The GCC hotel industry has undergone considerable change in recent years. But the ongoing downturn in revenue, influenced by multiple factors, is expected to be a dominate topic at this week’s annual Arabian Travel Market, the largest gathering of tourism stakeholders in the Middle East.
Despite its reputation as a trailblazer in the tourism industry, Dubai, the ‘grandfather’ of the region, as one industry expert coined it, has not been immune to the change in fortunes. Revenue per available room (RevPAR) in the emirate slumped by nearly 15 percent to AED687.63 ($187.170) in February compared to the same month last year, marking the seventh consecutive month-on-month decline.
Dubai’s double-digit drops in revenue largely reflect the entire GCC industry. STR Global Middle East & Africa area director Philip Wooller says the region’s hoteliers will have to get used to lower prices.
“The Middle Eastern markets are certainly seeing some changes and it may be that a new norm will set in for the foreseeable future,” he says.
“Many of these markets are beginning to see more maturity in the hotel landscape and of course room rates will be affected as a consequence.”
The market dynamics are changing as Dubai starts to find the right balance, he says.
“From late 2010-2011, Dubai went on an incredible upward projection of room rates and visitors, and it just got to such a level that Dubai become without a doubt the most successful hotel market in the world at the back-end of 2014. It just got to unsustainable levels, I think. A double-digit room rate [increase] each month was not unheard of,” he recalls.
Largely outside of its control, the perfect storm in the tourism market for the GCC region saw a number of factors come together at once to affect the region’s performance.
“The indirect impact of conflict and oil price has meant that the decline in the Russian visitor has been quite dramatic over the last 18 months,” PwC Middle East partner and hospitality and leisure leader Philip Shepherd says.
“The expenditure of those visitors is proportionately much higher than when the emirate has been able to open up other markets into India and China. While the numbers are broadly on track, the mix is different and therefore we would argue that the mix of hotels in Dubai needs to adjust to the new reality.”
Deloitte said competition among Dubai’s hotel operators will bring a “new norm” for occupancy rates in the city of between 70-75 percent this year.
Yet Dubai’s tourism industry still stands apart and the figures reflect that. The emirate welcomed 2.68 million people in the first two months of the year, up from 2.58 million during January-February 2015.
The top source market for visitors to Dubai remains India, with 314,000 visitors during the first two months of the year, closely followed by Saudi Arabia (295,000), Oman (223,000) and the UK (200,000). Each of those figures has shown a marked increase on the previous year.
“[The drop in RevPAR] hasn’t been helped by [a decline in] the higher-spending visitors that you would have had in the past, particularly the Russians and the Europeans, who are finding it expensive after the euro devalued by 25 percent against the dollar. It is making [Dubai] an increasingly expensive destination,” Shepherd says.
Additional supply coming onto the market also has driven down RevPAR but analysts do not expect that to improve anytime soon, with more hotels due to open before the World Expo in 2020. STR Global estimates 19,846 rooms in 63 hotels are currently under construction in the emirate.
“An average hotel takes about three years from conception to launch,” Shepherd says. “A lot of these [were announced in] 2012 and they’re all coming on stream about now. It’s just a lump of supply has come on stream and while the tourism numbers and the visitor numbers are still growing very nicely, you just have a short-term impact because of that.”
While the negativity surrounding Dubai’s sliding figures is grabbing headlines, the emirate’s high occupancy rates still place it well ahead of many other global cities. With 84.9 percent occupancy in the first two months of the year, Dubai is among the top three cities globally.
“If you stand back and look at it absolutely, Dubai has occupancy levels and ADRs [average daily rates] that the rest of the world would die for,” Shepherd says. “They’ve had a very rich mix for a long time, but it is maturing. As a city, it’s in the top ten of most visited cities in the world and you would expect it will start trending towards the kind of averages that you expect in other mature cities like London, New York and Paris. On the absolute terms, it’s actually still extremely high performing.”
The mix of hotels, however, has often been questioned, the luxury, five-star segment significantly dominating the market.
“There’s a big need for the quality affordable or midscale segment hotels,” EY MENA head of transaction real estate Yousef Wahbah says. “The concentration in today’s market is really on the five-star and luxury, but that segment, in my opinion, is saturated. I do see an opportunity to focus on the three- and four-star segment.”
