On Behalf of

Business & Finance Club - Tourism - Dubai: Dubai hotel development projects have slowed and become more grounded, a subject which no doubt is being revisited at this year's Arabian Hotel Investment Conference (Ahic) running from yesterday to tomorrow.

Experts last year concluded that some hotel projects had to be shelved because master-developments in the region were put on hold. It was also made clear that banks were cautious about financing new developments.

"It is not about becoming the most luxurious hotel operator with the most properties on the books anymore but the niche and mid-market. Funding is a big issue now," said Alasdair Maclean, partner at Davis Langdon, during one of last year's Ahic sessions.

This still holds true today. Expect a repeat of comments like that made by Elias Hayek, who looks after Starwood's legal affairs in the region. "It is more difficult to finance a deal but it isn't down to game zero, creativity is required."

Fast forward a year and hoteliers and developer owners are still looking to grow and finance a sustainable hotel development and operation. Some, like the Jumeirah Group will indeed test investor and developer appetite for its new lifestyle concept, the Venu Hotels, at Ahic.

The rise of ‘no frills'

"Although some high-profile hotel brands are still being introduced by owners in the region, such as Four Seasons and Mandarin Oriental in Abu Dhabi, we see the overall emphasis shifting towards the mid- and budget-ends of the market," says Harmen de Jong, consultant at PKF The Consulting House, which advises hotel and property developers.

He cites the Park Inn, Holiday Inn and Premier Inn and the recent launch of ‘economy' brands such as Landmark Group's Citymax as examples, adding that a shift from high-end lodging to mid-end and budget is a natural progression of a maturing market.

The current times are indeed ideal for budget type hotels, less finance maybe, but construction costs are down. Rotana's Centro, IHG's Express and Accor's Ibis are increasing their presence in the GCC market.

Still, some concepts that had been launched during the peak, such as Easy Hotels and Eco Hotels to name but a few, seem to have disappeared from the horizon. Layia Hospitality though is another group, which has come up with a ‘no frills' concept — Day & Night — and isn't scared of moving forward.

"In recent years everyone focused on making the better five-star hotel, with some exceptions. Two years ago it wouldn't have been feasible to build budget hotels, we couldn't have kept the rates that low," said Mohammad Al Sari, the managing director of GGICO, the majority partner in Layia Hospitality at the launch of Night & Day.

Accor Hospitality is also focusing on the mid-market and economy segments in its expansion plans in the Middle East. However, the group's development director for the region, Philippe Baretaud, alerts that not all ‘cheap' hotels will survive.

There are the many unbranded ones which are likely to suffer, as they tend to suffer from a lack of consistency and under-investment, he said in a pre-Ahic interview. It's a fact the industry has been pondering for a while and taken on board over the last year: instead of focusing on new-built alone quite a few existing assets have been branded or re-branded.

"Branded economy lodgings, because of better management ratios, are more able to focus on a volume strategy versus an average-rate one. This results in reasonable gross operating profits as long as development cost and debt leverages were kept under control."

Resilient concept

The expected average rate for the economy segment is expected to stabilise at around $80 (Dh293) to $85 over the next years coupled with 80 per cent occupancy. Economy hotels come with a big advantage, they are income oriented, versus the luxury cousin's need for capital gain and with that the cost of investment is substantially lower over its life span.

In other words, it will do well no matter where the economic cycle is at a given time.

"The concept is more resilient, less exposed to cycles and used to generate above 15 per cent of return on capital employed. In this instance the development of budget hotels in these markets should be more of the focus and also be the main opportunity of securing returns and offering diversity to travellers," Baretaud suggests.

Interestingly enough though, according to a rough research by TRI Hospitality Consulting Middle East up-market hotels still take up 51 per cent of the GCC hotel pipeline, meaning those signed or under construction, over the next five years.

"On the face of it this points to a market of opportunity in the mid-market and budget sectors. However, up-market projects tend to start earlier, or to put it another way, take longer to build than the others. Therefore our figures are biased towards the high end, especially as we go further into the future," says John Podaras, associate director at TRI Hospitality Consulting Middle East.

Nonetheless the consultancy's research also indicated that deals being signed or projected this year are mainly aimed at the mid-market and budget segments.

"They can represent a more acceptable risk proposition to financial institutions who, in these cash starved times, tend to be the controlling force behind the go or no-go decisions regarding hospitality and real estate projects," he explains.

TRI's research confirmed an increase of 13 per cent in GCC rooms for this year, the same again next year and 14 per cent in 2012. Another 10 per cent is to be added in 2013 and slowing to additional 6 per cent in 2014.

Uncertain market

"Comparing our latest figures, we note a good 8 per cent of projects being delayed by one year from 2010 to 2011, or 2011 to 2012 and so on. However, much of this data is very subjective, due to the uncertainty of the market, especially in cities like Dubai," Podaras said.

