Coming to market: A slew of new hotels are expected to open over the next several years

In the four years since the 2008-09 economic downturn swept the world, Dubai’s hotel industry has experienced substantial volatility. Occupancy and revenue per available room (RevPAR) rates dropped substantially in the wake of the crisis, especially at high-end luxury properties, as wealthy leisure tourists made an effort to reduce their discretionary spending across the board. Developers and real estate investors ducked their heads to wait out the crisis, and many new hotel projects – in various stages of completion – were put on hold until further notice. It did not take long, however, for the recovery to begin. By 2011 RevPAR and annual average room rates (ARRs), which had bottomed out in 2010, had begun to rise rapidly throughout the emirate. As of mid-2012 recovery was well underway, with occupancy rates up to around 83% compared to 79% during the same period the previous year, according to data from Jones Lang LaSalle (JLL), a multinational real estate firm.

CONTINUED DEVELOPMENT: While rising visitor numbers point to steadily increasing demand for lodging in the emirate for years to come, hotel operators still face a number of challenges. In line with the recovery, the emirate’s hotel pipeline has expanded rapidly in recent years, as developers work to tap into new growth in the tourism sector by restarting work on stalled projects and launching new developments. Indeed, according to a late-October 2011 report in the Financial Times, the number of hotel rooms in Dubai is expected to jump by around 60% over the next five years. As these new properties come onto the market, the sector could potentially become oversupplied, which would strain new and old hotels alike.

Despite this issue, local hoteliers are optimistic about future growth. Any slowdown due to oversupply would likely only be temporary, as the local tourism sector’s long-term growth prospects are broadly positive. Additionally, much of the upcoming expansion will take place in the two- and three-star segment, which remains significantly undersupplied. With this in mind, most forecasts expect that the local hotel market will benefit from steadily rising occupancy rates and increasing revenues for the foreseeable future.

IN FIGURES: Prior to the downturn, occupancy rates at Dubai hotels peaked at around 87% in 2007, up from 84% in 2006 and 84% in 2005, according to data from HVS, a US-based hotel consultancy and research firm. By the end of 2008, after three to four months of rapid decline following the fall of US-based investment and securities firm Bear Sterns in September, occupancy rates had dropped to 81%.

By the end of 2009, at which point the downturn had spread around the world, occupancy rates in Dubai had fallen to just 69%, the lowest the emirate had seen since the mid-1990s. Other key hotel indicators followed similar trajectories during the crisis. ARRs, for example, dropped from a decade high of $259 in 2008 to $184 in 2009 and just $167 in 2010. Similarly, RevPAR rates fell from $225 in 2007 to $209 in 2008, $127 in 2009 and just $121 in 2010.

SLOW RECOVERY: By late 2010 and 2011 the sector had begun to show early signs of recovery. It is important to note that there has been some disparity in terms of the extent of the recovery so far, with different organisations reporting different statistics. For example, according to official government data from the DTCM, occupancy rates jumped from around 70% in 2010 to 74% by the end of 2011. According to TRI Hospitality, a UK-based hotel and tourism research firm, meanwhile, occupancy rates had risen to nearly 82% by the end of 2011, from just below 80% at the end of 2010. According to HVS, meanwhile, occupancy rates jumped by three percentage points from 69% to around 72% by the end of 2010, for example.

While these figures vary substantially, the broad trend toward recovery is clear. By the end of 2011, according to HVS data, ARRs had risen to $191 and RevPAR rates had grown to $138, both up 14% on the previous year. In general ARRs (and RevPAR rates) lagged about a year behind occupancy rates in terms of recovery, as a result of many hotels lowering the former in order to boost the latter, a sound strategy that appears to have paid off.

By late 2011 and early 2012 the recovery was in full swing. According to DTCM figures, Dubai’s hotels brought in Dh13.67bn ($3.7bn) in revenues in 2011, up substantially from the previous year and slightly higher than the record Dh13.24bn ($3.6bn) earned in 2008. As previously mentioned, by mid-2012 occupancy rates had jumped to around 83%, according to JLL figures. According to TRI Hospitality statistics, meanwhile, as of late September 2012 occupancy rates were running at around 80%, while ARRs were at around $281, slightly up from the same period during the previous year. According to an early 2012 report from TRI, ARRs grew from $191 at the end of 2010 to $206 at the end of 2011. Over the same period room RevPAR jumped from around $153 to $168, while food and beverage RevPAR rose from $116 to $120, according to TRI figures.

