All eyes on the Middle East

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With the Arabian Hotel Investment Conference and Arabian Travel Market, regional development is May's hot topic. Chris Jackson looks at how the Middle East fits in with hoteliers' global ambitions.

While the local cultures in the Middle East are renowned for their traditional hospitality, the region was largely ignored by the major international hotel chains until second half of the last century.

That is clearly not the case now, with the region dominating international trade headlines for dizzying scales of development and turning in incredible performances from existing properties.

But what stage is the market in the region at now - is it approaching a stage of maturity and critical mass, or is it still in its infancy? And do the big global players see the region as critical to their global ambition, or is the focus beginning to swing towards the twin-headed behemoth markets of China and India?

2008 Snapshot

The contribution of international hotel brands to the region's inventory is not insignificant, with InterContinental Hotels Group (IHG), Hilton Hotels and Starwood Hotels and Resorts already operating more than 150 properties in the region between them - or more than 40,000 rooms.

Large regional players have also developed impressive inventories in their relatively short lifespans. Rotana Hotels currently operates 23 properties - with 4405 rooms - across the region, while Jumeirah operates five properties with more than 2200 rooms.

The future looks no less impressive, with companies such as IHG and Mövenpick Hotels and Resorts announcing large development pipelines.

In Hotelier Middle East's regular section on upcoming properties from the big brands, more than 275 projects have already been signed and announced, contributing more than 70,000 rooms to the regional inventory.

Lodging Econometrics estimates as many as 516 projects are underway in the region - including those that have had public announcements, dedicated land parcels and are being actively pursued - which adds up to more than 150,000 extra rooms for the Middle East hotel industry.

Coral International managing director Michel Noblet says he believes in the success of Dubai, and the wider region.

"A strong real estate market has ensured a buoyant mood in the industry," he explains.

"We remain bullish about the market. Everyone seems to be eyeing the budget and serviced apartments segment at the moment and rightly so. The pyramid is very much upside down in the region, with too many luxury hotels. However, the trend is reversing with more and more brands moving towards mid-scale products."

Noblet says the company has recently launched two brands to capitalise on the changing market trends, with Ecos Hotels representing an ecologically friendly budget brand, and EWA Hotel Apartments, which offers serviced apartments for families and long-staying guests.

Dusit International regional vice president Middle East Sam-Erik Ruttmann agrees that more growth is possible.

"The UAE is still growing strongly for the next three years, and we are expanding our horizons and interests to the rest of Middle East and North Africa, which are under development by GCC developers," he explains.

"We see this from the many requests we get to operate hotels from serious developers and the positive growth rates year on year. At the same time, we are finding that our hotel company is in high demand, as it brings a unique selling proposition in comparison to the plethora of "cookie-cutter" global brands with our unique Thai-service delivery experience."

A spokesperson for Jumeirah says there are still growth drivers in the region.

"Looking at the projections for tourism and growth in Dubai, there is a definite need for more hotel rooms to accommodate the projected 15 million visitors to Dubai by the year 2015," the spokesperson explains.

"The GCC region has also wisely spread its attention across new market segments and multi-faceted projects such as The Palms in Dubai, The Pearl in Qatar, Reem Island in Abu Dhabi and Amwaj Islands in Bahrain."

Hilton Hotels president Middle East and Africa Jean-Paul Herzog is similarly positive about the region's future.

"As the Middle East hotel market continues to boom with double digit growth year-on-year, the next frontier of hospitality will take centre stage; for example mid-market and economy options, plus new emerging markets such as Saudi Arabia, Abu Dhabi and Bahrain," he explains.

"We don't see an immediate downturn, especially here in the Middle East where higher oil prices mean higher revenues, paving the way for wider investment opportunities and enhancing the tourism sector. Strong oil income will promote investment in diversified projects focusing on tourism - according to the WTTC, the Middle East is the only region to remain on course for its 5% growth in its travel and tourism industries for 2008."

