By Emma Davey and Gavin Samson
Owners of new hotel developments are often inundated with information, but there are three key points to bear in mind, say TRI Hospitality Consulting’s Emma Davey and Gavin Samson.
Hotel development in the Middle East has been considered by some as an industry in overdrive, with the United Arab Emirates staking a claim to first prize. The rapid pace at which new developments are announced continues to confound the naysayers, and whips up a further frenzy amongst those appearing to compete for the top spot in tomorrow's news. But aside from the PR hype, what does the potential hotel owner of today really need to consider before investing in a hotel property?
The answer: plenty. Obviously different markets across the Middle East have their own nuances that separate the considerations, but there are some issues that cross borders or that are likely to become increasingly magnified across multiple destinations in the future. Here we highlight three current considerations for the hotel owner in the Middle East.
With the cost of construction materials increasing by as much as 35% since the beginning of the year, it should be no surprise that costs tops the list of considerations. The major concern for a new hotel owner is assessing the time between planning for the development (market and financial feasibility study) and putting the project out to tender to construction consultants. Obtaining municipal permits and ensuring that infrastructure to new sites meets the timescale of individual development plans can also be tricky.
As long as the study has evaluated the potential impact of changes in construction costs, and the project can withstand an upward swing, the owner can have some confidence in moving forward with plans. However, timing is the critical issue and with many of the region's top construction companies engaged in existing projects, manpower availability and therefore lead times have been impacted. Delays can lead to a further shift in costs - upwards.
Mitigating against the risk of increasing construction costs can include forging deals with construction companies, but this is only likely if you are a major developer with a forward order beckoning across the next decade. The most sensible step is to ensure that all the facilities included in the design for the hotel are market supportable, and to resist the tendency to provide specifications for a property that are in excess of the classification requirements, yet yield limited revenue-generating opportunities.
With rising real estate costs and the resulting inflationary pressure on consumer prices, the human capital costs of running a hotel are increasing. Staff accommodation is usually the responsibility of the hotel owner, and is a substantial cost in most GCC countries where expatriates account for the major share of employees. Notably the welfare of staff is an important area for branded hotel companies, who count upon their international brand image being forged both within their company and externally.
Staff housing compounds offering a variety of accommodation and appropriate recreational facilities are becoming the preferred option. Where visa restrictions are being lifted, permitting easier transfer for employees between hotels, the lifestyle offered by the employer is often a deciding factor, in addition to a better salary. Stemming resignations is an important part of suppressing costs related to recruitment and training. A focus on staff retention, and a balance between staff costs and staff welfare, lies in the relationship between owner and operator.
Picking a hotel management company as a partner can be as tricky as contemplating an engagement proposal, particularly as most contracts are expected to last longer than the average modern marriage - and are harder to escape. The union with an established hotel brand brings undoubted benefits to the effective management of a hotel, but all at a price, whether in the fees paid or the control held in the relationship.
As a forerunner, Dubai has already demonstrated the need to move forward from the established international hotel giants and invite new blood to the market. The area has been the catalyst both for foreign hotel management companies to make their first international move and for local companies to create their own brands. Exciting times!
However given that hotel management agreements will outlast the current hotel performance cycle, the critical judgement from the owner is to understand what agreement he wants to be tied to some 15 or 20 years down the line. The risks for the owner are that the terms offered are not understood in the context of a market performing differently than expected. This can best be prepared for with an impartial assessment of terms and a minimising of emotional commitment to any specific brand.
TRI Hospitality Consulting is one of the world's leading management consultancies in the fields of hotels, tourism, leisure and real estate. Further information: www.trimideast.com or +971 4 345 4241.