A conflicting picture

It's hard to think about the Middle East right now without thinking about the past three years of social and political upheaval.

The entire region is suffering as a consequence and geopolitical uncertainty is damaging 'investor confidence' in a number of markets. Economic development is only half the story. In the core Arab Spring countries, the human and social costs have become totally incalculable. War threatens to seep over borders; opportunities are becoming prolonged disappointments.

The performance of the region's hotel market is something of a surprise given this relatively bleak backdrop.

Luxury beyond the dunes

Discounting places such as Syria and Libya, where conflict has become entirely consuming, many of the core Gulf Co-operative Council (GCC) countries boast large development pipelines. The UAE, Saudi Arabia, Oman, parts of Egypt, have sidestepped the disruption one would expect countries so close to the core Arab Spring areas to experience.

The UAE has done this by maintaining its reputation for recreational exceptionalism. Only 40 years ago, Dubai was an isolated fishing village; today, the city-state boasts of underwater discus-shaped hotels and the Burj Khalifa, the tallest man-made structure in the world. Its devotion to extravagance is without precedent or limit.

The idea is to create an area of unparalleled, walled-in consumer hedonism - a brand built upon a uniquely insane mixture of maximalism and replica. For the most part, it's worked. Property prices took a tumble at the outset of the financial crisis when it appeared, for a moment, that the dunes really would reclaim the city. But the hotel market has picked up dramatically since then, resuming growth in occupancy and average room rate.

"The place is synonymous with record breaking," says Filippo Sona, head of hotels and hospitality, MENA region at Colliers International. "Seven-star hotels, the largest man-made island, the first ski slope in the middle of the desert. This is something you can't find anywhere else."

Far from harming its rapid capitalist development, the Arab Spring seems to have actually made things better in Dubai, intensifying development as redirected demand floods in from countries such as Egypt, Jordan and Bahrain. Some analysts expect another 30,000 rooms to be added by 2017.

"Cities like Dubai have benefitted from the political unrest in other places in the Middle East, which diverted a lot of traffic on the leisure front," says Hala Matar Choufany, regional managing director at HVS. "Occupancies in Syria, Cairo and across Egypt, even in the Dead Sea in Jordan and Bahrain have seen massive dips from high 60s to low 30s. But other places are doing well."

Of course, its sense of 'fun' isn't the only reason Dubai is absorbing the Arab Spring's lost traffic. Its population is a mixture of business expats, migrant workers and Western tourists - not exactly the dissenting kind. Those workers who do have genuine grievances lack any kind of formal structural outlet, with trade unions banned and political opposition to Sheikh Mohammed's rule non-existent.

"They've been able to pitch themselves, not only as a capital of entertainment but as a place that is safe and stable," Sona says.

The same is true of Oman where, despite a few noteworthy concessions, the absolute ruler, Sultan Qaboos, has subordinated any real attempt at political dissent. His ability to maintain what's been called "the calmest police state in the world" is certainly helping its capital, Muscat, become an emerging destination in the Middle East. New developments such as the Muscat Hills, the City Seasons Hotel and The Wave have all helped boost supply in the region.

A desire to diversify the economy away from oil and gas means that development is expected to continue. By 2014, airport capacity in the capital is set to reach 12 million a year. That number could rise to 48 million by 2050, if major infrastructural projects take place.

The legal and moral appetite these countries have for stereotypical Western tourists and business practices will invariably affect the kind of tourism that can take place.

Unlike other places in the UAE and Saudi Arabia, Dubai is widely regarded as a 'space of exception', less conservative than its neighbours and more happy to operate outside the bounds of Islamic law. Its famous luxury hotels are stuffed with Russian courtesans and smashed expats that raise all kinds of questions, in no way unique to Islam or the Middle East, about the compatibility of turbo-capitalism with legal systems based on religion.

Accepting local customs

Every now and again, these tensions seem to bubble up. In July of this year, a Norwegian woman was charged with perjury, alcohol consumption and extramarital sex after falsely reporting to the police that she had been raped.

Whether these kinds of incidents will affect the future of Dubai, or anywhere else, as a place for building hotels remains to be seen. Sola calls it "the number one" future growth area, both for international operators and investors. And Choufany notes its potential as a place for more than upper-class luxury, developing new submarkets and new sources of demand.

