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Fri 26 Jan 2018 12:54 AM

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Opinion: why the Gulf's hotel boom doesn't have to lead to bust

Hoftel's chairman looks at a sector impacted by supply, diversification and increasing competition

Opinion: why the Gulf's hotel boom doesn't have to lead to bust
The new Bulgari Hotel is the centrepiece of Dubai’s Jumeirah Bay development

According to figures from hotel data company STR, Dubai currently has the largest hotel room pipeline of any city in the world, standing at over 50,000 rooms on an existing room count of less than 100,000. What’s more, it is concentrated at the top end of the market, with around 14,000 upper-upscale rooms (a 60 percent increase), around 13,000 upscale rooms (a 56 percent increase), and over 8,000 upper-midscale rooms (a whopping 99 percent increase) planned.

Other surveys offer similar results. Ernst & Young show an increase from 94,000 rooms at the start of 2015 to 164,000 by Expo 2020; while Lodging Econometrics suggest a construction pipeline of 194 projects in the UAE totalling 55,264 rooms.

Interestingly, although the market has generally softened in 2017, especially in terms of average rates, the impact has yet to be fully felt. In 2017 up to November, according to STR, annual room supply in Dubai grew less than six percent. So if hotel owners are starting to feel the pinch, one has to fear that the worst is yet to come.

The RevPar squeeze

The question being asked now is whether there will be a significant downturn in RevPar in 2018/2019. Being realistic, it’s likely. No market in the world, with the exception of Las Vegas in the boom times, at least to my recollection, has added 50 percent room inventory without seeing an impact on hotel performance metrics.

Moreover, there are some strong potential headwinds for Dubai in 2018 – increased competition from new attractions in Abu Dhabi and RAK; the implementation of five percent VAT, which hotels in a weakening market may not be able to pass on to consumers; and the gradual recovery of Turkey and North Africa from internal turmoil, which had diverted tourists to the safe haven of the UAE.

Renaissance Downtown Hotel opened to great fanfare in November, 2017

Does that make it all doom and gloom? Not really. I remember asking a head of strategy for a major Dubai firm in 2009 how the emirate would fare, given the meltdown in financial and property markets and its lack of oil and gas. “We’re not worried,” he said. “Basically, if you live between Cairo and Karachi and you want to have fun, you’ll come to Dubai”.

The market has of course borne out that prediction over the past decade, recovering spectacularly from the global financial crisis. Moreover, there are more demand drivers being created – new theme parks, new shopping experiences, spectacular new buildings like the Dubai Frame and of course, though a few years off yet, another record-breaking new airport. Nor is it clear that RAK’s push into adventure tourism or Abu Dhabi’s into cultural tourism will be a negative – they may well offer families the scope for more varied and longer stays in the UAE.

Equally, the decline in oil and gas prices which hit the business side of the visitor equation is also coming to an end, which should help midweek occupancies as well. So even if there is a short-term dip, it will correct itself.

The medium term

Looking further ahead, the competition will only grow. If Saudi Arabia really develops a string of islands in the Red Sea, that will be a challenge for the “sun, sea and sand” European and Russian markets. Sri Lanka and Zanzibar, as they develop, may pull away potential Chinese guests and they have a historical offering which Dubai can’t match.

However, the biggest determinant of success in the long-term may be Expo 2020. It will see a surge of visitors during the year but many markets fare badly after a major event like an Expo, Olympics or World Cup. Why? Because too many hotel rooms and serviced apartments get built to cater for that short-term rush of demand, leaving a big overhang afterwards.

How a market fares in the aftermath depends a lot on how good an impression it has made during the event itself. I recall trying to sell a hotel in Barcelona in 1994, two years after the Olympics, when city-wide occupancy had fallen to 48 percent. It all looked grim. However, the city had done an amazing job in positioning itself for the Olympics and became one of Europe’s favourite short-haul destinations thereafter. So, it’s all to play for if Dubai can do the same.

Given the Emirates’ track record of success to date, my strong feeling is that it will do just fine. Of course, billions of dirhams of investment depends on that and for a more in-depth discussion on the market and the challenges faced by hotel developers and investors, the upcoming Gulf and Indian Ocean Hotel Investor Summit will provide the perfect forum, with 90 senior executives locking horns to debate the best way forward.

Gulf and Indian Ocean Hotel Investor Summit
When: January 29-30
Where: Yas Viceroy, Abu Dhabi

The Gulf and Indian Ocean Hotel Investors’ Summit
Some of this year’s seminars

Investing in frontier markets – dangerous hype or solid profits?
When: Monday, January 29
Time: 3.05pm-3.45pm

What value beyond distribution can OTAs offer owners and hotel operators?
When: Monday, January 29
Time: 3.45pm-4.15pm

Is Dubai in danger of being overbuilt and could it be heading for a hard landing?
When: Tuesday, January 30
Time: 9am-9.40am

From motor oil to tanning oil – can the Gulf markets successfully diversify?
When: Tuesday, January 30
Time: 2.10pm-2.45pm

The merging of hotel and residential offerings – a good extension to our business or a mortal threat to it?
When: Tuesday, January 30
Time: 3.25pm-4pm

Simon Allison, Chairman of HOFTEL