The search for the middle ground

"At 321m, it soars higher than the Eiffel Tower," the narrator chirps. "It's the tallest hotel on Earth and possibly the most luxurious: a structure designed to amaze." Cue a montage of helicopter tracking shots of the exterior, palatial rooms and enough aquariums to astound a Bond villain. "Its name means 'The Arabian Tower'. This is the Burj al-Arab."

The introduction might be from a documentary entitled Megastructures, but it effectively promotes a familiar, if carefully cultivated, image of the region. Over the past decade, the GCC has become a byword for a limitless ambition embodied by Brobdingnagian construction projects. From engineering feats such as the half-mile-high Burj Khalifa to the Herculean preparations to host the world's premier sporting events, the Gulf is widely considered to be about as far from a budget holiday destination as one can get.

Until now, that is. While demand for the 'six-star' lifestyle promoted by tourism boards across the GCC remains high, it has masked a steadily rising demand for rooms in the economy section of the market. Overall, the sector is poised to expand at an annual rate of 9.5%.

"There is almost certainly an imbalance in terms of demand and supply between luxury and lower-scale hotels," says David Vely, Whitbread's senior vice-president for development in the Middle East. "Most of the branded GCC supply is concentrated in the upscale or luxury segment; almost 81% vs 19% for the mid-market segment. From that base, we see a lot of growth potential from all countries in the region."

Combined with such an appreciable gap in the market, rising levels of demand have fuelled an image among operators that budget and mid-market offerings constitute a new frontier ripe for exploitation. For Laurent Voivenel, CEO of Hospitality Management Holdings (HMH), which operates five brands within MENA, this has come as a result of long-term economic trends across the GCC.

"As the region's low-cost airlines become more established, a rising number of cost-conscious travellers are seeing the region as a viable destination in its own right," he says. These customers are usually members of the region's growing middle classes, those who have reaped the benefits of rising living standards, lower taxes and increasing levels of entrepreneurship.

"In some ways, it's a situation that parallels the early days of the European hospitality market," explains Christophe Landais of Accor Middle East.

"Particularly in Dubai, we're seeing more and more customers from Saudi Arabia, Qatar or Kuwait looking to spend their holidays here. And they can do so with ease. Frequently, they don't need a visa to travel, and flights from Kuwait City or Riyadh to Dubai can take just an hour and a half."

"Visitors of this type aren't necessarily looking for luxury," adds Landais. "They're here for the shopping opportunities. And for that, they're willing to trade in the costs of a higher quality hotel experience for one that really just accommodates their basic needs: a good bed, shower, internet and transport connectivity, as well as access to good restaurants and spas."

Above all, it's a demographic that remains firmly rooted in the cultural milieu of the Gulf region. "At HMH, we see the biggest growth potential in the region today as lying in the halal-friendly mid-market segment," says Voivenel.

"We were the first and still the only international alcohol-free chain of hotels, and HMH stands apart from other hotel management companies that create standalone dry brands. We're halal-friendly wherever we operate."

Manage alliances

In most cases, the expansion plans of mid-market and economy hotel operators are straightforward: build rapidly and substantially around prime shopping and culture destinations. "At Accor, we've been opening 30 hotels in the GCC a year on average since 2012, two thirds of which comprise our economy and mid-range brands Novotel, Adagio and Mercure," says Landais. "That pattern will hold until 2020. In the mid-market especially, we're aiming to boost our number of keys by 15% annually."

"At HMH, we have three brands out of five targeting the mid-range section of the market," says Voivenel. "Given the rise in demand that we're seeing across the GCC for such accommodation, we see massive potential for no-frills B&B brands. Our strategy is to expand aggressively in this segment with a target of boosting our existing portfolio of hotels by 30% over the next five years. This will include having a hotel in every GCC country while doubling our portfolio in the UAE and Saudi Arabia."

These considerations have deeply influenced where operators choose to locate new hotels. "For our economy and mid-market offerings, we select sites with a strong primary catchment area that present outstanding commercial, offices or leisure elements that will attract visitors to that particular location," says Vely. "A good plot also needs to have great accessibility and visibility. Obviously, the project needs to stack-up financially. The high cost of land has often proven a significant hurdle."

Ultimately, much of the bill for construction is picked up by the GCC member states, unsurprisingly given the equivalencies they've drawn between a healthy tourism industry and international clout. Having lobbied hard to host events such as the FIFA World Cup and Expo 2020, Qatar and the UAE especially are choosing to spend billions on expanding transport and hospitality infrastructure. Given the disparity between the number of luxury rooms available compared with that in the mid-market, prioritising construction for the latter has proven key.

This is especially true of the hospitality industry in Saudi Arabia and Qatar, explains Landais. "Both governments have made a conscious effort to fund construction in mid-market and economy hotel sectors to spur tourism," he says. "For Riyadh, its intention has been to foster a sustainable domestic market and accommodate a rising number of religious visitors, whereas the Qatari Government is making a conscious effort to mould itself as an international tourist destination. Compared with Dubai, its overall market share is growing more slowly, but it is amassing a formidable capacity ahead of the 2020 World Cup."

"In the GCC, a lot of the investment comes from sovereign funds and government development arms, whether through companies they directly own or are closely affiliated with," explains Vely. "A few family offices and high-net-worth individuals are also active in the sector."

Partner up for success

It's this factor, in combination with the heavy affiliation of the construction industry with local businesses and often the governments themselves that has seen hotel operators expanding into the mid-market through a series of strategic partnerships and management agreements. "We only operate on a management or contract basis," says Landais. Accor's partners have included major local investors, including Majid al-Futaiim based in Dubai, and the Kuwaiti company Action Holding.

Premier Inn is reliant on a similar model. "Our operation in the GCC is owned and operated through a joint venture with Emirates Group," says Vely. "This joint-venture company has commenced operations by the greenfield development of our existing five hotels in the UAE, and any new developments tend to be a mixture of management contracts and investment in selected opportunities." From this vantage point, Premier Inn has announced several long-term management contracts for four new hotels owned by developer Action Hotels in the UAE, Saudi Arabia and Bahrain.

While the burgeoning growth of the budget and mid-market offerings in the GCC hardly square with the image of Qatar or the UAE's bid for international respectability, it's nonetheless a symptom of economic diversification. For Vely, it's a phenomenon every emerging market must undergo before attaining parity with more affluent competitors.

"Take the state of the market in North America, where the mid-market segment occupies a 62% market share," he explains. "That's the hallmark of a developed, globalised economy; one with a healthy middle class. At least from a financial standpoint, it [results in] hotels that are increasingly easier, faster and cheaper to develop, with less risk and superior yields."