Rotana president Selim El Zyr points to the region's growing attraction for tourists as driving the industry's growth.

"Tourism in the Middle East has enjoyed an unprecedented boom in the previous three years," he says.

"Hotels in the Gulf countries had significant increases in occupancy and average room rates. Hotels in the Levant are rebounding despite the challenges and the events that followed September 11."

"With additional entertainment and leisure facilities being developed, it will only continue to grow. There is currently high demand for a three-star plus brand, which we are developing in Centro by Rotana. Centro is coming at a time that will ideally position it for continuous long-term development, strong operating performance and sustainable growth well into the future. We have committed to having 25 Centro properties within the coming five years."

Ritz Carlton regional vice president Middle East Pascal Duchauffour still sees blue sky for the region's properties.

"The Middle East market is still on the uptrend, as current economic factors enable the region's property developers to invest in brand name hotels to be included in their portfolio," he said.

The strong economic indicators and positive forecast from the financial and oil sectors point to increasing numbers of business travellers and tourists to the region, and the current mega-projects, which include the strengthening of the infrastructures of roads, new airports, flight routes and residential and commercial buildings, are proof of the support for this uptrend.

"The luxury end of the hospitality industry is still a strong draw for the region's developers, and with more tourists in the near future, golf, spa, amusement parks and all-inclusive resorts will remain a top draw."

Kempinski Hotels president and chief executive Reto Wittwer says the company's expansion in the Middle East demonstrates the importance of the market to its global expansion plans.

"We believe it remains a growing market with a great deal of potential in terms of increasing incoming and intra-national visitor numbers," he explains.

Local tourism bodies in the region such as the DTCM (Dubai Department of Tourism and Commerce Marketing) and ADTA (Abu Dhabi Tourism Authority) are greatly contributing to the success of the travel industry with pro-active marketing campaigns at world trade exhibitions and throughout the international media.

Within the region both the spa and MICE businesses are really taking off and are now considered to be a paramount element of any hotel operation in the Middle East. Take for example the ultra-luxurious Anantara spa in the Emirates Palace.

"Additionally, niche products within hotels are on the rise - such as the Ski Chalets in Kempinski Hotel Mall of the Emirates, which cater to a very different clientele within the traditional scope of a five-star hotel."

Shaza Hotels chief executive Chris Hartley says he believes the Middle East hotel industry is still growing strongly.

"Competition is without a doubt increasing; however there will always be a place for unique brands which are able to find a voice in this noisy market by creating a product that tailors to the needs of customers," he adds.

"Intra-regional travel in particular is flourishing, and we believe that products and services that cater to this market will continue to develop rapidly."

What's next

With an almost unanimous positive outlook for the region, it is no surprise that hotel companies have strong development pipelines across the Middle East.

Rotana has the strongest development programme, with 37 new properties planned for the region contributing more than 11,000 rooms to the inventory.

Swiss operator Mövenpick has 19 properties on the cards, comprising more than 6600 rooms.

Indeed despite the gloomy economic outlook emanating out of the United States, most operators believe the Middle East will be somewhat immune to the 'credit-crunch' and related financial woes.

IHG chief executive Andy Cosslett says the company could see some moderation in RevPAR throughout the year, but was still likely to end 2008 in positive territory.

"Our business model relies on signing up new deals and getting those hotels open, and that continues to flow," he said.

"The hotels that are in our pipeline in America [are going ahead], we are not losing hotels because they cannot get financing. The financing situation is tougher, getting credit is a little harder, and the spreads are a bit richer."

With the company embarking on an ambitious relaunch of its Holiday Inn brand, Cosslett says the market mood is positive.

"We are out there selling the relaunched Holiday Inn brand, and we are talking to hundreds of owners asking them to sign up for a multi-year investment with Holiday Inn, and everybody is signing up," he adds.

Hotel owners have made sensible plans for the future and managed their cash well, generally, and they are a very good risk for banks to lend to, because the history of ownership of hotel brands in America, particularly branded hotels, has been excellent.

