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Wed 15 Jan 2020 01:08 PM

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Simon Allison, CEO, HOFTEL: How can the hospitality sector prosper once again?

Predictions For 2020: The hotel market was challenging in 2019, meaning competition was high between global brands, and management contracts have come under the microscope

Simon Allison, CEO, HOFTEL: How can the hospitality sector prosper once again?

Simon Allison, CEO, HOFTEL

The past year has been a challenging one for the hospitality sector in the region, characterised by a massive increase in supply in many markets, with the consequence of softer pricing and, in many cases, reduced profits. Indeed, according to figures from leading revenue bench-marker, STR, revenue per available room (RevPar) - the key measure of hotel performance - has seen a fifth year of overall decline in the Middle East, with Dubai down around 15 percent (although Abu Dhabi is back up this year).

That said, demand has remained robust and nearly all the regional markets are still seeing growth in tourism numbers. Markets like Dubai, Ras Al Khaimah and Muscat are enjoying a plethora of new and often exciting hotel projects; the transformation of tourism in Saudi Arabia is simply stunning, with markets like Riyadh and Al Khobar/Dammam seeing demand up by around 20 percent. Jeddah and Makkah have the highest RevPar of the region’s main cities, at around $160 and $125, respectively.

Life after Expo 2020?

2020 will of course see the start of the Dubai Expo and that is going to help to sustain hotels in a market which is moving at incredible speed from 70,000 rooms to 160,000. Admittedly, once the Expo is over, there will be some difficult years ahead, but the long-term plan for the emirate to add new attractions will surely mean that it will continue to be a star in the regional firmament.


OPPORTUNITIES Dubai is enjoying a plethora of new hotel projects

However, looking beyond these surface numbers, changes are afoot to the structure of the hotel sector. Hotel owners face two challenges - one cyclical and one structural. The structural one has seen two phases. Phase one witnessed the growth of both online travel agents (OTA), such as Booking.com and Expedia, and of the sharing economy, with companies like Airbnb. Phase two has seen these groups and the main hotel brand companies, like Marriott, coming together in an increasingly overlapping continuum.  Thus, travellers can now book rooms in private homes not only on Airbnb but on OTA sites and also on the sites of the big hotel brands such as, for example, Homes and Villas by Marriott International. While all of these groups benefit from such trends, the owners of hotels unfortunately do not. Worryingly, the brands which are supposed to be filling their rooms are actually helping to create new competitors which are luring guests away.

Overlying that trend is also the overbuilding problem, which is putting pressure on rates. For example, on STR data, the average room rate in Dubai in the second quarter of 2019 was AED514 ($139) versus AED716 in 2015.

Cost-cutting and oversupply

Understandably, owners are reacting to these trends by looking at cost-cutting measures. Many of them blame the brands for their weaker revenue lines, which is partly, but not entirely, fair. It is, after all, developers who are creating the oversupply, even if they are being actively encouraged to do so by brands which have little to lose because they take top-line fees even as profits plummet.

A key trend we are now seeing is that owners are looking hard at the long-term management contracts they have signed with the brands. Some are setting up their own management companies under new brands. Others are converting their hotels to franchises under which the global and regional brands look after marketing and sales and set key operating standards, but the owners actually run the hotels themselves. However, this is not as simple as it looks. You need a professional team and ideally a portfolio of five or more hotels over which to spread that team’s costs for it to make sense. This approach has been adopted, for example, by Aldar.

"Some of the big hotel brands are very used to franchising and quite amenable to it"

Other owners are adopting a relatively new approach, which is to hire so-called “white label” operators. Such operators run the hotel under a fairly flexible management contract, while still paying a franchise fee to the relevant brand. While this has the disadvantage of incurring two sets of fees, the benefit is that the white label operator will be experienced and may have economies of scale of its own. They are also usually regarded as being more focused on cost-cutting than the global brands and have vast expertise in co-ordinating with them.  Abu Dhabi National Hotels - run by the very experienced Khalid Anib – has, for example, created its own white label operation which is able to service not only its own hotels but those owned by third parties. Other stand-alone white label operators, like Aleph and Valor, are also looking for deals.

Future is franchising?

Some of the big hotel brands are very used to franchising and quite amenable to it, while others feel that their noses have been put out of joint by the new trend. Either way, big brands may have to get used to it because over the coming few years we are likely to see more and more owners looking at cost control measures in order to survive in an increasingly challenging environment.

However, the region continues to create and showcase a wider variety of leisure and cultural attractions and this, coupled with an increase in government spending, will help ensure a positive and buoyant long-term outlook, which we expect to be reflected at our upcoming Gulf and Indian Ocean Hotel Investors’ Summit (GIOHIS) at the Al Hamra Convention Centre and Waldorf Astoria in Ras Al Khaimah on 23/24th November 2020.

Simon Allison, CEO, HOFTEL

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