What’s next for Dubai’s hotel sector?

More than 50,000 hotel rooms are expected to be delivered in the UAE in the build up to Expo 2020, in order to provide accommodation with the anticipated 25 million visitors who will come to the country over the course of the six-month event.

The question facing the hospitality sector is what will happen when the Expo is over? Will the market experience an imbalance of supply and demand, or will it have matured and learned to survive on lower occupancy or yields? More importantly, how will the market keep up with travellers who are spending less on accommodation in a city where most hotels are in the luxury category?

Also, is it strong enough for hotels to pass on the newly introduced cost of VAT onto the customers?

Arabian Business speaks to three industry experts.

Simon Allison, Founder of Hoftel, an invitation-only network of hospitality property investors

Are there too many hotels being built for Expo 2020?

Olivier Harnisch: Well, I don’t think there are hotels being built for Expo 2020 specifically, because the event will come at a time when Dubai is still growing, so I don’t think there will be too many in the future.

The demand is there, as seen by growth of between seven and eight percent a year, and between two and 2.5 million room nights coming onto the market. While the quality of Dubai hotels is fantastic, and they are great at operating around 80 percent occupancy, supply and demand will not be perfectly correlated going forward, so there will be periods of volatility.

This is something that we have to be ready for as an industry. There will be periods where, as a hotel manager, you will have two or three new hotels open up in your immediate vicinity. The demand growth will not be able to immediately absorb that supply, so we’ll have to be very strong on the commercial side, but also on the operational side.

Simon Allison: A lot of hotels are being built in Dubai at present, though this is more to do with the general expansion of the tourist offering and not just for Expo. That said, there is always a dip in demand after a major event like the Olympics, the World Cup or an Expo and so there will surely be some softness in the year afterwards.

Of greater concern would be a general economic downturn which usually has a much greater impact on occupancy than a post-event dip. Does that make it all doom and gloom? Not really.

I remember asking the head of strategy for a major Dubai firm in 2009 how the Emirate would fare, given the meltdown in financial and property markets. “We’re not worried”, he argued. “Basically, if you live between Cairo and Karachi and you want to have fun, you’ll come to Dubai”.

Olivier Harnisch, CEO of Emaar Hospitality, a group that operates the Address, Vida and Rove hotel brands

Olivier Harnisch: When occupancy goes down to 65 percent, which is a level where most hotels in other parts of the world make money, we will have to be able to operate more efficiently and flexibly. This efficiency mindset starts with the way hotels are built. There is still a lot of generosity in the way hotels are constructed, especially in areas the guests don’t see, such as the back of the hotel and office space.

Does the market need more mid-scale and affordable hotels?

Tony Ryan: As I have a global role with JLL, I see this in very different markets around the world. This is similar to China, where there was an oversupply in luxury hotels that needed be filled out with mid-scale offerings. These can be constructed at a very significant discount to what you might expect for a five-star hotel; often at 20 to 30 percent of what it might cost for a luxury equivalent.

The rates they offer, allied with an aggressive distribution system, also makes them very compelling financially. We are increasingly seeing a burgeoning middle class from India and China who want high-end, but there is also a vast number of people looking for mid-scale hotels. So the growth in mid-scale and upscale is found right across the globe and I think it’s applicable in Dubai.

Tony Ryan, Managing director of JLL Hotels & Hospitality, which develops and executes strategies for hotel investors, owners and operators

Olivier Harnisch: The old perception that Dubai is only about sun, sea and shopping is changing. We opened Dubai Opera a couple of years ago, and in Abu Dhabi, the Louvre Museum just opened, so there is a huge diversification in terms of offerings and attractions.

The Dubai market is a bit atypical compared to other markets in that over 60 percent of hotel room supply is in the upscale and luxury category. Yet, there is an increasing demand for mid-market hotels. Emaar Hospitality has responded to that by creating Rove Hotels, a contemporary mid-market brand for Generation Y. More importantly, we should not make the mistake of thinking that the traveller that stays in the mid-market hotel has little money to spend. That is not the case. There is an increasing number of travellers who consciously decide to spend a lower percentage of their travel budget on accommodation. Our goal is to build mid-market hotels to respond to that demand.

Do you think hotel brands take too much of the glory and profit, and too little of the pain and slow market conditions?

Simon Allison: Generally speaking, yes. The way the business model works is that the brand takes two to three percent of the revenue, the top line of the hotel, and then another percentage of the operating profit. But they’re not affected by what happens under the operating profit, such as the insurance, the property tax, and the debt. You can actually have a situation where the hotel owner is losing money, but the brand managing the hotel is still making a healthy fee.

Generally, experienced owners know how to negotiate these contracts quite well, so there is a lot more alignment of interest with the brand. A lot of new owners, however, don’t. And the brands will usually offer them an initial template which is very favourable to them.

One of the reasons we set up Hoftel as an owners’ group is so that owners can learn from each other on how best to deal with this.

The UAE’s hotel occupancy rates are expected to increase this year due to strong growth in demand

Tony Ryan: It’s a dynamic relationship depending on different markets around the world. It’s absolutely critical that the owner, who is about to commit hundreds of millions of dollars to a particular asset, feels as though he is being listened to and is getting the best possible return he can from that investment. That requires an understanding from both sides as to what they can contribute.

Brands these days are effectively a profile for the asset, but most importantly they’re about distribution. And that’s the critical thing that a brand will bring to a hotel. For a location that is relying particularly on inbound traffic, this is where an international brand can really come to the table and provide much better occupancy, which will reflect in a much higher rate.

Simon Allison: On that point, I think there is a fundamental change happening in the industry. Owners do pay a lot for distribution – selling the rooms to guests – and a lot of the distribution is done by online travel agents, such as booking.com and expedia.com. So owners are questioning why they are paying the brands these fees for the room nights when, in reality, someone else is selling them.

Then you have a new group of unbranded, white label operators, who will run your hotel for you, and then you have to pay a franchise fee to the brand. The overall fee might be higher, but the general perception of the owners is that those white label operators are much more focused on your bottom line. So that’s a challenge for the brands.

A report from analysts Coface said VAT is not expected to impact on the UAE’s growth

Do you think the introduction of VAT will have a significant effect on the industry in the months ahead?

Simon Allison: The world is used to VAT. Most countries have it. It depends on whether the market is strong enough for it to be passed onto the customer, or whether the hotels have to absorb it. And clearly, with a lot of new supply coming into markets like Dubai and Saudi Arabia, a lot of owners will be swallowing that rather than passing it onto the customer. It also adds another layer of complexity to all the accounting, so that’s unhelpful. But again, most of the world has learned to live with it.

What worries me slightly is that every year or two there is another additional cost. When you have extra costs on the hotel rate, as a customer I think, “Oh, that is just the rate. I have to pay more”. When it gets above 25 percent, people will stop and calculate it. That is when people will really focus on it, and that could hurt.

Tony Ryan: I’ve seen VAT introduced in a host of countries around the world. On the whole, there is an initial period of disruption for a year or two until the market gets used to it and then it’s very quickly understood. I must point out that the structure of VAT in the UAE is very simple in the way it was adopted.

In other countries, such as India, where there are four or five tiers of VAT, it is unbelievably complicated in terms of how a hotel should be applying VAT to different services provided by the hotel. So I don’t see this tax as particularly challenging.

For that reason, the system that’s been adopted here will be readily absorbed by the industry, including both domestic and inbound players. There’s nothing unusual about this in terms of what’s happening in other markets.