Some of the best returns in residential or commercial properties have been in hotels, so the banks don't seem to have any problems. Of course things are changing, but overall business is remaining solid.

Hilton's Herzog is similarly upbeat about the economic situation.

"The weakened dollar is in fact welcome news to European travellers, who are enjoying longer, richer holidays in this part of the world," he explains.

"Development and growth is a key priority of our business at this time, with the industry's largest development pipeline for any US-based hotel company - we have 900 hotels in the pipeline, 16% up on the previous year. Our vision is to be the industry leader with a dynamic, entrepreneurial, high growth business that seizes global opportunities."

A spokesperson for Jumeirah echoed Herzog's view, noting that the occupancy rates in the company's Dubai-based properties were primarily driven by the UK and European markets.

"The other side of the coin means that the credit crunch has severely limited private equity firms' access to capital," the spokesperson adds.

"Lenders are no longer jumping at the chance to finance 90% of a deal's acquisition price. Thus securing funding for multi-billion dollar transactions is no longer that simple. But the many properties that are in the pipeline are secure and going forward; we do not intend to change our forecast for 2008."

Mövenpick's Nikolov says the company's global expansion plans are similarly unaffected to date.

"We continue to receive just as many requests for potential development projects as before the sub-prime crisis, in particular in Asia and Eastern Europe, which is where where we're focusing our future expansion," he explains.

Fairmont Hotels and Resorts executive director sales and marketing Middle East and Africa Kent Cooper adds that he believes the region is still vibrant.

"We're pleased to be in the midst of it," he says.

Fairmont's presence in MENA reinforces our expansion strategy in the region of offering unrivalled travel and lifestyle opportunities, as well as demonstrating our commitment to working with key partners to develop world-class properties that build on our brand's global strength.

"Our development strategy remains focused: growing the company through hotel management and on building brand awareness in key gateway cities and international hubs in Europe, Asia, Africa and Middle East. It is also imperative for the brand to build up greater distribution in the US market."

Crouching lotus, hidden dragon

The Middle East may be outperforming many other regions in the world in terms of Rev Par growth and pipeline growth, but for some operators the focus is swinging firmly east to take in the growing might of India and China.

IHG's Cosslett believes the Middle East will be the strongest growing market in the short term, but from a long-term perspective the demographics and infrastructure development in China will create a much stronger market.

"Over the next 10 to 15 years, China will be the number one markets in terms of adding hotel rooms to the inventory, and given we have a leading position over there that is great news for us," he says.

That's because India has the same level of underlying demand, but the difference between the two markets is that infrastructure is more certain in China.

They have 97 airports under construction, and frankly India doesn't, they are building 75,000 km of highways over the next 10 years, and India isn't, and that is the difference.

When you are in the hotel business and infrastructure goes in, that is when you need hotels because people get in cars and planes and then they need somewhere to stay.

"I think there is a massive opportunity in India, and it is like a pressure valve that can't be let out because the infrastructure is going in so much more slowly, whereas in China the government has taken control and is driving that quickly."

In addition to infrastructure investment, the two countries also have a weight of numbers.

"In the Middle East we have terrific short term growth, and over the next five to seven years I think the Middle East will be the fastest growing region in the world, but it doesn't have the billion plus people like India and China. You might get inbound investment and traffic, which will need hotels, but over the long haul it is the high density markets which are ultimately going to sustain a much bigger hotel industry."

Dusit International's Ruttmann also sees China overtaking the Middle East.

"We believe that China will overtake the Middle East in the middle market hotel development, as the Middle East matures with its luxury hotel inventory," he adds.

"In India the hotel development is still in its early stages and the potential for all levels of hotels will be fuelled by the Indian economy's strong growth pattern with the growing middle classes."

Mövenpick's Nikolov sees strengths in all three markets when asked to compare the Middle East to China and India.

"Demand and growth has been unprecedented in all three areas and will likely continue to remain so for some time to come," he says.