NEW SUPPLY: At the end of 2008 Dubai was home to 519 hotels and hotel apartments, according to DTCM figures, up from 444 at the end of 2007 and 423 at the end of 2006. This rapid pace of development only slowed slightly in the years following the downturn. In 2009 some 20 new hotel apartments and one hotel came onto the market, bringing the total number to 540 at the end of the year. This figure rose further to reach 573 in 2010 and 575 in 2011.

According to JLL data, at the end of 2011 Dubai boasted 53,400 hotel rooms in total. This number was expected to rise to 58,400 by the end of 2012, 63,100 by the end of 2013 and 66,100 by the end of 2014. As of May 2012, some 52 new hotel projects, including around 25,000 rooms, were either under construction or in the early planning stages. Dubai’s hotel development pipeline is currently the largest in the Middle East and among the largest in the world.

MAJOR UPCOMING PROJECTS: A substantial number of the hotels that have opened up shop in Dubai since the downturn are two- and three-star properties (see analysis). According to data from JLL and the DTCM, the percentage of four- and five-star hotels operating in the emirate fell from around 60% in late 2009 to just 37% by June 2012, as a result of new budget operators entering the market. Since the crisis a variety of international budget brands have set up operations in Dubai, including three new properties from Premier Inn, a leading UK-based budget hotel brand; four Express-branded hotels by the US-based Holiday Inn; and a number of Ibis-branded properties by Accor, the French hotel group.

In addition to the budget market, a variety of mid-tier and high-end properties have also been completed in recent years. In the first quarter of 2012, for example, two new five-star hotels came onto the market, The Palm resort, which was developed and is operated by Rixos, a Turkish hotel chain; and the Millennium Plaza Hotel Dubai, by the UK-based Millennium and Copthorne Hotels group.

Numerous hotels opened for business in the second and third quarters of 2012, including the Meliá Dubai, by the renowned Spanish operator Meliá; the Jumeirah Creekside Hotel, by local firm the Jumeirah Group; and the Ramada Plaza Hotel and Suites by the US-based Ramada Worldwide.

Around 1700 new hotel rooms in total came onto the market in the first three quarters of 2012, according to JLL, and an additional 3300 rooms are expected to be delivered before the end of the year, though some of these may end getting bumped back to 2013. Major new hotels scheduled for completion before the end of the year include the Al Khor Rayhaan by the Abu Dhabi-based Rotana Group; Fairmont The Palm by Canadian hotelier Fairmont; the Conrad Dubai, by the US-based Hilton group; and the first tower (of two in total) of the JW Marriott Marquis Dubai, by the US-based Marriott Hotels and Resorts.

DOWN THE LINE: Post-2012, a number of other new hotel projects are expected to come onto the market. Developments scheduled for completion in 2013 include the Royal Amwaj Resort and Spa, the Novotel Dubai Al Barsha, the Sofitel Dubai Palm Jumeirah Resort and Spa, the Sheraton Dubai on Sheikh Zayed Road and the Staybridge Suites Dubai at Union Square, according to HVS. Among the projects scheduled to be completed in 2014 include the Hilton Dubai Palm Jumeirah, the Waldorf Astoria Dubai Palm Jumeirah, the Park Inn Dubai at the Airport Free Zone and the Crowne Plaza Dubai at the International Media Production Zone, in addition to others.

Finally, in 2015 new projects scheduled for completion include the Crowne Plaza Dubai at Business Bay and a new Centro budget hotel at Jebel Ali Airport, according to HVS. A number of other projects have been announced but have yet to put in place a solid timeline. These include three Marriott brands - a JW Marriott hotel, a Courtyard by Marriott hotel and a Marriott Executives Apartments development – in Lifestyle City; a Park Inn at Bur Dubai; and a Courtyard by Marriott at Jebel Ali, as well as a number of others.