Dubai: Four-star hospitality in Dubai sounds just as good as the five-star version ... more so for investor-developers.
“The government is offering huge incentives for developers of three- and four-star properties until 2019-2020 — this translates into extremely attractive yields,” said Saeed Khalifa Mohammad Al Fuqaei, chairman of the Shuraa Group, which has been involved in three such transactions to date. “And if you go by businesses that have consistently done well even since 2008, four-star hotels in Dubai have provided exceptional returns apart from investments in restaurants or supermarkets.
“When you have incentives from the government to create more hotel stock outside of five-star, you run with the opportunity.”
Investors and developers have also been helped by more areas of the city opening up to mid-tier hospitality projects. In fact, the four-star hotel boom has closely followed most of the mixed-use communities that are getting created in the city. And as the development activity stretches out to the Expo 2020-Dubai South location, the options for hospitality operators scale up accordingly.
And there are prospects shaping up offshore as well, through the Deira Islands development. Apart from the high-end resorts, the Nakheel master-development will also see a fair sprinkling of more value-based hospitality offerings.
“The margins enjoyed by developers who own and operate their hotels vary with the scale of their operations,” said Amruda Nair, CEO and managing director of Aiana Hotels and Resorts, in a recent interview. “Often the challenge is to manage the costs of a single asset due to high administrative and infrastructure costs that are required to market the hotel successfully.
“In such cases, often a franchise model or management contract with a brand is often more cost-effective.
“It is usually when the operations are scaled by multiple properties that the own-and-operate model works to the developer’s advantage and can result in a 6-8 per cent increase in their returns.”
For Shuraa’s Al Fuqaei, the intention is to build, but not own the properties. “I made a quite successful exit from our first project, which was a joint venture and with a location in Bur Dubai,” he said. “We started early 2012 on the construction and sold it in 2014.
“For the other two projects, I opted to do it on my own — the profit realisations are definitely better this way. But unless you have deep pockets, it’s best to do one project at a time.”
His company is close to finalising an exit for its property at Jaddaf, which leaves it with an ongoing development at Jumeirah Village. Going forward, Culture Village has the makings to be a good investor prospect, Al Fuqaei added.
Now that the Dubai Parks and Resorts’ built theme parks in Jebel Ali are up and running, there could be growing investor interest for hotel-specific projects in and around that vicinity. In its projections for early 2017, the consultancy ValuStrat reckons that Dubai’s hotel sector performance will be “driven by additional tourists seeking newly opened attractions”.
And, according to Al Fuqaei, “The moment a particular emerging location gets the bulk of its infrastructure ready, that would be a good time for investor-developers to launch mid-market hotel projects. Land prices are still attractive.
“The best part of having such a project is it takes less time if the funds are there. And when you have the property ready with a hotel operator on board, the price you can sell at carries a higher premium.
“This status will continue all the way up to 2020 ... and even thereafter. It’s one reason why Shuraa’s development profile will remain strictly confined to hospitality.”
The Gulf’s hospitality pipeline is packed
* Currently, among Gulf states, Saudi Arabia leads the race with 34,753 rooms under construction followed by UAE and Qatar.
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