrims visiting the Holy Cities.

On Point Holy Cities City Profile June 2010 11 Master Plan Considerations Following the unplanned expansion of the real estate markets in the 1980 s, the Saudi Authorities have recognised the need for a more coordinated approach to the development of the Holy Cities. They have therefore embarked on a general overhaul of the planning of the Holy Cities and in particular the area around the Holy Mosque in Makkah. Rarely has the need for a more coordinated approach to the planning and development of these cities been as high a priority as it currently is. The overall objective of the planning framework currently being developed is to balance the increasing needs and requirements of religious pilgrims with the permanent social and business needs of the local resident populations of Makkah and Madinah in a sustainability driven approach. Achieving the right balance between expanding the hospitality sector capacity and traffic capacity is another major objective and priority for the Saudi Authorities in terms of the future planning of the Holy Cities. Makkah After addressing the most urgent priorities of safety for religious pilgrims undertaking the Hajj, the Saudi Authorities are now turning their attention to improving the comfort standards for pilgrims and creating a functioning city for residents of Makkah. More than 20 master plans have been submitted for individual large scale real estate developments in central Makkah in recent years. Several of these have now been approved with the projects progressing to the implementation phase. Providing additional quality space for visitors has highlighted the needs of the permanent residents of the Holy Cities and prompted the Authorities to introduce a social sustainability dimension in the approval process. Among the major projects in Central Makkah for which master plans have been approved are: Jabal Omar is one of the largest of the mega developments. Construction has commenced on this project, which is located on the western side of the Haram. The project company Jabal Omar Development Company, was formed as a joint stock company of 5,000 owners of 1,200 real estate parcels covering an area of 232,000 sq m. The project is expected to deliver over 10,000 hotel rooms as part of the total built-up area of around 1.8 million sq m. Jabal Khandamah. This project covers 600,000 sq m of land to the east of Al Masjed Al Haram in Makkah. The development aims to replace the old buildings, streets and narrow alleys with high quality new buildings. The Khandamah project aims to become a pedestrian friendly city, with the total separation of pedestrians and vehicular traffic. The development includes a total of 2.5 million sq m of built-up area of various hotel classes, retail facilities and residential units for up to 90 thousand residents. King Abdul Aziz Road is a 3.5 km development site that starts at the west entrance of the holy city of Makkah on the intersection of the Jeddah Makkah highway and the third ring road and ends at the east entrance of the Jabal Omar development. The plan is to re-develop one of the most densely populated areas in Makkah, to provide a mix of high quality hospitality, residential and commercial real estate to serve the local population as well as Hajj and Umrah visitors. Source: King Abdul Aziz Road

