Abu Dhabi has welcomed half a dozen new hotels since the beginning of 2012 as the capital ups its efforts to boost its tourism industry to a level that even comes close to that of its neighbour, Dubai.
But hospitality consultants say the projects have pushed the hotel market to a point of saturation, and with even more hotels scheduled to open this year, this problem has the potential to become acute. Some argued that a rate war — when hotels slash prices in the face of competition — is underway.
"I would say the Abu Dhabi hotel industry is already in the beginning of an oversupply situation," Guy Wilkinson, managing partner at Viability, a hospitality consulting firm, said.
According to the Abu Dhabi Tourism and Culture Authority's figures, in June of last year there were 51 hotels with 11,579 rooms and 47 hotel residences with almost 5,000 rooms, Wilkinson said. Since then, a number of hotels have already come online. In November 2011, there were 43 confirmed hotel projects in Abu Dhabi which would bring a total of 14,108 new rooms on the market, according to Viability data.
"By our calculations, the supply will double in four years' time," Wilkinson said.
Study on rates
In the autumn of 2011, Viability conducted a study on hotels in downtown Abu Dhabi that are predominantly four-star and three-star. Wilkinson said the study showed that these hotels have already experienced the effects of oversupply, with average room rates dropping.
"They've been maintaining reasonable occupancy rates, but are losing on average room rates," he said. "One dropped from Dh650 to Dh400 and is expecting that trend to continue."
The four-star and some three-star hotels are suffering because they are competing aggressively for business with some of the five-star hotels that have opened, he explained. "They are offering low rates to fill up the rooms and by doing this, the ones that suffer are the four-star hotels beneath them. It's what they call a rate war."
According to the Abu Dhabi Tourism and Culture Authority's figures, average occupancy rate went up to 67 per cent between January and September of last year compared to 62 per cent for the same period in 2010, an increase of nine per cent.
For the same period, the average room rate dropped from Dh545 in 2010 to Dh470 in 2011 — a drop of 14 per cent, Wilkinson said.
"That shows that the occupancy is quite good, but it's been bought by reducing the room rates which is a natural thing that hotels do when competition gets tough in the market," Wilkinson explained.
Room rates have dropped over 20 per cent in the past 12 months, Peter Goddard, managing director of TRI Hospitality Consulting, said. "It's dropped substantially and hotels would be making less money."
Goddard said he expects these rates to drop another 10 per cent, while occupancy rates would hold up at 70 per cent. According to TRI, 15,666 rooms are anticipated to open by 2016. "Some hotels probably won't proceed. Some may be stalled, suspended or may not get funded," Goddard said. "The realistic number may be as much as half." This has undoubtedly changed the rules of the game, especially now that guests have a much wider range of choice.
The new resort-oriented projects such as St. Regis and the Hyatt on Saadiyat Island will be capturing a new segment in the market that has not gone to Abu Dhabi. "If we're going to make a fair analysis of resort hotels in Abu Dhabi, I think only a few will be considered directly competitive," he said.
Two new Hyatt hotels have opened in Abu Dhabi recently — one on Saadiyat Island and another at Adnec's Capital Gate.
Peter Fulton, managing director for Hyatt International, South West Asia, told Gulf News that he thinks the market is going into a supply and demand direction where it would take a while for demand to pick up. Fulton expects 2012 to be a vibrant yet very competitive year. "We do expect 2012 to gradually build up," he said.
"In both of our hotels, occupancy rates in the first part of the year have been okay, but we're hoping it would move forward," he said. "We've got 300 keys and that's well above 50 per cent… so it's good," he said referring to the Hyatt on Saadiyat.
"Both [hotels] are totally different products in different parts of Abu Dhabi and I feel there's room for both of those in a competitive market," he said. "In general, with the increase in supply and the competition in the market, it will be good for the consumer and good for the industry... so it's going to be a win-win situation for everybody."
According to John Pelling, general manager of St. Regis Saadiyat Island Resort, Saadiyat is a leisure address that comes with "an opportunity." "I seriously believe this destination is becoming very important and desirable in many markets, there is much reason for optimism," he said.
Pelling said he's very "optimistic that occupancy and rates will be encouraging" given it's still early in the year and knowing the line-up of events Abu Dhabi will host.
"We really hit the ground running when we opened on December 26 by being the sponsor hotel of the prestigious Volvo Ocean Race, followed directly after by being the venue for the Irena conference that saw heads of states and ministers from around the world enjoying the facilities."
Ruprecht Schmitz, general manager of Millennium Hotel Abu Dhabi, told Gulf News that there are "inevitably increased challenges", yet they expect 2012 to be better than 2011.
"In the past, it was a matter of can I get a room? The game has changed a lot since then," he said.
Today, there is a clear separation in the market where hotels in the downtown or Corniche area will not be competing with the ones on Saadiyat Island, for example, he said. "They are purposely built for a certain market and for us to compete with that is going to be difficult," he said.
"The planning for all of these [new] hotels had started prior to the financial crisis and that was also a time when there was a huge shortage of rooms. Since then, a few imperatives in the business world have shifted, but that doesn't mean when the projects are finalised and open, there will be 90 per cent occupancy," he said. "You can't expect a destination to be built overnight."
Building on loyalty
Adrian Deegan, area director of sales for Abu Dhabi and Al Ain at Rotana, told Gulf News that although the new hotels on the market will make business more competitive, Rotana will be banking on its well established base of clients.
"We have built up a lot of loyal guests and repeated guests," he said.
Rotana also has no intention to slow down. Two new hotels by Rotana are scheduled to open in the second and third quarters of this year, adding over 700 rooms to the market and bringing Rotana's total number of hotels in the emirate to 13 by the end of this year.
Deegan said he doesn't expect the rates to decrease. "In terms of occupancy and rates, we are expecting an increase on 2011."
According to Wilkinson, some 15 hotels are supposed to open in Abu Dhabi next year. "It's going to be a lot tougher."
Wilkinson said that the corporate demand would grow slowly but surely, while the availability is growing at a much faster pace.
With an increase of almost 100 per cent over the next four years, Wilkinson said that there's a need for something spectacular to fill up the rooms. "They need some kind of an amazing mass tourism destination to balance things out," he said.
So far, Etihad has been making great strides at both the regional and international levels to promote Abu Dhabi as a tourism destination. The city's international airport is also undergoing major expansion and redevelopment, one of the Government's largest investments, which will allow the airport to handle up to 40 million passengers per year. Similarly, much is being done by the Abu Dhabi Tourism and Culture Authority and the Tourism Development and Investment Corporation (TDIC).
"That's obviously what they [the Abu Dhabi Government] are working towards and it's long term and it has to be because things can't be built overnight," he said. "Abu Dhabi in 10 years' time is going to be one of the most amazing places to come and visit. In the meantime, while there will be the question of too many hotels, it's largely unimportant if you're looking from the perspective of having the adequate capacity for the future. They're obviously doing the right things even if there are some growth pains at the moment."