As capacity in Dubai's hotel segment grows, diversity, quality and value remain priorities

With tourist numbers growing year-on-year and the prospect of a huge event just five years away, optimism is prevalent in Dubai’s hospitality sector. At the same time, as new hotels, apartments and holiday villas are built, there are fears in some quarters that the emirate may create a glut in supply.

Expo Figures

Dubai Department of Tourism and Commerce Marketing (DTCM) has estimated a total requirement of 140,000 to 160,000 rooms, or keys, by 2020. In June 2014, its figures showed there were 88,680. So, at the lower end of the scale, supply must grow by 51,320 keys, or 58%, and at the upper end by 71,320 keys, or 80%. With no plans announced to erect temporary accommodation, or to put up visitors on hired cruise liners moored offshore, as the organisers of the Sydney 2000 Olympics did, demand for keys for Expo 2020 must be met by the hospitality industry through the development of new properties. A miscalculation on the demand side could lead to over-supply, threatening occupancy levels, room rates and investors’ returns on investment. However, in April 2014, Helal Saeed Al Marri, director-general of DTCM, told the magazine Gulf

According to TRI figures, average occupancy rates for 2011, 2012 and 2013 were 81.79%, 80.17% and 80.50%. So, while there was a slight fall from 2011 to 2013, the overall figure was above 60%. Felix Louis, business head at Autorent Car Rental said that these figures illustrate Dubai’s strong potential for growth moving forward. “With many hotels in the emirate continuing to post over an 80% occupancy rate, Dubai remains a high growth destination for both business travellers and inbound tourists, boosted by its strategic location in MENA region,” he told OBG. Comparative figures cited in Alpen Capital’s “GCC Hospitality Report” published in September 2014 showed rates for 2013 were: 66.5% in Saudi Arabia, 77% for UAE as a whole, 64% for Qatar, 65% for Oman, 59% for Kuwait and 49% for Bahrain.

Other Measures

The HotStats figures for 2001-13 show an annual increase in all other measures including average room rate, revenue per available room (RevPAR), total revenue per room (TRevPAR), gross operating profit per available room (GOPPAR) and the percentage measure of gross profit. The average room rate increased from $205.50 in 2011 to $324.44 in 2013. RevPAR went up from $168.07 in 2011 to $261.44 in 2013. TRevPAR was $303.40 in 2011 and $454.51 in 2013. GOPPAR was $126.84 in 2011 and $206.05 in 2013. Gross operating profit margins rose from 41.81% in 2011 to 48.30% in 2013. Over the three most recent full years, average room rates jumped by 58%, RevPAR by 55.5%, TRevPAR by 50% and GOPPAR by 62%.

Supply & Demand

Although by these measures, Dubai’s performance is the envy of many in the hospitality sector, maintaining the upward trend may be a challenge as new supply starts to hit the market. Henning Fries, managing director of the hospitality division of Al Habtoor Group, is prepared to take a longer-term view. “It’s proven in the past that supply and demand has its own equilibrium and sometimes it leans a little bit more toward supply and other times it leans a bit more in the direction of demand, depending on which phase you are in and so there is an aspect of self-regulation,” Fries told OBG. “So sometimes the market will forgive you a slight imbalance and it’s easier to forgive in a market with traditionally high occupancy such as Dubai than when you have a market that is running at lower occupancy and you have new supply coming in, temporarily outpacing the demand.” Indeed hotel occupancy in Dubai fell 2.9% year-on-year in January 2015 as hotel supply continues to outpace demand, STR Global said, with supply growing by 6.8% as of January, while demand increased by 3.7%.

Broadening Appeal

With its reputation built on luxury shopping and five-star hotels, Dubai is hoping to reach a broader demographic by increasing the supply of mid-market and budget accommodation. In September 2013, the Dubai government urged developers to bring forward plans for the construction of three- and four-star hotels and offered a 10% reduction in municipality fees levied on room rates for any projects which met their criteria. TRI Consulting’s Hewett explained the rationale to OBG: “Dubai has been a luxury destination and it is now looking towards good quality mid-market hotels to entice investors. In order to double the number of visitors, you need to have to be able to attract international independent travellers, international groups and regional family holidaymakers. You have to have a range of offerings that appeal to all areas. The four- and five-star average rate is $320, which is high, because it is so geared to upscale tourists.”

One global brand with a successful track record in this mid-market range is Premier Inn. In October 2014, the company, which has five hotels in Dubai, with three more under construction, said as many as five other sites were being considered. The company told local press part of its strategy was to have a large number of properties in the area so that at times of high demand, customers finding no rooms available at one outlet can find availability at another of its sites. David Vely, regional senior vice-president for development at Premier Inn International, told The National newspaper, “If Dubai’s growth froze today, it could take another 20 or 30 Premier Inns.”

Value For Money

A GCC business specialising in three-star accommodation is Landmark Hospitality, which currently operates two of its CityMax hotels in Dubai. The COO of its hotel division, Russel Sharpe, told OBG that value for money was not only important for tourists, but also for Dubai’s expatriate population, who would help the country to grow.

“It is not to the government’s advantage to have the cost of living very high and not to their advantage to have retailers and food essentials out of the reach of the middle class,” Sharpe told OBG. “It is okay to say that Dubai is for the rich and famous, but it is really the middle class and lower middle class that spend their money here.” The first CityMax in Dubai was a 378-bed hotel located in Al Barsha and another has since opened in Bur Dubai. The company also has a hotel in Sharjah and announced plans to construct 20 new properties across the Gulf.

The group anticipates increasing competition in its segment of the market. “We are looking at a huge build-up of supply, a flood of mid-market hotels and we are thinking to ourselves can we still get the demand and that is dependent on a number of things,” Sharpe told OBG. “We are just a small cog in a big wheel and if DTCM can reach out and grow additional markets, and aviation does its job in catering for the air lift to bring in 20m people, then supply will be on the same par as demand.”

Renovation

At the same time as developers are considering investing in new hotels to meet demand, owners of existing hotels are spending on refurbishment and renovation. That work has already begun, with five-star hotels reporting completed refits costing from $35m to $50m each in 2014. Property developers at the publication Construction Week’s UAE Infrastructure Summit in March 2014, were comparing notes on orders from the hospitality sector.

Tom Hasker, country director for the UAE and head of project management for the Middle East at Faithful and Gould, estimated approximately 10,000 rooms would need to be refurbished before 2020, and he told reporters his firm was currently working on 13 hotel projects at that time. Bishoy Azmy, CEO of Al Shafar General Contracting, said 30% of his company’s schemes were in the hospitality sector, the highest demand he had seen in 23 years.

The drive to improve supply is expected to increase the level of competition in Dubai’s hospitality sector and to expand the range of rooms and tariffs available to visitors. TRI Consulting’s Hewett told OBG he was optimistic. “The good thing about the market here is that there is a constant evolution. People understand that to remain competitive, you have to evolve and change and this is going to be the case especially as the market sees new supply. Hotels that have been around are going to have to reinvest and renovate,” he said. While that process has already begun, following the announcement of Expo 2020, it appears it will to accelerate in the next five years.