"While Dubai has been a significant growth motor in the Middle East, other destinations in the area have, and are, catching up - rapidly fueling additional demand to the region. By sheer size and expected economic development, both China and India hold further enormous potential for growth in the hospitality sector."

A spokesperson for Jumeirah also sees potential in all three markets, adding that the company was also seeing strong demand from Japan.

Kempinski's Wittwer said the Middle East region's diversity allowed it to develop unique products, which would allow it to grow in terms of inbound and intra-regional travel.

"India is quite developed in terms of products, which is why international five-star hotels tend to enter the very upper echelons of the industry with grand palace properties and opulent resorts versus very modern properties," he says.

"In this market, Kempinski benefits from the marketing alliance with The Leela Palaces and Resorts, both with its brand exposure within India and also to attract the important growing Indian outbound travel market."

"China remains an exciting market both internationally and intra-nationally. As a European brand, we have established the Kempinski brand in this market as representing quality, status and sophistication, which works extremely well for us in China. Equally, if we take the Commune by the Great Wall Kempinski, ultra-modern, contemporary and design hotels are increasingly appreciated. The Chinese intra-national travel market is already very large, as shown over Chinese New Year when about 18 million people travel to visit relatives elsewhere in the country, and the potential of the Chinese outbound travel market is simply huge."

Shaza Hotel's Hartley sees no slowing down in India, China or the Middle East.

"India, particularly Mumbai and New Delhi, is undergoing strong development in both international hotels and domestic resorts," he adds.

"The Chinese tend to cater to a mass-market and are therefore developing hotel chains which follow tried and tested international models. In the Middle East, we believe there is increasing demand for higher-end products and services and regional brands that offer more unique and personalised experiences for discerning regional travellers."

For Coral's Noblet, however, the Middle East could still provide continuing dominance on the global hotel industry.

"The Middle East has come a long way to command the top table of the global travel industry," he says.

"Owing to its strategic location and driven by strong markets like Saudi Arabia, Qatar, Kuwait, UAE, Bahrain and Iran, the Middle East will continue to rule the roost."

"However having said that, one cannot overlook the potential of economic giants like India and China. We are very soon looking to enter India, Pakistan and Iran."

Although Golden Tulip chief executive Hans Kennedie sees the region contributing 10% of the company's global revenue in the next five years, he adds that the Middle East's geography will stand it in good stead.

"I think that the Middle East region is like the transfer point for many travellers going east, west, north or south," he says.

"You will have plenty of business here. It is an extremely attractive region in which to have your business meetings and your conferences, and of course there are great hospitality products and a lot of good work being done on infrastructure."

Noblet's view is echoed by Ritz-Carlton's Duchauffour, who sees the region holding its own against the powerhouses of India and China.

"In relative terms and context, the Middle East hotel industry is well positioned to grow as much, if not more, than that of India and China," he says.

"All three are burgeoning markets for the hotel industry, especially the luxury tier, so there is still much room to expand. This region especially is a magnet for skilled and unskilled workers from all over the world, and this attraction stems from the multitude of attractive factors such as abundance of service jobs, relatively low inflation rates, central geographical location in relation to Europe and Asia, and manageable costs of living."

Asking Marriott International president JW Mariott Jr. which of the three markets will be the most important, he says they are all equally important to the company's long-term vision - but China would contribute more to Marriott's portfolio.

"China will have more than the Middle East, but the Middle East will have more than India ," he explains.

Not the end of the world

Discussion about whether or not China and India will replace the Middle East as the markets with the strongest growth are almost a moot point, as each market will undoubtedly contribute successfully to the global hotel industry.

Operator and developer strategies will no doubt change in time, given the complex nature of shifting political and financial stability, particularly on the macro-market level.

Regardless of the comparative strength of the Middle East market, operators are unanimous that the results to-date has been outstanding, in many cases unprecedented - and there is no real reason why they should not continue to be so.

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