12 On Point Holy Cities City Profile June 2010 Efforts are being made to coordinate between the 20+ individual masterplanned projects with an international firm of master planners engaged to ensure a degree of consistency and adherence to a number of guiding principles, including: Madinah (Including Knowledge Economic City) With a population of approximately 1.1 million (growing at over 2% per annum) and a major increase in the expected number of religious visitors, Madinah s growth also requires strategic real estate planning. Introducing a more balanced and comprehensive planning regime. Providing more open space and improving the overall experience of visitors and local residents. Balancing land use and transport capacities to avoid problems of overloading the transport network. New institutions are being created and existing ones strengthened and supported, to provide guidelines to individual developers during the critical design and planning phases of their projects. The main focus of these guidelines is to ensure a more balanced and harmonious form of development of central Makkah. The authorities are seeking to create a better balance between the much needed increase in the quantum and quality of the accommodation and the resulting pressure that such developments will impose on the public realm and the transport infrastructure. Hajj and Umrah have historically relied on a residential hospitality model, whereby visitors to Makkah were accommodated in residential type buildings, minimally furnished and not serviced. This led to a substantial stock of residential real estate stock being developed. This stock has traditionally been used by pilgrims as temporary accommodation during the Hajj season, while being utilised by local residents for residential use for the rest of the year. Over recent years, the Hajj and Umrah lodging model has been changing towards more service based hospitality providing higher comfort and safety standards and therefore requiring higher financial resources. The suitability of this style of accommodation to service the needs of the local population is more limited and this has resulted in the needs of the surrounding communities becoming more acute. The Holy Mosque of Madinah, which is located in the Central Area, is considered the focal point of the city. The urban framework of the city spreads within four ring roads, although the construction of the third and the fourth ring roads is not complete. Most of the projects in the Central Area are complete. Madinah is planning to develop the area between the second and third ring roads and facilitate the development of areas beyond the third ring road. Several commercial and residential projects are expected to be developed in Madinah over the medium-to-long term. The most prominent real estate project, Knowledge Economic City (KEC), is located approximately five kilometers east of the Holy Mosque. It is a 480 hectare development with a projected built up area of 8 million sq m and a projected population of 150,000. The project will require investment over USD 8 billion. kec is planned to include a number of uses including a technology office park, a center for Islamic studies and research, an educational / entertainment park, a medical and polyclinic center, a multimodal transportation centre, a world class business district, a major retail hub, residential units, a 10,000 capacity mosque, a convention centre and a hospitality complex. HOK completed the master plan of the development. kec has been conceived as one of the Kingdom of Saudi Arabia s key economic cities. It is poised to uplift the quality of living to international standards and will deliver a critical mass to the city. Currently, the master developer is constructing Phase 1, a villa development in the northwest sector of the project. The villas are anticipated to be handed over in 2011. kec also has the potential to accommodate a sizeable share of religious pilgrims as it is strategically located equidistant from the Haram and the Airport, and will be served by the train station.

On Point Holy Cities City Profile June 2010 13 Hotel Market Analysis With approximately 7.7 million pilgrims in 2008 (including Saudis), and the shift towards more high quality hotel style accommodation to accommodate Hajj and Umrah visitors, the hotel markets of Makkah and Madinah have been among the most active in KSA in recent years, attracting significant interest from both local and overseas investors and developers. Most of the existing room stock (around 50,000 in Makkah and 20,000 in Madinah) is not of international quality and there is a clear need to increase this supply to accommodate the growing and maturing requirements of pilgrims undertaking Hajj and Umrah. There are discussions underway between the development industry, that is proposing a significant increase in the number of hotel rooms in the Holy Cities, and the Saudi authorities, who are looking to prudently regulate future increases in religious tourist arrivals. The manner in which there discussing are resolved will have a major impact on the future direction of the hotel markets in both Makkah and Madinah. Makkah Despite the potentially unlimited demand from Hajj and Umrah visitors, the Makkah hotel market is still influenced by supply considerations with recent additions to stock resulting in a 30% fall in the average room rate in 2009 to SAR 654 per night. Market performance was also negatively impacted by health concerns related to H1N1 which resulted in the average occupancy level declining to just 53% (for the year 2009), its lowest level for more than 5 years. There is a significant degree of seasonality in the Makkah hotel market. The Hajj, Ramadan and school holiday periods are peak times. Occupancy levels fall steeply during the clean up period of 1 2 months following Hajji, during which Umrah or Hajj visas are not issued. During the peak periods, most quality hotels only take bookings from tour operators and impose minimum lengths of stay. Hotels run at 100% occupancy during the Hajj period, but occupancy levels fall to 30% 40% in the off peak seasons immediately after Ramadan and Hajj. Leading international operators are competing to deploy their most prestigious upscale brands within the future hospitality projects in the Holy Cities. The extent to which these brands are in line with the current and future demand profile remains an open question. On the other hand, the conventional budget hospitality concept does not seem to provide a straightforward or relevant alternative. The optimal hospitality model in the Holy Cities is yet to be reached in a context where investors and the Saudi authorities, are challenging the conventional vision. Makkah Quality Hotel Market Performance (ADR and Occupancy) ADR (SAR) 900 800 700 600 500 400 300 200 100 0 830 100 663 699 90 654 80 532 70 61 61 56 56 53 60 50 40 30 2005 2006 2007 2008 2009 ADR (SAR) Occ % Occ % The average length of stay also varies significantly according to the season. In the Hajj season, all of the major hotels benefit from stays of up to 20 days per guest. This is due to the minimum stay packages enforced by hotels. During Ramadan, many hotel operators will only sell ten day packages to increase the average length of stay and room yield. The other major factor influencing hotel performance in Makkah, is the distance of individual projects from the Holy Mosque. It is noticeable that regardless of the properties positioning, its location and proximity to the Holy Mosque is the key driver of occupancies and average room rates. Properties within walking distance of the mosque registered the highest revenue per available room (RevPAR) of SAR 530 in 2009, compared with SAR 198 for properties within the same quality category located further away. The expected increase in religious tourists could support between 65,000 to 80,000 hotel rooms in Makkah by the year 1440 (2019). While currently announced projects could increase the stock of rooms to around 100,000, not all of these proposed projects are likely to materialise and there are opportunities for additional hotel projects to service the likely increase in visitor demand. Source: STR Global, Jones Lang LaSalle Hotels

