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Wed 10 Apr 2019 07:45 AM

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Opinion: Dubai's hospitality industry must adapt and evolve

Dubai hotel market fundamentals continue to be relatively strong, and is showing signs that it's now maturing, writes Olivier Harnisch, CEO of Emaar Hospitality Group

Opinion: Dubai's hospitality industry must adapt and evolve
Olivier Harnisch, CEO of Emaar Hospitality Group, said more emphasis must be placed on building cost-efficient properties.

The main topic of conversation among hoteliers in Dubai these days is about the challenges that the market faces.

They cite declining average daily rates (ADR), the number of new hotels coming up and point out that profit margins are under increasing pressure.

When negative talk takes precedence, it is important to remain level-headed and analyse the situation from a rational point of view.

From my perspective, two tools can be used to look at Dubai’s hospitality sector: the first is a rear-view mirror – looking back – the second is a pair of binoculars – looking around.

This approach is more than about viewing the market through the analogy of the glass ‘half-full, half-empty’. It aims to see operational aspects through evidence-based rationality rather than false bravado, through sugar-coating the hard facts or sheer empty rhetoric.

The rear-view mirror shows that revenue per available room (RevPAR) figures have indeed been declining since 2015, mainly because of the erosion of ADR.

As most hoteliers with international experience know, they came down from a very high level after many years of growth. The binoculars on the other hand allow us to look beyond our immediate environment, and there the result is more encouraging.

Maturing

Scan through the leading hospitality markets globally and there is ample proof that Dubai’s hospitality sector is not in as bad a shape as what the skeptics point out to. In fact, our fundamentals continue to be relatively strong. It also reminds us that our industry had an extended honeymoon and we are now maturing.

With a 78 percent year-round occupancy and an average daily rate of AED 804 across all Dubai hotels in 2018 (TRI Consulting), Dubai’s hospitality market compares favourably to many cities in Europe, the US or Asia. Destinations such as Berlin, Shanghai for example perform substantially below our city.

Our fundamental indicators are still robust. According to the Mastercard’s Global Destination Cities Index 2018, Dubai is the world’s fourth most-visited city, after only Bangkok, London and Paris, while the city had the highest international overnight visitor spend among 162 cities, at $537 (AED 1,972.45).

With the Dubai International Airport fostering its leadership position as the world’s busiest for international passenger traffic, our hotel sector is supported by a vibrant tourism and aviation industry.

New markets such as Russia and China are growing with the number of Chinese visitors recording 12 per cent growth to 857,000 and the number of Russian visitors gaining 28 per cent to 678,000 in 2018, after virtually doubling in size in 2017.

Expo 2020 Dubai effect

Further, the Expo 2020 Dubai effect will catalyse the sector’s growth with a unique opportunity to strengthen Dubai’s positioning as a world-class, technologically advanced and open destination.

In all logical reasoning, the hospitality performance indicators such as ADR, occupancy and RevPAR are gradually settling to levels that are on par with international cities. This said, the market is clearly changing. Except for the Expo 2020 period, over the next few years hotel room supply growth will outpace demand and this will pose a set of commercial and operational challenges to the industry. 

However, this will also offer an opportunity for the local hospitality sector to reinvent itself. Much can be done to cope with the increasing the maturity of the market.

Value-minded approach

It starts with how we plan and construct hotels. More emphasis must be placed on building cost-efficient properties. Parameters such as gross floor area per key, building efficiency (ratio of commercial, revenue generating areas to non-commercial, non-revenue generating areas) and cost of construction per square metre determine the return on investment a hotel will generate after its completion. Much more focus will have to be applied to these factors.

We will have to be smarter in building hotels. We, as an industry, have shown our ability to build beautiful properties in Dubai, now we must continue doing this in a more cost-effective manner.

A value-minded approach to hotel construction should preferably start at the beginning of a project, not when the largest part of the budget has already been committed, as is often the case.

In addition to hotel construction, we must learn to operate hotels in a more flexible, cost effective way, which essentially means continually evaluating the deployment of resources to revenue projections, whilst delivering outstanding quality levels.

In the future, intelligent cost management will be more critical than ever. Productivity management, best-in-class benchmarking, and zero-based-budgeting will no longer be theoretical concepts but essential tools in operating hotels effectively. We have much room for improvement in this area.

Overall, this is not a gloom story. These are signs that our market is maturing. We have been blessed in the past years with growth rates that were far above global averages. We may have to settle for more normal numbers in the future. And it is up to us to adapt to these changing circumstances.

Olivier Harnisch is CEO of Emaar Hospitality Group

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