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Wed 14 Nov 2007 04:00 AM

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Developers' transient obsession

Hotel industry consultant Guy Wilkinson visited Cityscape Dubai last month and was left thinking: what will happen to large-scale mixed use developments when supply-induced demand slows?

Last month's Cityscape Dubai exhibition was the largest property show in the world., a showcase for all the amazing ‘mega' projects the Gulf and now the wider Middle East region have to offer. For those of us from the hotel sector who had the overwhelming experience of touring it, there were plenty of hotels, resorts and serviced residences to see, as well as a few examples of timeshare, fractional and condo suites buildings, all of generally components of much larger mixed-use developments. It got me thinking: Why do the developers of such projects apparently like such transient accommodation so much? What do they stand to gain?

These large projects are carved up and sold off to ‘sub-developers.' The master developer may prime the pump by building a few spectacular buildings itself, just as Emaar did at Dubai Marina, and then sell building plots to the scores of other developers who subsequently want to jump on the bandwagon. This isn't always the pattern, Dubai Festival City, for example, is all being developed by the Al Futtaim Group, who will own and lease all the buildings across its 6.5 square kilometre site. Others sell off ready-made buildings, like Nakheel at The Palm, Jumeirah and in International City, Dubai.

Having decided how he's going to add value to and earn a decent return on investment from the land, the developer then asks himself what different components should go where. Master planners are brought in to think about putting villas and town houses round a golf course here, a beachfront retail ‘festival marketplace' there, a high-rise downtown business hub in the middle, an industrial zone further into the desert.

Archetypically, hotels and other types of transient accommodation fit into many of these different zones. A boutique hotel may double as a club house for the golf course and provide useful accommodation for those ‘visiting friends and relatives' in the golf housing. A beach front is a natural location for resort hotels and if they're all lined up in a Riviera, then something like timeshare units will stand out and probably sell. The office district will need some smart corporate hotels, preferably with serviced apartments, to accommodate business visitors, and ideally have a decent amount of meeting space too. Out among the factories and warehouses, one of those new branded economy hotels would do nicely, to cater for cash-strapped travelling sales folk.

If you happen to be building a huge airport or 45 theme parks back-to-back into the bargain, you can easily argue the need for more hotels and transient apartments of all types and categories to cater to a positive invasion of future guests. And as a result, you can persuade countless sub-developers to carry the risk of actually investing in them.

This is where the danger lies. It's like one of those ‘circular formulas' that occasionally pop up in your Excel files. "Build it and they will come" has been proven such a sound adage in the Gulf, especially in Dubai over the last few decades that few people stop to challenge the sense in it. I don't deny that there is indeed a proven phenomenon referred to by us technical boffins as ‘supply-induced demand'. It can be defined as ‘new demand that would not otherwise have been attracted to a destination, resulting from the opening of new lodging.' Demand is indeed often increased as a result of the consequent direct and indirect marketing activities of both lodging operators and intermediaries ranging from tour operators and travel agents, to airlines and government tourism authorities. It's increased, but in reality, by not very much compared to real, innate demand growth.

The idea of mixed-use projects is that they offer wonderful synergies in terms of demand. Out-of-towners visiting a big mall will stay in a neighbouring hotel. Office workers and local residents will eat there at lunchtime, while their guests stay there at night. Hotel guests will get to use the golf course, and this can be part of an attractive incentive programme, in which corporate workers get a holiday while also attending a session in the on-site conference centre.

The theory is sound, but really, just how introverted can a market become? The point is that however much a mixed-use development is self-supporting, it can't be insulated from trends in the wider exterior market in which it is located. If Dubai's market as a whole softens, so will that of Dubai Festival City. If Jeddah's hotel market hits a trough, so will that of the future King Abdullah Economic City. If Oman's market goes flat, so will that of The Wave. Mixed-use projects may be flying now, but they can't defy gravity forever.

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