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Fri 9 Nov 2007 04:00 AM

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Does Dubai need budget hotels?

With many mid-range and budget properties planned for Dubai, PKF The Consulting House’s Sven Gade looks at the demand for the sector within the emirate and its future potential for success.

Dubai has low cost airlines, increasing attention from tour operators, a target of 15 million tourists to meet by 2010 and several budget brands that are already secured by the big players - so why ask whether budget hotels are necessary? Should the question not be: how does a mid-market hotel succeed in Dubai? PKF sees much opportunity for this segment in Dubai, but here are some messages for those wanting to benefit from it.

Whether 12, 15 or 20 million tourists in Dubai - and when - is almost an idle question; past and present growth proves that there will be tremendous momentum in Dubai's accommodation market for years to come. Tourist number growth only slowed recently because of insufficient supply to accommodate demand. That is great news on one hand, but bad news given that competitive destinations don't sleep. So Dubai needs hotels fast? Mid-level hotels are fast to build, flexible to adapt and have a shorter payback time (ROI), which is one good argument for the product.

Another argument is that growing to 15 million or more tourists per year requires the destination to tap into new markets - the number of high spend travellers in the world has a ceiling, and is more competitive than the mid-segments. Thus Dubai turns to wider generator markets such as Eastern Europe, Asia and the European mid-market segment - which makes sense to get volume. However, the product for such tourists is about value for lower budgets, which is another argument for mid-market hotels, or we have to dilute luxury hotels' target segments.

And it is not only the leisure tourism segment that grows. Significant growth in business travel, MICE and VFR is projected, but the budgets of the future volume will not all be high expense accounts - on the contrary, to these target segments affordable value for money with quality is more important than to leisure travellers and the repeat potential is high.

Yet the majority of the future development underway is positioned in the luxury segment, which opens up a gap in the two- to three-star plus segments. Only few developers are filling that niche: another opportunity!

The calculations on budget hotels are simple: lower construction cost, good gross operating profit (especially in Dubai), high volumes leading to good returns and shorter payback periods compared to deluxe properties. The high numbers of units in this type of operation also drive good site utilisation.

Not least, it is comparatively easy to reposition such properties upwards, downwards or sideways should future demand require that. The only obstruction - again especially in Dubai - is that high land prices are an issue, which is why these hotels tend to not occupy prime sites.

So many factors point in favour of budget hotels, and in addition several existing brands have been snapped up by big players such as Premier Travel Inn (Emirates Group), Easy Hotels (Istithmar), and Yotel (IFA) - it is evident that they see the opportunity too.

Operating companies such as Hyatt, Starwood and Marriott have also developed mid-market brands to satisfy perceived future product demand. The same goes for local chains like Rotana (Centro) and some of the new Islamic hotel brands, which have added a two- or three-star string to their bow.

So what does a smaller developer with one, two or three properties do? To sign up a global partner is not easy; many of them are under exclusivity already, and/or very prescriptive in their product standards.

This is where it helps to consider the specifics of Dubai. Hotels here have a high F&B component - which is relatively independent from the standard of the hotel - because local residents frequent the outlets with gusto. Dubai is also known for innovation and concept development and adding that little extra to what's "normal" elsewhere - visitors expect to get more. And there is probably no other destination in the world where "tradition meets glitz" to the extent we see here, so bringing together opposites into one product or one destination is a specialty and a part of Dubai's vision.

So when planning to develop a smaller number of mid-market hotels to benefit from a real opportunity, why not consider:

• adding more outlets than the standard would require - that is unusual for budget hotels.

• giving the hotel "a twist" to make it unique through products, services and facilities because Dubai gross operating profits allow that and guests expect it from Dubai.

• allow the best of both worlds to meet in the design to avoid standardisation - but remember that taste is always in the eye of the beholder.

And there is no need to hesitate in setting up a new brand - the UAE has already produced a number of well-known brands such as Jumeirah, Rotana and Coral. Demand is ample to act as a platform for a successful undertaking, and the region around Dubai offers plenty of space for extension.

After all, this is the ‘City of Entrepreneurialism' - but it is important to ensure that the concept is well defined and tested, and has access to good staff and experts to ensure it will be a success.

PKF currently estimate that Dubai will need more than 100 hotels and hotel apartment units in the two- to three-star plus segments as and when the 15 million tourists arrive in town. One hundred hotels is more than twice of what we have now - it is a huge opportunity. Go grab it - but ensure differentiation.

Sven Gade is director and head of consulting at PKF The Consulting House, business advisors to the hotel and property sectors.

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