Suite dreams

Dubai might be in the doldrums, but Thomas Storey, president of Fairmont Hotels & Resorts, still thinks there's room for growth in GCC.
Suite dreams
By Joanne Bladd
Fri 29 Jan 2010 04:00 AM

 

Dubai might be in the doldrums, but Thomas Storey, president of Fairmont Hotels & Resorts, still believes there's room for growth in the Gulf.

 

Time was when dubai's hotel industry was hot business. When the petrodollar boom put Dubai on the map, a rash of five, six and even seven-star residences sprang up overnight, gobbling up the emirate's coastline. Counted among that glitzy citizenry were brands such as Hilton, Raffles and Marriott - to name just a few - lured in by the city's bright lights and even brighter prospects.

 

By 2007, fed by a ready swarm of tourists, the Jumeirah strip was raking in 90 percent occupancy at $300 a night. Hotels, it seemed, were one of the biggest games in town.

 

For Canada's Fairmont Hotels and Resorts then, when the time came to look East, Dubai was its first pick. The upper-crust chain struck it lucky, snapping up a five-star, city-central property originally earmarked as a Sheraton hotel before the deal fell through. When Fairmont Dubai opened its doors in 2002, it was on the crest of the tourism wave when guests still outnumbered rooms.

 

What a difference eighteen months can make. From Jumeirah to Jeddah, the Gulf's hospitality industry is feeling the icy chill of the financial crash. Both corporates and consumers have tightened their belts, thinning the crowds and pushing hotels into a dogfight for guests.

 

In Dubai, peak season occupancy has shrunk nearly 17 percent from 2007. The latest figures show revenue per available room (revPAR) - the industry's measuring stick for fiscal health - has plunged 31.4 percent, while average daily revenue fell 23.7 percent to $235.48. Not many people want to drop $300 for a room these days.

 

Further muddying the mix is a building frenzy that is poised to dump thousands of new rooms on an already glutted hotel market, with potentially disastrous results. The Gulf has $7bn worth of hotel projects under construction, the bulk of which - $4.4bn - are in the UAE.

 

The wider Middle East is expected to gain 29,226 guest rooms in 2010 alone.

 

Thomas Storey, however, doesn't look as worried as he might. The straight-talking president of Fairmont Hotels & Resorts, Storey oversees a stable of 63 luxury hotels worldwide, five of which are in the Middle East. That number will hit nine within the next three years.

 

‘Today, the Middle East represents about 15 percent of our global portfolio, but its about 40 percent of our pipeline growth," he tells me from the penthouse suite at the Fairmont Dubai, gesturing at its sprawling views across the city. "There's a lot happening for us in the Middle East, largely started by this hotel. We've been very lucky."

 

Lucky he might be, but that's not to say that Fairmont isn't feeling the pinch. The Fairmont Dubai, its flagship Middle Eastern hotel, saw revPAR tumble by 25 percent last year, while overall revenue fell by some 30 percent.

 

The 32-storey property is one of Fairmont's top three moneymakers, alongside its hotels in Banff Springs and San Francisco, and contributes around five percent of the group's annual $4bn turnover. After Canada and the US, the UAE squares up against Europe as the Fairmont's third largest market, meaning any downturn in fortune here takes on a ripple-effect for the wider chain.

 

For that reason, Storey has been quick to do battle for the UAE's shrinking pool of guests, tweaking the hotel's strategy to tempty in the lower-rate, but high volume, group business.

 

"In the past we were less inclined to take some of that business because it wasn't as highly rated," Storey admits," but now it helps keep our occupancies up. It's helped to offset some of the decline in transient travellers. Because this hotel is positioned in the top end of the market, you can keep the occupancy to some extent, but you're not going to keep it at the higher rate."

 

The fight between room and rate - whether to drop prices in favour of occupancy - plays out strangely in the Gulf. Hotels here are often lucrative baubles for wealthy tycoons who, in contrast to more developed markets where occupancy reigns über alles, favour the prestige of high prices over full rooms.

 

"The positioning of the hotels as high-end is very important to the owners," says Storey, snapping his cuffs.

 

"There are many very wealthy owners here, and they are more inclined to protect the positioning than they are to worry about the financial returns."

 

As a result, while destinations such as Europe, the Caribbean and the US have opted for deep price cuts in a bid to keep tourism flowing, dollar-linked Dubai has begun to look prohibitively expensive by comparison. For Storey, though, the bottom line wins out.

 


"This is a big property to run; it has a lot of food and beverage, meeting space. So the more people you have in the property, the better the overall performance of the hotel is," Storey points out.

