SYgle>Industry Information>Oversupply likely to stifle Dubai hotel performance

Oversupply likely to stifle Dubai hotel performance

Column: industry Tag: Dubai hotel,Dubai hotel performance,hotel performance,hotel supply Published: 2018-02-05 15:11 Source: Author:

(From left) Luca Bandecchi, of SBK Holding; Russel Sharpe, of Citymax Hotels; Olivier Harnisch, of Emaar Hospitality Group; and Jalil Mekouar, of Majid Al Futtaim, discussed Dubai’s supply concerns during the Gulf & Indian Ocean Hotel Investors’ Summit. (Photo: Terence Baker)

ABU DHABI, 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.”

Change of model

Growing visitor numbers and the opening and marketing of new demand generators bode well for Dubai, according to Harnisch and Mekouar, but success will not be shared evenly across the city.

“Supply and demand growth will not be perfectly correlated,” Harnisch said. “In some micro-markets there will be temporary oversupply, especially as before we were blessed with linear growth rates.”

He added that is a problem since Dubai hoteliers will have to adapt to the market’s volatility.

“We will have to think about profit per square meter and to change our business models with volatility,” Harnisch said. “Fixed costs are too high; and we need more midmarket hotels.”

Harnisch said added midmarket guests do not necessary have less money than those booking luxury but often choose to spend less on the accommodation portion of their trips.

“Management agreements have to be more owner-friendly,” Harnisch added.

Citymax’s Sharpe said the changes he has seen have not all been positive.

“We are seeing people run away from leases as they cannot afford to fulfill them,” Sharpe said. “Increasingly, I think we will find ourselves struggling. Singapore went through the same problems, and Dubai is moving in its direction.”

Going forward, it’s critical that owners make smart development decisions, Sharpe said.

“The most important question is to ask: What is your objective in building a hotel, especially considering the private sector (in Dubai) is competing with the semi-government sector, which is building for other reasons than ROI?” he said. “Jumeirah was the only semi-government-owned hotel firm, but now there are a few.”

Boom and bust?

More hotel rooms are coming to Dubai, panelists said, but so are more key demand generators and expansions to the city’s two airports.

One attendee pointed out Dubai’s Expo 2020 event was not being discussed at the conference, nor was there any talk about likely oversupply in 2022 and 2023.

Mekouar said pain always accompanies growth.

“Some will suffer more than others, but it will force hoteliers to be better and question themselves, and that includes the big players,” Mekouar said.

Owners and developers are already thinking about the health of Dubai beyond Expo 2020, Harnisch said.

“No one builds just for Expo, for six months,” he said. “That would be foolish, but Expo 2020 is just one more step in the destination’s maturity. How can we increase supply without building too many hotels, some of which will not be sustainable?”

“How can we build better hotels with more control over costs?” Mekouar added.

Harnisch said another potential concern was Saudi Arabia.

“It is a game-changer,” he said. “It keeps providing excellent hotels, combined with an improved efficiency mindset.”

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