As Dubai continues to work on diversifying it’s offering and attracting a wider make-up of tourists, hotel developers remain only too happy to contribute with adequate accommodation, blowing away concerns of oversupply. “With over 100,000 hotel and serviced apartment keys, Dubai has become one of the largest hospitality markets in the world,” says Saahil Lalit, associate director at Colliers International Middle East and North Africa (Mena). “This, combined with the RevPAR performance seen over the last five years, gives a clear indication that it’s a fundamentally strong market driven by solid pillars across various spheres of the tourism value chain.”
Indeed, JLL’s recent The Global Hotels Landscape report, looking at 106 cities around the world, places Dubai in the Rising Giants category, alongside the likes of Bangkok and Shanghai. Among the key factors considered were the significant magnitude of the emirate’s hotel market, its development and performance speed, and demand in terms of air passenger arrivals.
“Dubai is a truly expanding market, in which supply is expected to keep growing at a fast pace over the next years, in continuation of the historic trend that has seen Dubai’s hotel supply more than double over the last ten years,” says Marko Vucinic, senior vice-president and acting head of JLL’s Hotels and Hospitality Group — Middle East and Africa.
“The supply increase comes in line with the government’s plans to turn Dubai into a major global tourism destination through its role as a platform for business in the Middle East, as well as the development of numerous leisure tourism attractions. As a result the Emirate experienced double-digit growth in demand for many years.”
Laurent A. Voivenel, senior vice-president of operations and development for the Middle East, Africa and India at Swiss-Belhotel International, points out that Dubai was among the top four most visited cities in the world and the best performer in the Mena region.
“There are multiple reasons that make Dubai a ‘Rising Giant’ in the global hospitality industry,” says Voivenel. “This definitely makes the emirate more attractive.”
Existing and future leisure attractions, such as Dubai Opera, the theme parks, Dubai Safari and the Water Canal, also play a huge role. “Talking about the hospitality sector, as the city matures from a luxury destination to a leisure and family mass tourism market, there is a need for more quality mid-scale hotels. Dubai needs to become more affordable,” says Voivenel.
Lalit points out that Dubai’s aim of 20 million tourists by 2020 is pushing the emirate to develop more hotels at an aggressive pace. “As per the latest numbers another 50,000 hotel and serviced apartment keys can be expected by 2020 — a 10 per cent year-on-year growth for the next five years,” says Lalit. “This is at par with the historical growth in demand, which has been around the 10-11 per cent mark in the last decade for hotel guest nights.”
Shift in performance
This rather large supply pipeline, comprising 50 per cent of the existing supply, despite existing and expected future demand, has led hospitality experts to wonder whether it could threaten performance.
A recent slowdown in growth pace raised the question of potential oversupply. However mid-year data shows renewed demand growth with a 10 per cent increase in arrivals, mostly due to the strength of developing source markets such as India and China, says Vucinic
In line with the government’s efforts to further enhance Dubai’s position in the global tourism map, hotel demand has been becoming more diverse and less focused on upscale visitors from Western countries.
“A decrease in Average Daily Rates [ADRs] was experienced in recent years as a result of the growing focus of the emirate on Asian source markets and mid-scale demand, with lower purchasing power,” says Vucinic. “Occupancy rates, however, have been relatively stable over the last few years and maintained their position in the high 70s.”
Lalit reckons that there had also been an interesting shift in travel motivation, where the leisure segment now dominates the market with a 39 per cent share, followed by corporate at 29 per cent and the Mice sector at 17 per cent.
“This is a result of various leisure anchors that have sprung across the emirate, boosting the leisure demand and also increasing the average length of stay to 3.6 nights in 2016,” he says.
Softening returns
This increase in leisure footfall not only ensured Dubai’s positioning as a tourism destination, but also resulted in better rates and average spend per tourist/ hotel guest for the hospitality market, says Lalit.
On the other hand, according to Vucinic, a decreasing RevPAR has meant a softening in returns for traditional hospitality projects and assets. “Hotel developers are still confident in the city’s potential, and rather than reducing investments in hospitality projects, the current trend is to optimise their positioning and implement efficiencies in the design, while also avoiding over specification in order to maximise return on investment,” Vucinic explains.
To reach 20 million visitors by 2020, the city needs to achieve an annual visitor growth of 7-8 per cent, which Voivenel says is only achievable by targeting a wider range of visitors and mass tourism markets.
“We are increasingly witnessing a shift in key source markets to lower-spending regions due to growth in low-cost carriers, expanding middle class, etc, and this necessitates the development of more budget hotels,” says Voivenel.
Raj Sahni, owner and chairman of RSG International Group, which recently invested into a five-star Rotana Hotel in Dubai, has no worries about oversupply and potentially weakening revenues. “I think we are jumping the gun too soon in accepting that a state of oversupply is inevitable in the near future,” says Sahni. “Every market has its peaks and troughs, and only a sustained drop should be a cause for concern.
“Dubai continues to add leisure attractions and has enacted many policies to ensure the convenience of the international traveller, thus expanding the market for more arrivals. I am certain that investment and RevPAR will still continue to attract investors to the market.”
Azizi Developments is also investing in hospitality, focusing on serviced apartments, which the firm believes is a key addition to Dubai’s real estate landscape. “From an investor’s point of view, serviced apartments offer good returns, and with an ever increasing number of expatriates and professionals in the country, and major events like Expo 2020, the demand for international-level serviced apartments is expected to grow,” says Farhad Azizi, CEO of Azizi.
Expectations
Meanwhile, Voivenel cautions that operators and owners need to tune down expectations. “There will be challenges in terms of profitability, potentially lower returns,” he warns. “This could mean getting used to lower occupancies of 70 per cent as an average rather than 80 per cent. Also, hotels in Dubai are heavily reliant on the strength of the economies in the source markets of their guests and market shocks can result in fluctuations in revenues from one year to the next.”
