Dubai’s hospitality sector gets a dose of stability

The new year has started with increased uncertainty facing the Dubai hospitality sector. The real estate market ended the year on a quiet note as nearly all segments witnessed stable rents and prices during the fourth quarter of 2014.

While much of the focus has been on the strong growth of the residential sector over the past two years and the recent stabilisation in the past six months, the hospitality sector is also now poised at the top of its cycle.

There are two related major macroeconomic factors that have moved against the UAE economy over the past six months, the dramatic decline in oil prices and the significant escalation of the dollar against most other currencies (of which the decline in the rouble has been the most spectacular). The major short-term implications of these trends on the Dubai real estate market are the immediate loss of tourist and retail spending from Russians and others from non-dollar dominated jurisdictions, and the impact of negative sentiment surrounding the fall in oil prices.

The Dubai hospitality market is positioned close to the peak of its cycle and facing increased challenges. The immediate trigger for the slowdown is the strength of the dollar, which has made Dubai relatively expensive for those coming from non-dollar dominated economies.

With the value of the rouble falling so significantly over the past six months, the number of Russian tourists to the UAE fell by 8 per cent in October (compared with the same month of 2013), with a much more pronounced fall expected this year. The Russian Consul-General in the UAE has estimated that there may be a decline of up to 40 per cent.

Russians were the fifth-largest source market for hotel guests in 2014, but given the market is extremely diversified, that accounted for only 4 per cent of total guest nights in Dubai.

This gap left by the Russians is likely to be filled by more tourists from the GCC (particularly Saudi Arabia), Iran and China this year. Chinese tourists have grown rapidly in recent years but remains a relatively small market in Dubai (accounting for less than 3 per cent of hotel room night demand). But this is expected to increase in line with the global growth of tourist numbers from China and the extensive marketing of Dubai in that source market.

The other factor weighing on the hospitality sector here is the significant increase in room supply scheduled for completion in the near term. A total of 4,700 keys are scheduled for completion, and while some of these are likely to be delayed into 2016, this represents a significant injection of new rooms, equivalent to around 7 per cent of the current stock.

In response to the changed dynamics, hotel operators are likely to engage in a more active quest for competitiveness. The strategies used to complete for the tourist dollar will vary, but many hotels are expected to focus on differentiating their entertainment and F&B offerings.

In conclusion, while sentiment towards Dubai realty has certainly softened over the past six months, the market looks very different from the previous peak (in 2008). The rate of growth in the hotel and residential sectors over the past two years has been unsustainable.

This year promises to be more subdued (with minor corrections in prices in some sectors), but this stability may be just the thing that Dubai needs to increase its competitiveness in the long term.

— The writer is the Head of Research at JLL Mena.