Dubai leads growth in region's hotels sector

Hotels in most Gulf cities are performing well, although those in crisis-hit cities continue to suffer. Published in MEED, 29 October 2013

Some 16 hotels and 5,500 rooms were added to Dubai’s tourism sector in the 12 months to the end of June this year, according to the emirate’s Department of Tourism & Commerce Marketing. That takes the total stock of hotel rooms to almost 81,500, but the figure is growing all the time. Property consultant Jones Lang LaSalle estimates that a further 3,800 rooms are due to be added in 2014 and 3,000 more in 2015.

This expansion represents a large investment by developers, but many more rooms will be needed in the years ahead if Dubai is to meet its ambitious aims. In May this year, the emirate’s government set itself the target of attracting 20 million tourists by 2020, twice the number that visited last year.

Dubai excels

If the number of tourists gets anywhere near that figure, there should be a promising future for the hospitality sector in Dubai. But, in any case, the emirate already outperforms other cities around the Middle East by most metrics. In a recently released survey of the region by global consultancy firm EY (formerly Ernst & Young), Dubai came out on top with the highest room occupancy level for the first half of this year, at 86 per cent. In terms of the average room rate, it came second with $284 a night, behind Kuwait City at $299. At $245, it also commanded the highest room yield, also known as revenue per available room (RevPar) in the trade.

Dubai benefits from a global brand name, often excellent infrastructure, its role as a playground for the wider Gulf region and an economy that is gradually recovering from the recent slump. According to the government, 5.6 million visitors arrived in the first half of this year, accounting for 21.7 million guest nights in local hotels. That compares with 5 million visitors and 13.2 million guest nights in the first half of 2012 and suggests the target of 20 million tourists by 2020 could be achievable.

Dubai may be the leading mainstream tourism destination in the Gulf, but most other GCC cities have also seen a solid performance from their hotels sector. Of the 16 cities included in the EY survey, the leading contenders on the three measures of occupancy levels, average room rates and RevPar were all from the Gulf. Cities in the Levant and Egypt tended to do less well.

“The hospitality market across the region witnessed strong growth in the first half of 2013,” says Yousef Wahbah, head of real estate transactions for the Middle East at EY. “The peak winter tourism months showed significant increases across all key performance indicators. Despite the continued economic and political uncertainty in a number of markets, overall hotel occupancy rates and RevPAR have continued to grow.”

In terms of occupancy levels, Abu Dhabi, Jeddah and Mecca all posted figures of 80 per cent, followed by Medina and Muscat at 73 per cent and Al-Ain and Doha at 71 per cent. In most cases, this marked a slight improvement of between 1-3 percentage points on the figure for the same period last year, although Mecca suffered a fall of 5 percentage points and Jeddah did not see any change.

When it came to average room rates, only GCC cities were able to command prices of more than $200 a night. Following behind Kuwait City and Dubai on this score were Jeddah, Doha, Riyadh and Abu Dhabi, with rates ranging between $217-275 a night. In the three leading cities of Kuwait City, Dubai and Jeddah, the rates were higher than last year, with a jump of nearly 15 per cent in the case of Jeddah. Doha and Riyadh both saw slips of about 4 per cent, however.

The rankings for the best performing cities in terms of RevPar were similar, with Jeddah, Kuwait City, Doha and Abu Dhabi following in the wake of Dubai. Jeddah, Kuwait City and Abu Dhabi all posted double-digit improvements on this score.

The picture is not as rosy across the region, however, and some areas are continuing to struggle. Political turmoil and lower levels of economic activity continue to put off visitors to Bahrain and Cairo, where most hotel rooms lie empty. The average occupancy level in Manama for the first half of this year was 45 per cent, while in Cairo it was just 31 per cent.

Manama improvement

For Manama, this actually represents an improvement on the same period last year. In the first half of 2012, the occupancy level at hotels in the Bahraini capital was just 37 per cent. The rise in guest numbers means the city managed to improve its RevPar figure to $96 a night, from $83 in the same period last year. With average room rates of $212, that still represents a steep drop from what the hotels could be earning but any improvement must be welcome after almost three years of political and economic turmoil in the country.

Hoteliers in Cairo do not even have that crumb of comfort. Average room rates have increased from $79 a night in the first half of last year to $88 a night this time around, but there was a significant drop in the RevPar figure from $31 in 2012 to $28 this year, a fall of about 10 per cent.

However, other areas of Egypt’s tourism market are showing more resilience. Visitor numbers to Cairo may be down, but the Red Sea resorts of Hurghada and Sharm el-Shaikh continue to do well, with occupancy rates of 71 and 70 per cent respectively. For Hugharda, this marks a 7 percentage point improvement on the performance for the first half of 2012. Room yields may be low in these two resort towns, at $39 a night for Sharm el-Sheikh and just $27 in the case of Hugharda, but at least tourists are still coming.

Syria fallout

Life for hoteliers in Amman and Beirut is also proving to be difficult, due to a combination of underperforming local economies and the fallout from Syria’s civil war. Occupancy levels have fallen sharply this year, with a 16 percentage point drop to 63 per cent in Amman and a fall of 7 percentage points to 58 per cent in the case of the Lebanese capital.

Hotels in Beirut have responded by cutting their average room rates by more than anywhere else, with a 21 per cent reduction from $210 a night in the first half of last year to $166 this year. Despite this, RevPar rates have fallen by even more, dropping by 30 per cent from $137 in 2012 to $96 in the latest survey. Hotels in Amman have resisted such price cuts, but here too room yields have fallen sharply, with a 16 per cent decline from $119 in 2012 to $100 this year.

There is no way to tell how long the downturn will persist in these markets as so much depends on whether there will be a quick resolution to the Syrian crisis. However, the strength of the Gulf markets and the Egyptian Red Sea resorts means, in broad terms at least, the industry is faring well. Wahbah says EY remains broadly positive about the prospects for the region’s hospitality industry.

What is more certain is that it will take something special for any city to be able to rival Dubai’s hotels sector, where more operators continue to be attracted to the market. In recent months, the emirate has seen the arrival of Indian luxury hotels group Oberoi Group, which opened a hotel on Business Bay in June, and Thailand’s Anantara Hotels, Resorts & Spas, which unveiled its first hotel in the country in mid-September on the Palm Jumeirah.

Mid-range hotels

It is not just the luxury end of the hospitality market that needs to expand. In late September, Dubai’s tourism department announced an incentive plan to encourage investors to build more three- and four-star hotels.

In a speech at an industry trade show in Dubai on 29 September, Helal Saeed Almarri, the department’s director-general, announced that mid-range hotels would be granted a four-year waiver on the standard 10 per cent municipality fee levied on hotel rooms for every night they are occupied. The tax break will be available to hotels that are granted construction permits between now and the end of 2017 and could help convince even more hoteliers to invest.