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Ageing Dubai hotels under pressure

Newer assets with fresher designs and trendier concepts will keep ageing hotel properties on their toes

Image Credit: Gulf News Archives
Hotels need to strengthen their value-added offerings to retain customers
Property Weekly

With the momentum provided by the World Expo 2020 and the ever-growing tourist market, several new hotel rooms and hotel apartments are coming into the market every year. Dubai expects to host 25 million visitors during the Expo and targets to have about 164,000 hotel and hotel apartment rooms by then.

Citing Tourism and Commerce Marketing data, Dubai Statistics Centre points out that the city had 79,825 hotel rooms and 24,678 hotel apartments during the first quarter last year. While Dubai is raising its new hospitality offerings to cater to all segments of people, ageing hotels and hotel apartments are facing the immense pressure of competing with the numerous fresh properties now available in the market.

Filippo Sona, director and head of hotels in the Middle East and North Africa (Mena) at Colliers International, says that although a large number of rooms are coming to market, tourism is expected to achieve a compound annual growth rate of 7.6 per cent. “By 2021, circa 50 per cent of Dubai supply will require refurbishment with 35 per cent in need of major renovation, equating to 79,500 and 55,650 keys respectively,” says Sona. “This means that to remain competitive old hotels will have to reposition their assets, and the unbranded hotels will have to seek a brand to be able to compete and be recognised as an asset that offers international standards.”

Sona foresees good occupancy levels to be maintained in the next four to five years, comfortably above 75 per cent. He also expects the rates to come under pressure because the source market of Dubai is evolving.

“To maintain volume there is the need to target mega source markets such as China,” he says. “Historically, this market drives volume and less average room rate. For future hotel developments where land cost constitute up to 20 per cent of total costs, expected internal rate of return is 12-14.7 per cent. To achieve the above returns, stabilised occupancy is needed: 64 per cent for three-star property, 71 per cent for four-star property, 68 per cent for five-star property, 68 per cent for standard serviced apartments and 69 per cent for deluxe serviced apartments.”

Refurbishment

For a number of landmark properties that entered the market around 2010 and are now around the seven-year mark, this year is a good time for a refurbishment, says Marko Vucinic, senior vice-president and acting head of hotels and hospitality group in Mena at JLL.

A refurbishment is a way forward for ageing hotels; Vucinic points out that old properties will struggle to compete with newer assets that offer fresher designs and trendier concepts as the Dubai market is experiencing necessary changes.

“We see more challenges appear for ageing hotels regarding average daily rates [ADRs] rather than occupancy,” says Vucinic. “Hotels will have to lower their rates to attract customers. With lower average rates, it can be expected that occupancy rates experience an only limited decrease.

“Although the hotels are ageing and renovations make sense for most of the hotels in principle, it is crucial for the owners to measure the incremental impact of it on the hotel performance.”

Also, repositioning should be considered for some properties that do not offer any strong competitive advantage as simple refurbishment might not provide sufficient returns, he adds.

Industry challenges

The existing hotels in Dubai face pressure in numerous forms. Explaining these challenges, Nathan Hones, partner at Carter Associates, says that older hotels have to compete with new ones that have all the latest technology and innovation wholly integrated within the building, which creates a seamless guest experience.

“New hotels can draw upon the most current trends in food and beverage service and give in-house guests and external local customers the experience they are looking for, thus driving additional revenue through non-room income streams,” says Hones.

Occupancy levels

Hones points out that the occupancy rates last year have held relatively stable across the various tier markets. “Dubai’s midscale and economy class occupancy rates have gone up slightly, and the upscale hotel sector has gone down slightly,” says Hones. “The more telling figure is not the occupancy rates, but rather the ADR that has slumped between 7 per cent and 10 per cent year-on-year, depending on the asset class.”

He says hotels face the challenge of maintaining occupancy levels amid downward pressure across the industry on ADR and RevPAR. “The existing hotels can slow this erosion of ADR and RevPAR by capturing back some market share through refurbishing food and beverage outlets, freshening up guest rooms and looking into means of increasing additional revenue streams,” says Hones.

He adds that problems concerning refurbishments do not come from the hotel operators as they understand the condition of the hotel best . The real problem comes from the owners that can be reluctant to invest in their asset, especially if it requires a closure and loss of revenue, says Hones.

Hones adds that in some cases, owners who have fully recovered their investment and enjoy good occupancy levels are not in a rush to allocate additional funds into their asset. In the other scenario, the owners that might have significant debt obligations and face dropping RevPARs and ADRs, are reluctant to ask their investors to reinvest in refurbishment programmes.

Current trends

Rashid Aboobacker, associate director at TRI Consulting, says the growth in supply and competition will drive many of the older hotels to explore ways to remain competitive and retain market share. These properties could change or upgrade certain facilities, renovate and refurbish or even redevelop the hotel. Other options include changing the sales and marketing strategy, repositioning the property, such as converting a hotel apartment to a hotel or from a corporate hotel to a conference hotel, signing up an operator or brand or a franchise affiliation or even changing existing ones.

“Those who do not embrace change, upgrade their properties and stay competitive may experience a decline in performance, escalation in costs, legal challenges and loss of reputation, and some may even go out of business,” says Aboobacker. “Typically, a hotel undergoes routine maintenance and replacements throughout its life, but major refurbishments can be expected every five to six years, and major renovations involving substantial capital expenditure may be required once in nine to ten years.”

He further states that Dubai is seeing several older hotels going through renovations of guest facilities, most frequently concerning upgrading rooms, repositioning food and beverage facilities and adding meeting and banquet facilities. Some owners are rethinking their brand or franchise affiliations, leading to rebranding of properties.

Sanjay Chimnani, managing director of Raine and Horne and exclusive representative of India’s Lemon Tree Hotels in the GCC, sees the franchise affiliations as a growing trend in the industry these days. When occupancy is full and there is not enough competition, Chimnani says hotels could work on their brand name. However, when there is a fight for occupancy, the prominent and well-known regional and global brands stand strong in the market.

“We see in Dubai that a lot of standalone self-branded operators are finding it difficult to run their operation in the competitive market,” says Chimnani. “Hence they either find an operator to manage and operate the property for them, or they become part of a franchise of a larger group that gives them its name and its marketing advantages, yet allows them to operate it.”

This way a standalone hotel gets an advantage from a franchise name, he says. Additionally, most brands also do regular property audits to ensure that their franchise standards are well maintained, and any refurbishment happens as per brand standards.

“Having an international or regional brand name offers a lot of marketing depth, the advantage of its brand familiarity and reputation and a more significant room rate, more penetration into the market and higher occupancy with better prices,” says Chimnani.

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