Gear shift: unfavourable supply-demand in Dubai's hotel industry

About 30 years ago, Dubai’s now-iconic Sheikh Zayed Road was flanked by desert on either side, a handful of low-rise buildings barely visible from one another. Today, there are skyscrapers – including the world’s tallest – as far as the eye can see, the result of the unprecedented growth of Dubai and the UAE’s economy, to which tourism contributed $64 billion in 2016.

Over the past three decades, global hotel operators have opened properties in the UAE’s tourism capital at an incredible rate. And as Dubai gears up for the World Expo in 2020 – investing in infrastructure, transport links and leisure attractions – the surge in supply shows no sign of slowing.

Approximately 25,000 keys are planned to enter the UAE market in 2018 alone, 80% of those in Dubai, although inevitable delays will likely mean that some of the new supply won’t hit the market until 2019. Notable openings will include the W Dubai The Palm and a Zaha Hadiddesigned ME Dubai, part of the 95m-high Opus Building in the Burj Khalifa district in downtown Dubai.

Not to be outdone, Abu Dhabi will see the opening of palatial resort hotel Rixos Saadiyat Island and the sleek hotel-slash-serviced-residences of the Abu Dhabi EDITION. Meanwhile, in the UAE’s more affordable northern emirates – which are putting more effort than ever into attracting leisure tourists with a slew of new attractions and initiatives – the Emirati-themed luxury boutique hotel Al Bait Sharjah and the Park Inn by Radisson in Ras Al Khaimah are two of the openings to watch.

Supply outpacing demand

Yet, while the UAE’s hotel industry is still clearly on a growth trajectory, it’s not an entirely rosy picture for operators, who are struggling with an unfavourable supply-demand situation at present. “The fact that supply is increasing faster than demand is putting pressure on the rates we can charge our clients,” says Marc Descrozaille, president of Middle East and Africa for Mövenpick Hotels & Resorts.

Indeed, according to STR, although the occupancy level in UAE hotels increased 0.5% to 75.1% last year, the average daily rate fell 3.8% and RevPAR 3.3%. “Supply growth continues to affect hotel performance in the country, especially with Dubai's build-up to the 2020 World Expo and beyond. Not only will the amount of new hotel supply continue to influence Dubai's average daily rates (ADRs), [but also] the type of new hotel supply entering the market will create a shift in the pricing landscape, with more offerings in the mid-scale segment,” the analysts said in a statement in January.

Descrozaille, Mövenpick’s recently appointed regional president, says there are a couple of ways that Mövenpick, which will open two hotels in Dubai and one in Ras Al Khaimah in 2018, is adjusting its strategy to ensure it continues to operate profitably under these conditions.

“First of all, we’re working to bring more value to the client, so we’re trying to be innovative in the way that we are packaging the experience in Dubai – for example, by working with partners so that clients can book a large portion of their week’s experience in advance,” he explains.

Mövenpick is also trying to coordinate its sales and marketing efforts more efficiently. “We have multiple hotels in Dubai, for instance, so we’re really trying to market the whole thing as a destination – it’s not every hotel individually anymore. We really have the same voice in the market for all hotels,” Descrozaille says. “We’re looking at how to synergise and carry out administrative tasks centrally, too.”

It’s an example that Filippo Sona, director and head of hotels at Colliers International MENA, believes other operators must follow. “Hoteliers will need to shift from a revenue-focused approach to a cost-focused approach. Optimisation of the operating and streamlining costs will be an important task to maintain profitability levels,” he says.

The good news, according to Amr Elnady, head of hotels and hospitality for Jones Lang LaSalle, MENA, is that the market remains fairly liquid in terms of the availability of equity and debt. “Most of the capital providers or sources of funds remain fairly bullish on investing in the hospitality market in the UAE,” he says. “From a demand perspective, trading has been fairly resilient in respect to the occupancy rate. And while there was a bit of room-rate decline over the past three to four years, we do believe that the major developers who are contributing to the larger proportion of the development market are taking a medium to long-term view and considering the wider investment cycle of the tourism industry in the UAE.

“What we’re seeing right now is that, despite the fact that a lot of hotels are still being developed, the fall of RevPAR is starting to slow down a little bit – so we are going to see a bit of stabilisation over the next couple of years.”

New customers, new services

Alongside the current pressure on room rates, operators are also having to adjust their offerings to cater to an entirely different customer base compared with just a few years ago. For example, the number of Chinese guests visiting Abu Dhabi has grown by 40% annually from 2014 to 2017. Following the introduction of on-arrival visas for Chinese tourists in November 2016, Dubai saw a 41% increase of Chinese visitors in 2017 alone.

“China, as a mega source market, is expected to continue to grow, and it is important for hotels to understand how to target this source market and provide certain types of services such as Chinesespeaking staff,” Sona advises.

Indian visitors to the UAE are also expected to increase from 2.3 million tourists in 2017 to 3.1 million in 2021 and analysts predict the continued rise of key source markets such as Russia – where there was a 98% growth in arrivals to Dubai in 2017 compared with 2016.

For Elnady, the biggest opportunities for developers, geographically speaking, lie in Dubai and Ras Al Khaimah. When it comes to market segments, mid-scale and upscale hold the greatest promise in the medium to long term.

“We predict significant demand growth from all source markets that are seeking value-for-money offerings, but at a quality level, and it’s important for quality mid-scale offerings to be developed in order to service those demands,” he says.

“From a financing perspective, banks, financial institutions or even other sorts of government institutions take the view that [the mid-scale] segment remains a little bit more secure than the luxury segment, because you can achieve a higher margin on the select service side and your cost base is lower.”

On Descrozaille’s part, while he’s excited about Mövenpick’s upcoming openings in Dubai and Ras Al Khaimah, he believes the group’s biggest opportunity in the longer term is Abu Dhabi. “We don’t have any hotels there yet, and I’d say we need to have three,” he says.

“Abu Dhabi is changing – the destination is becoming more leisure-oriented, the Louvre Museum has opened and there will be the Guggenheim afterwards. All of this cultural change is placing Abu Dhabi on the international map, not just in the shadow of Dubai. There’s a real opportunity of having an allinclusive experience – where guests combine visiting the two cities in the same week.”

Are the big players becoming too big?

Compared with other global gateway cities – the likes of London, Paris or New York – Dubai has a much higher proportion of properties branded by international operators, something Elnady believes is likely to raise questions for the owners of those properties in the near future.

“If you look at London, a large proportion of the hotel supply is unbranded – you get hotel owners that manage their own properties. But in the UAE, 60–70% of that supply is branded with mainstream operators,” he explains. “Owners are going to start asking things like ‘Are we going to get the same level of attention as everybody else’, depending on capacity or the number of contracts they have with a specific operator.”

The team at Jones Lang LaSalle is also getting to the point of wondering if the big players are becoming too big. “How many Marriotts can we get? How many Novotels? How many Sofitels?” Elnady asks. “We’re now reaching the point where many of these large oWWperators are starting to allocate some of their new brands – such as Accor’s 25hours – to Dubai.

“They also need to consider what they’re doing, within such a competitive landscape, to be competitive to owners. If an owner today goes to three, four, five or six operators, what terms are they providing to be really competitive, excluding simply providing lower fees? I believe that, at some point in the future, we will see mainstream operators putting more skin in the game.”