14 On Point Holy Cities City Profile June 2010 Madinah Madinah's hotel market is strongly correlated to Makkah s as a large proportion of pilgrims perform Umrah or Hajj in Makkah and then go to Madinah to visit the Haram Mosque. Makkah also influences the Madinah hotel market in a more direct manner, in that most developments within Madinah are located to the north of the Holy Mosque, so that pilgrims can pray in the direction of Makkah. Unlike Makkah, not all hotel rooms in Madinah are sold via packages through third party distributors. A large proportion of Madinah s hotels utilise online distribution systems and the operator's own reservation networks. During peak periods, Hajj and Ramadan packages to Makkah include trips to Madinah. Given the limited increase in quality room supply in Madinah over recent years, the hotel market has remained more stable than in Makkah. While average occupancies declined to their lowest level since 2006, room rates remained largely unchanged from the previous year. As with Makkah, the Madinah hotel market is very seasonal in nature with hotel performance closely tied to the distance from the Holy Mosque. Makkah Quality Hotel Market Performance (ADR and Occupancy) 440 100 420 421 419 90 400 400 80 ADR (SAR) 380 360 340 354 51 375 62 62 64 58 70 60 50 40 Occ % 320 2005 2006 2007 2008 2009 ADR (SAR) Occ % 30 Source: STR Global, Jones Lang LaSalle Hotels Source: Fairmont Makkah

On Point Holy Cities City Profile June 2010 15 About Jones Lang LaSalle Jones Lang LaSalle Global Jones lang lasalle (Nyse:Jll) is a financial and professional services firm specialising in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2009 global revenues of Usd 2.5 billion, Jones lang lasalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.3 billion sq ft worldwide. LaSalle Investment Management, the company s investment management business, is one of the world s largest and most diverse in real estate with more than USD 40 billion of assets under management. Jones Lang LaSalle Saudi Arabia Jones lang lasalle is at the centre of most of the important real estate issues facing Saudi Arabia today: redevelopment of the Holy Cities, housing supply and affordability, the economic cities programme, transportation infrastructure, advising new CMAregulated funds, supporting multinationals' growth and investment in the country, and creating more transparency to support strategic decisions. We first opened in the Kingdom in April 2008 and now have offices in both Riyadh and Jeddah. By combining global best practice with a full time local intelligence network, the operation has built up a position as the industry leader in Saudi Arabia and is widely referenced in the local business media. Our team offers the full range of services including feasibility studies, valuations, leasing and tenant representation, investment transactions, capital raising and research studies. We also cover the full range of asset classes including offices, residential, hotels, retail, industrial, education and infrastructure.

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