Oversupply likely to happen Dubai hotel performance

United Arab Emirates—Dubai, the United Arab Emirates’ principal hotel destination, should expect some short-term performance struggles, sources said, but in the long term, the market should rebound as long as owners stay firmly in the minds of operators and developers.

During the Gulf & Indian Ocean Hotel Investors’ Summit, panelists debated Dubai’s development concerns during a session titled “Dubai is in danger of being overbuilt and could be heading for a hard landing.” Olivier Harnisch, CEO, Emaar Hospitality Group, said the metrics in the United Arab Emirates are still very good when compared with other parts of the world.

“I am optimistic,” he said. “World (gross domestic product) is 3%, and travel is due to increase by 1%, in the (United Arab Emirates) by more.”

While Dubai has had some successes, it’s still considered a young hotel market.

“Growth rates are good in Dubai, and it has proximity to the two largest growth markets, China and India, but yet Dubai is still not a mature market,” Harnisch said. “A lot of people have not come here yet, and (as a destination) we’re diversifying from the three S’s of sun, sea and shopping.”

While Dubai’s average daily rate is reasonably priced from a visitor’s perspective, investors are still hoping for higher returns, said Russel Sharpe, COO of Citymax Hotels.

“The last three years have seen a steady deterioration of (revenue per available room),” Sharpe said. “Currently, it is the worst in the Middle East, and with this declining RevPAR comes the challenge of explaining to investors as to whether the feasibility studies they did five years ago still add up. They do not. There is no way eight-year (return on investment) can be maintained, and added to that, more supply is coming.”

Poor metrics have caused the hotel landscape to change in the city, Sharpe said.

“The line has been rubbed out in terms of rate between upper four star and five star,” he said. “Where is the demand coming from, and at what price? We were considered an expensive destination, and that is now not the case.”

Luca Bandecchi, vice chairman of SBK Holding’s hospitality committee, said he also has concerns about Dubai.

Speaking of the Fairmont Dubai, which SBK owns, Bandecchi said the property is located on Sheikh Zayed Road—one of the city’s principal thoroughfares—reported increased occupancy but no ADR gains. He added that’s common among Emirati hotels.

“ADR really has struggled a lot, and of course for owners ADR is what counts,” Bandecchi said. “This is something that worries us. We need to look into other areas. On Sheikh Zayed Road all projects are five star, so that leaves opportunities in lower segments.”

Jalil Mekouar, CEO of hotels at Majid Al Futtaim, said Dubai has come a long way.

“Dubai has created something out of what people would have said was not much,” he said.

Mekouar also underlined Dubai’s history as a reason not to panic quite yet.

“Mid-70s occupancy is good for large cities, and Dubai (has higher occupancy) than that,” he said. “It is in a maturing cycle. People said Dubai was over in the last dip, but here were are again building sensationally.”