Jones Lang LaSalle (JLL) took a closer look at Dubai's hotel supply in its first quarter report of this year. The report's authors also remarked that the prevailing credit crisis and contraction of room yield and earnings over 2009 has had an effect on development. "It has resulted in a significant number of projects being cancelled or delayed in the city."

The report established that plans for future hotel supply have been adjusted down by 60 per cent to around 12,600 rooms over the next three years. And the higher segments, four and five stars, still represent 62 per cent of Dubai's total hotel supply, currently around 42,000 rooms.

Positives in a more cautious development environment certainly exist, especially in cities, including Dubai, where many were worried about an oversupply. It keeps occupancies up. According to JLL, they should remain healthy in the mid-70ies over the next couple of years.

Accor Hospitality Middle East has no fear of oversupply. It will be opening another 12 hotels between this year and 2012 and would be operating a substantial 8,700 rooms by the end of this year in the region.

And as far as Dubai is concerned, Baretaud, points to the emirate's proven ability to keep tourist numbers up during times of crises. The city's status as business hub on the crossroads of Europe and Asia alone affords it a unique selling point.

"The Mice market and trade tourism are of paramount importance for the hotel activity in the emirate," he added.

However, hotels already under construction to complete between now and 2013 rely on Dubai achieving the 15 million tourists it said it would by 2015. And it may not, considering global economics.

"The problem for the hotel market in Dubai over the coming years will be at the supply level. Despite remaining an attractive destination the hotel market will be oversupplied," Baretaud said.

Rethinking the old versus the new

Hotels on the drawing board are unlikely to be launched in the near future, but Baretaud reckons that this does not paint a picture of a depressed market. There will be opportunities in conversions of existing hotels or projects due to complete by finding the right international brand for them.

A rethink or remodelling applies equally to those properties still under design. "It is certainly true that almost all of the projects that we got involved in have a degree of re-engineering about them in order to optimise the concept and minimise costs," Podaras comments.

Then there are those hotels, which can't be rescued by the current owner due to financial difficulties. Traditionally, investment funds are interested in picking up these kinds of assets. Here in the region though this market has been quiet, although funds are eager to participate. And there is a reason for that, partly a lack of transparency and banks not putting those assets up for sale, Baretaud highlights.

"We should see distressed hotel asset opportunities appear in Dubai as some have been developed at high cost and with high debt leverage. It depends on the banks though, who so far have chosen to maintain the status quo," he adds.

Abu Dhabi though, he adds, has escaped the distressed hotel scenario, but Doha and Muscat may well struggle with one or two properties, because of their bias towards upscale hotels up to now.

Average daily rates are slightly up since their 26 per cent fall from the peak to around Dh880 and occupancies recovered to 80 percent in the first quarter of 2010, according to JLL. However, the future points to 70 per cent occupancy and it is the resulting revenue per room (RevPAR) everyone has their eyes on.

The dramatic falls in RevPAR in 2009, by over 30 per cent, in Dubai were just the natural cause of a previously undersupplied market, Baretaud reasons.

"The hotel market is cyclical and keeping things in perspective Dubai's RevPAR is still the highest compared to other key cities in the world."

Owners though were used to the good times. De Jong says that expectations regarding the expected yield on hotel investments in Dubai and the wider GCC region have adjusted.

"During the first eight years of this millennium, hotels in Dubai were high-return opportunities. Now owners are looking for ways to sustain or increase the bottom line and some even struggle to cover their debt service."

As a result, over the last few years, PKF predominantly got request for business advisory services, such as feasibility assessments and development management, from hotel owners.

"Currently the emphasis is on hotel asset management to improve asset performance. The latter typically aims to increase owner's return on investment whilst monitoring and enhancing the hotel's operations," de Jong concludes.

Development opportunities in the region

PKF Hospitality Consulting House's market mirror predicts a positive long-term outlook for the UAE's tourism sector, with an especially strong demand for Abu Dhabi. Although it doesn't see a significant increase in RevPAR's any time soon. Bahrain's market also has been down but is expected to recover all the same. Oman's performance also declined, according to PKF, but shows promising factors opening up opportunities for hotel and tourism investments. And Qatar is experiencing a slower pace of investment and development but with GDP expected to grow, the tourism sector should expand accordingly.

Saudi Arabia is on top of the list of most hotel operators and investors thanks to its large domestic market and religious tourism.

However, Baretaud, issues a word of caution regarding Amman, alerting to the risk of too many properties being built in the higher segments and thus recommending development in mid-scale and economy properties.

"To make the destination affordable whilst investors can still get a decent return on their hotel investments. The track record of hotel performances is quite low," he said.