I remember going to a hotel conference in the USA in 2001. It was the peak of the cycle, new hotel supply was rising and demand was starting to fall off. A negative adjustment to hotel performance was clearly on the way.
However, hoteliers were in denial. One speaker said that there would be no downturn. A second accepted that there might be – but was confident that it wouldn’t affect the cities in which his company ran hotels.
A third bought into the story of the downturn and freely admitted that it would indeed impact the cities where he owned hotels. No problem though, he said, because his hotels were so well located that they would be little affected. They were all wrong. When the crash happened, it swept everyone before it.
A similar mood of denial prevailed in the UAE at the start of 2018. At a debate held at the Gulf and Indian Ocean Hotel Investors’ Summit in February, speaker after speaker was confident that Dubai, Abu Dhabi and Saudi Arabia would all enjoy a “soft landing”. By April at Arabian Travel Market, the mood was darkening and by the HOFTEL Members’ Summit in Dubai in October it was quite sombre.
Overall, it is clear that the next few years may be challenging for hotels
At present, however, unlike the US downturns of 2001-2003 and 2008-2012, the market in the UAE is quite stratified. Resort hotels in some of the markets like the Palm Jumeirah, Yas Island and Saadiyat are generally doing reasonably well and in a few cases, booming. In contrast, hotels in downtown Dubai (Deira and Sheikh Zayed Road) and downtown Abu Dhabi are being hit and having to discount rates heavily in order to fill up. Meanwhile, concerns about oversupply are rising in Saudi Arabia and even Muscat.
Overall, it is clear that the next few years may be challenging for hotel and serviced apartment owners around the region. What can they do to preserve their bottom lines?
The answer adopted by many hoteliers at the moment is to slash rates and suck in low-rate business. That approach can work for a short-time, but if the supply issue lasts for several years, as it probably will, then it poses the danger of dragging down the entire market.
However, there is a wide range of other approaches to support profits which are worth consideration. For example, owners should consider reviewing their cost structures to see where fundamental changes can be made.
These may include combining back office functions, “complexing” with other hotels sharing the same owner or operator, and looking closely at their supplier contracts and their management agreements with operators to ensure that key business partners are fulfilling all of their obligations.
Another option would be to seek out new market segments, especially from India, China and Africa as well as South East Asia, the ASEAN region is still booming and flights from there are relatively inexpensive. The process of opening up these new markets involves genuine sales and marketing efforts rather than just sending out offers or maximising e-commerce channels.
Owners do not need to sit idly by and suffer from lower profits
Owners should also review their use of under-utilised areas, for example, converting restaurants to meeting rooms or vice versa; renting out some of the ground floor or even the parking and asking tricky questions like “Can the GM’s office make way for a saleable suite?”
Now is the optimum time, if they can afford it, for owners to use the slow market as an opportunity to do renovations. Finally, a number of owners with portfolios of hotels and serviced apartments are now moving from management agreements to a franchise.
The good times will roll again one day. The region is extremely resilient, every destination is adding new attractions and tourism infrastructures are being upgraded. In the meantime, owners don’t need to sit idly by and suffer from lower profits. There is still plenty of scope for value-added asset management.
The Gulf and Indian Ocean Hotel Investors’ Summit (GIOHIS) 2019 takes place on February 4-5. Full details here.
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