The common argument has been that luxury hotels deliver better returns on investment, particularly when the high cost of land is factored in.
Dubai will complete an estimated $82bn worth of projects in the areas of housing, entertainment and infrastructure by 2020, according to Reidin.
Shepherd, however, says a paper that PwC Middle East is due to publish at this year’s Arabian Hotel Investment Conference (AHIC) will show that the converse is true and returns on mid-market hotels can be similar.
“I think some of the economics of the mid-market hotels are possibly misunderstood,” he says. “We’re publishing a paper on the mid-market hotels and our conclusion is that the returns that you can expect on a mid-market hotel, if designed correctly and not ‘over-specced’ [specifications], can be as good as the ones you’d expect on a higher hotel.”
He argues that there are a lot of misconceptions about how to make money out of a mid-market hotel.
“I just think that the force of circumstances in the market is that you have to have them,” Shepherd says. “All you will have, if you have a stock of hotels that are too oriented towards the five-star luxury, is that the older ones will have to become mid-market themselves just to ensure that you have the visitors coming from those main growth source markets, which is currently India and China.
“We see that there is financial sense and it is financially feasible to have mid-market hotels in Dubai and Abu Dhabi. In fact, most of the cities across the GCC need to have more of these types of hotels.”
The price of land, he says, is also factored into the financial equation of making money from the mid-market hotel investment.
“With a mid-market hotel, you make smaller rooms and more of them, and you have much simpler facilities,” he says. “The risk always in the Middle East is that — a story you hear many times — you can take a classic American or European mid-market hotel and then you add on all the ‘bells and whistles’ to it. Before you know it, it has almost become a five-star hotel — valet service, lots of F&B [food and beverage options].
“There’s a feeling that for the Arab customer you need all of these, but going forward it isn’t always the Arab customer that you’re targeting; it’s these other source markets, who will be attuned to having hotels with different sized rooms and more simple.”
Wooller also says it’s a common misconception that Dubai is dominated by five-star hotels.
“If you look at the [current] branded mid-market supply, it is limited. The major international brands, like some of the Hilton brands, IBIS, or Holiday Inns, there are probably less here than you would expect, but there are an awful lot of independent hotels in that sector, which are very affordable.
Nearly 3 million tourists from western Europe visited Dubai in 2015 — a rise of 6.1 percent compared to figures in 2014.
“Dubai is a luxury destination so it was always going to be a little bit top heavy on the luxury products because that is what it was designed to be.”
The latest Dubai Tourism statistics bear out Wooller’s point. Of the 677 hotels in the emirate, 90 are five-star, while 106 are four-star, according to the department. The largest category of hotels is one- to three-stars, with 265 establishments. Additionally, there are 66 deluxe/superior hotel apartments and 150 standard hotel apartments.
Demonstrating the changing nature of Dubai’s visitors, the highest occupancy during the first two months of the year was in hotel apartments, with 89 percent occupancy in standard apartments and 86 percent in deluxe.
Looking to the year ahead, the demand for mid-market and more affordable accommodation looks set to grow, with the large-scale leisure developments taking place in the emirate. The first of the theme parks under development is set to open after the summer. Typically aimed at the mass market, theme parks are expected to rev up demand for mid-level accommodation.
“Our view is that there should be a lot of opportunity in the mid-market hotels,” Shepherd says. “There is a disconnect at the moment, between visitors coming and what’s being built and there’s a significant gap.
“We’re a kind of a reverse pyramid in Dubai. Most markets will have a very large budget base of hotels, and nice peak at the top of the pyramid of five-star luxury. In the Dubai development they started at the five-star luxury and now we’re filling out the bottom of the pyramid and there’s still a bit more to do there.”
Wahbah predicts RevPAR will continue to decline in both Abu Dhabi and Dubai this year, with no significant improvement expected before 2017.
“I would expect RevPAR to be under pressure this year. The December to March months are the highest performing in the year in Dubai and Abu Dhabi. With Ramadan and the holiday season coming, I see RevPAR dropping more,” he says.
“I would expect to see further pressure on RevPAR given the normal period, coupled again with the new supply that is going to enter into this market. Give or take, 2016 in totality will witness a RevPAR drop anywhere between 5 to 7 percent [in Dubai]. I don’t expect to see significant improvement from now till the end of 2016.”
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