Like much of Dubai's economy, the explosion in the hotel industry was largely bankrolled by the emirate's booming real estate market. A huge chunk of business for the priciest hotels came from the property sector, which in 2008 accounted for more than half the economy. When Dubai's housing bubble burst last year - wiping as much as 50 percent off house prices - it blew a hole in the hotel industry it has yet to recover from. According to Storey, the real estate collapse is now the hospitality industry's chief problem.

 

"I think the single biggest challenge this destination has right now, is that a lot of the business of this destination was driven by real estate...and all of the follow-on business associated with that, you know, all of the designers, all of the architects, all the engineering firms, all the heat, light, gas. When that started dialling back, unfortunately Dubai doesn't have a lot of other industries to fall back on," he says frankly.

 

"My concern about Dubai has always been, ‘does it end up not having enough runway?' In other words, you get to a point where you've got to start diversifying that business base in a way that, if you have a shock to one segment, you've got other segments to fall back on.

 

 "I think we're still feeling it [the real estate crash] and I think Dubai will feel it for a while."

 

Adding to the squeeze is the issue of oversupply. Skeptics have been suggesting for years that the UAE has built more hotel rooms than it can fill, yet the Arab country has bounced back with sky-high occupancy rates, stoking more construction. It continues to add hotels at furious speed, with a staggering $4.4bn worth under construction - Saudi, the Gulf's largest economy, has a mere $1.2bn by comparison - new rooms that will crank up the heat on an already simmering hotel market, where demand is faltering.

 

If there is opportunity in the recession, says Storey, it's that a string of these projects will stall in the soured debt markets, creating breathing space for demand to recover.

 

"Usually what hurts in the hotel industry is not demand, it's supply. When you overbuild, all you're doing is taking a certain amount of demand and spreading it out over more hotels," he says, shrugging. "Dubai has really enforced the notion that if you build it, they will come. But what made things difficult here was... people started to defy the laws of reality, that ultimately demand does stop.

 

"Now, the market is regulating itself to some extent. With the downturn, I know there's a number of projects here that aren't fully funded and that are going to sit undeveloped."

 

One of which is the multimillion-dollar Fairmont Palm Jumeirah, a five-star resort originally slated to open on Dubai's iconic Palm island later this year. A joint venture with Kuwaiti firm IFA Hotels & Resorts, the coastline hotel will overshoot its completion date by at least a year to 2011 as its backers struggle to secure financing in the credit crunch.

 

"The problem is our partners in that venture are having financing challenges just like everyone else," Storey admits. "So it's hard to know [when it will be built]."

 

There is also uncertainty over whether the original plan for Palm Jumeirah, a development of state-backed Nakheel, the Dubai real estate firm that requested a standstill on debt repayments in November, will ever be realised.

 

"The question is going to become will the Palm ever get developed out now the way it was originally envisioned? I think it is a question mark now," Storey says.

 

It's a sign of the times that the next big opening on the Fairmont agenda is not in Dubai, as anticipated, but in Saudi Arabia. In the third quarter, the chain will open its first Saudi hotel, the Makkah Clock Royal Tower. (On opening, the tower will steal the title of world's tallest hotel, showing Fairmont hasn't left its Dubai roots too far behind.)

 

For Gulf hoteliers, Saudi has all the temptation of a vast sweet shop; a ready supply of guests (the kingdom attracts 47 million - largely religious - tourists a year), a lack of room inventory, and an apparent immunity to the recession. Riyadh reported the largest occupancy rise in the Middle East last year, up 18.9 percent to 52.6 percent.

 

A veteran hotelier Storey, unsurprisingly, is excited. "It's a huge, huge opportunity for us," he says animatedly.

 

"We are seeing these amazing, amazing numbers - like four million people a day - and there's almost no inventory. And we have the biggest, most upscale, most iconic hotel in Mecca. It will make Fairmont a recognised name in the Muslim community. We are linked with the holiest site ."

 

The Royal Tower hotel is topped with a 40m clock that can be spotted 30km away on a dark night. That's some branding, I say.

 

"I know," Storey agrees enthusiastically. "Huge right?"

 

For some, Fairmont has been slow to step to Saudi. The chain is, after all, part owned by Prince Alwaleed Bin Talal Bin Abdul Aziz Al Saud, who, alongside Colony Capital, combined it with Raffles hotel brand in a 2006 $3.9bn takeover. But Storey, it seems, is now keen now to make up for lost time.

 

"In the Gulf, it's our biggest potential market," he says firmly. "If we can be in Medina and Riyadh, it'd be huge. Give us five years."

 

For all the latest travel news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.