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Tue 6 May 2008 04:00 AM

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To build or not to build?

Building dedicated staff housing is a big step for any hotel; but increasing accommodation costs in the region is an important factor to take into consideration, says TRI Mideast's Emma Davey.

Building dedicated staff housing is a big step for any hotel; but increasing accommodation costs in the region is an important factor to take into consideration, says TRI Mideast's Emma Davey.

Inflation in the region is largely being fuelled by increasing accommodation costs and despite the government's attempts in the UAE to control growth through rent caps, the constant inflow of new people continues to generate higher prices and exacerbates the two-tier rental system.

Some hotels currently renting city apartments are having to budget for increases in accommodation costs in excess of the rent caps.

Such is the problem, that units previously considered as lower priced accommodation have been pushed up the price scale and can sometimes now sit uncomfortably higher than the tenant expects.

So, what if that tenant is a hotel? Upcoming hotels certainly face the challenge of securing accommodation at rents that fit the budget; a challenge that is not going to be solved in the short term.

Housing hotel employees is a big task when the hotels in the UAE routinely provide accommodation units (rather than allowances) for at least 85% of all personnel.

Depending on the hotel location and the dynamics of the city, hotels may provide housing for staff onsite - for example in Fujairah - in dedicated purpose built housing compounds, as seen in Dubai, or in apartments in city locations in places such as Dubai and Abu Dhabi.

Whatever the choice, the cost of housing is going to hit the bottom line for the hotel owner and the hotel management company.

Some hotels currently renting city location apartments are having to budget for increases in accommodation costs in excess of the rent caps because their expanding needs force them to take new leases, and due to the uncertainty of maintaining the relationship with their existing landlords.

The quality of staff accommodation and the lifestyle experience for hotel employees is also an emerging issue. With rising standards of living in traditional source markets, employees are looking beyond salary when seeking a job, and during recruitment drives the accommodation offered is a point of importance for candidates selecting a new position.

Furthermore accommodation is playing a part in staff retention, particularly in the recreational offering and the degree of privacy offered to individual staff members - for example through sharing policies.

With operational costs impacted by growing inflation, hotels will need to look, and plan, for efficiencies. Currently, hotels in Dubai and Abu Dhabi have accommodation costs in the region of AED 2000 (US $540) per employee each month, taking advantage of lower rents in properties they have occupied for several years.

However, for upcoming hotels, TRI estimates that with current market rents in available housing this budget could double to around AED 4000 ($1089) per employee per month.

It raises the question that, if employee housing budgets are under threat of spiralling upwards, should the hotel owner consider building staff accommodation?

Building benefits

There are certainly benefits to considering the build option, which are as follows:

• The hotel can forecast accommodation costs accurately over a longer period of time.

• Profit targets can potentially be more aggressive.

• Funding for the housing project is subject to less risk with a guaranteed tenant for the period of the management agreement.

• Developers can minimise the impact on the overall project by launching special-purpose vehicles purely for this element of the development, which will provide a better fit for the specific component profile.

• Staff welfare and satisfaction with living arrangements can be more easily managed. Building knockbacks

However, the build approach is not without its drawbacks:

• An additional plot of land at reasonable cost and within a reasonable travelling distance from the hotel(s) must be secured.

• The technical services and support provided by the management company may not extend to the development of employee accommodation.

• In keeping rents reasonable, and possibly below market value there may be an opportunity lost to this second investment made by the owner.

• Planning for staff accommodation will be subject to tenant mix restrictions - for example bachelors, male/female, single/married, rank distinctions - which may prove challenging, especially compared to the flexibility of unit allocation in open market real estate development. In meeting these tenant mix requirements, the owner's units may be left unoccupied.

In the present real estate conditions where residential rents and development costs continue to shift upwards, it has become increasingly apparent that decisions regarding staff accommodation need to be considered much earlier in the development period.

Building or renting is likely to be a decision driven by cost assessment, convenience, land availability, hotel location and prevailing market trends.

However, for those owners who are investing in multiple hotel properties, opening over a relatively short period of time, a combined solution to employee housing is likely to be the most practical approach. Furthermore, purpose built housing for hotel staff can meet many of the requirements for staff welfare and security.

However actually deciding who will then build it and pay for it - that is the tricky bit.

TRI has assisted and advised on hotel management company selections for numerous hotels on behalf of independent hotel owners and institutional owners across the MENA region.

TRI Hospitality Consulting is one of the world's leading management consultancies in the fields of hotels, tourism, leisure and real estate. For further information: www.trimideast.com or +971 4 345 4241.

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