"These stories happen in the UK and in the US for whatever reason," she says. "It doesn't have any impact on development. There are massive markets in the Middle East and further East that are price-sensitive. If you look at Dubai historically, every hotel was five stars with a rate averaging in excess of $400. Creating today's Dubai, with its increased visitation and airport arrivals, has been tied to the fact that more three-star and four-star hotels have been developed in the city."

Dubai's strategy to increase visitation has been a deliberate choice. Profitable markets such as Cairo, Jordan, China and India are dominated by potential tourists that are much more likely to book three- and four-star hotels than deluxe five-star accommodation.

Other countries haven't had quite that luxury. The Arab Spring has, in many ways, undermined the traditional image of the Middle East hotel market as a plaything for the rich. Large parts of Egypt around Sharm el Sheikh and Marsa Alam have been forced to extend their target markets towards the mid-market to recover losses.

"They've tried to lower prices and make more attractive offers," Sola says. "They've been able to add volume by aligning prices with the economic situation of Europe and by indirectly targeting countries with lower incomes such as Russia, Kazakhstan and Uzbekistan. Before, the Red Sea was too expensive, but now that prices have come down, even the working classes of these countries can afford to take a week's holiday."

The Eastern submarkets

Like Dubai, the Kingdom of Saudi Arabia has been able to escape the past two years of political instability. Already the main business point for the other GCC countries, the state has committed $373 billion to its five core business areas between 2010 and 2014. Riyadh experienced double-digit increases in passenger movements for 2012 with Jeddah going through similarly strong growth rates.

"The pipeline for both these cities seems to be quite aggressive," Choufany says. "Riyadh is looking to triple supply and Jeddah is looking to double. It is a growing country with different submarkets and cities being formed. Jeddah will be the leisure destination and Riyadh will have a more commercial presence."

"With international and domestic travel to the region growing and source markets expanding, the general outlook for tourism is strong."

"Religious tourism is feeding these cities," Sona adds. "Business is storming and record numbers of visitors are coming because the government has been able to ease the quotas of people that can go to Mecca and secondly they've eased restrictions on visas."

Investment in these cities is almost always domestic. Without freehold land available, few international companies are able or willing to invest except in very specific zones and places. And even with such a strong domestic play, private institutions and developers are used to playing second fiddle to government actors that take the lead on projects either through subsidies or direct support.

For anyone familiar with Western real estate markets, this is a striking asymmetry. In London, foreign investors, predominantly from the Middle East, have snapped up around 70% of the city's new build properties over the past two years.

Cash-rich buyers from the Middle East and Asia have become one of the most visible signs of the recession-era European hotel market.

"It's all about ownership and power," Choufany says. "In Doha, 90% of the hospitality market is owned by the government or the ruling family. It won't change in the near term of five to ten years. There are lots of rules and regulations governing foreign ownership that are being revisited. But it's not really clear how foreign ownership will be protected and how disputes can be resolved."

The rise in investments

Recent events in the Middle East suggest an end to its conflicts is a long way away. And yet neither operators nor developers seem particularly afraid of investment and expansion. Accor had an extremely strong year in 2012, adding 2,100 rooms to its portfolio and opening six hotels in Abu Dhabi, Riyadh, Makkah and elsewhere. By 2015, the group hopes to have added 100 new hotels in the region.

"Look at the number of travellers and inhabitants," says Olivier Granet, vice-president development Middle East at Accor. "In most of the countries there's still a very strong need for development. The average number of rooms per thousand inhabitants is two. In mature markets, it's between eight and ten. In the US, it's something like 15. Dubai is an exception, but if you look at the region generally you can find a lot of space for development."

Is this kind of strategy unrealistic or does it reflect genuine development potential in the Middle East? Both answers possess an element of truth. Dubai and Saudi Arabia may seem attractive to domestic finance and international operators, but stability across other North African and Middle Eastern countries can't be taken for granted. And yet the fundamentals are all there.

With international and domestic travel to the region growing and source markets expanding, the general outlook for tourism and hospitality is strong with or without the tragedy playing out in the background.