Hotel investments around the Middle East

Demand for rooms continues to grow, especially in Dubai, Doha and Jeddah. Published in MEED, 29 April 2015

Late last year, the Grand Hotel Villa de France reopened its doors in the port city of Tangier, Morocco. It was built in 1880 and has the sort of history that luxury hotels are proud to proclaim: the artist Henri Matisse painted Window at Tangier in 1912 from room 35. However, the hotel fell on hard times after the Second World War and it was shut for almost 20 years before being renovated by General Mediterranean Holding Group, owned by Iraqi-born Nadhmi Auchi.

He is far from alone in wanting to invest money in the region’s hotel sector. Across the Middle East and North Africa, there are more than $60bn-worth of hotel projects moving forward, according to regional projects tracker MEED Projects.

Some of these projects involve the expansion of existing facilities, but many are for new hotels. The greatest concentration of activity is in the UAE, where there are some 164 projects with a total budget of $25.3bn.

Industry research firm STR Global estimates that the UAE has 21,893 rooms in 76 hotels under construction.

In other GCC markets, Saudi Arabia is adding 16,945 rooms across 57 hotels and Qatar is building 6,492 rooms in 24 hotels. There is also a reasonable amount of activity in Egypt, where $3.3bn-worth of schemes are moving ahead, adding 4,004 rooms across 14 hotels.

Tourism growth

The underlying motivation for all this activity is the continued growth in visitor numbers and spending. Across the region as a whole, the tourism sector is performing well, despite the political instability in some markets.

According to the World Travel & Tourism Council (WTTC), visitor numbers grew faster in the Middle East and Africa than anywhere else last year. The WTTC is predicting that the global tourism industry will grow by 3.7 per cent this year, but it forecasts the Middle East region should do even better, with growth of 4.6-5.6 per cent.

Others are predicting even higher growth rates for some parts of the region. Dubai-based Alpen Capital says it expects the GCC hospitality sector to grow at an average rate of 9.5 per cent a year, to 2018, reaching a value of $35.9bn by that year, up from $22.8bn in 2013.

Even within the GCC, the market is far from evenly balanced. Based on forecasts for this year, it appears that demand for hotel rooms is strongest in Dubai, Doha and Jeddah. According to real estate consultancy Colliers, occupancy levels are expected to be above 75 per cent in these cities over the course of this year. Dubai hoteliers are likely to bring in the most money, with a forecast revenue per available room (RevPAR) of $396 for hotels on Palm Jumeirah leading the way.

Alpen Capital says it expects occupancy rates to remain in the range of 68-74 per cent across the GCC until 2018, while the average daily room rate will be $225-263 during that time.

Mid-market hotels

It is not all about luxury hotels though. There is a concerted effort in some markets to develop more hotels below the four- and five-star level. That is being fuelled by trends such as the expansion of budget airlines and the weak economic conditions in key source markets such as Europe.

“The way tourism is developing, especially in Dubai, which is ahead of the curve in the Middle East, is it’s going towards a mass-market product. The focus is towards mid-market hotel rooms and cheaper flights,” says one industry executive.

Evidence of this can be seen in the growing network of hotels being opened by the likes of UK budget chain Premier Inn in Abu Dhabi, Dubai and Sharjah. The brand is competing with local mid-market brands such as Centro, which is owned by Rotana Hotels, and Dubai Inn, which is being developed by Emaar Properties and Meraas Holding. Bahrain’s Ramee Group has also been expanding around the region with two- and three-star hotels.

The growth of the mid-market segment, coupled with a more general expansion in the supply of hotel rooms, suggests average daily rates may fall in places like Dubai. Indeed, rates did show signs of a slight decline there in February, but industry experts say any falls should be manageable.

“RevPAR performance declined in February [in Dubai], despite growing demand, as increasing supply continued to put pressure on rates,” says Elizabeth Winkle, managing director of STR Global. “The outlook for 2015 remains positive, however. Occupancy levels in excess of 80 per cent do not suggest a sharp fall in rate.”

In contrast to the health of the Gulf tourism market, the situation in North Africa is far more mixed. The Egyptian hotel industry continues to struggle, despite the improvement in security over the past year. According to Colliers, hotels in major cities such as Cairo and Alexandria, and in tourist centres such as Hurghada and Sharm el-Sheikh are struggling, with RevPAR rates ranging between $30 and $66. Worst off is Luxor, where the anticipated RevPAR rate is just $10 this year.

However, while the numbers may be low, they are still better than they were previously. Colliers says Sharm el-Sheikh and Cairo are likely to be among the fastest-growing markets this year, as a result of European tourists coming back to the Red Sea resorts and a combination of more tourists and business travel to Cairo.

Elsewhere, things look to be going in the opposite direction. The terrorist attack on the Bardo Museum in Tunis in March left 22 dead and is sure to undermine Tunisia’s tourism industry. The country saw a massive fall in tourist arrivals in 2011 in the wake of the revolution that ousted President Zine el-Abidine Ben Ali, with the numbers falling 30 per cent that year to 4.8 million. It subsequently made up most of the ground lost, with visitor numbers reaching 6.3 million in 2013, but this terrorist attack represents a serious setback.

“It will take time for the image of Tunis as a safe, attractive destination for tourists to recover,” said David Scowsill, chief executive officer of the WTTC, following the attack. “Travel and tourism contributes more than 15 per cent of the GDP of Tunisia and almost 14 per cent of all jobs, so it is a vitally important part of the economy of the country. Tunisia needs the sector to recover quickly.”

Moroccan success

In nearby Morocco, meanwhile, the industry is on a more stable footing. Figures from the World Tourism Organisation, an arm of the UN, suggest that Morocco overtook Egypt in 2013 to become the second-largest tourist market in the Middle East and North Africa region, when measured by visitor numbers. That should help to persuade more people to follow in the footsteps of Nadhmi Auchi and develop more hotels across the country.

With the football World Cup seven years away, much remains to be done in Qatar to prepare the country for the tournament. According to the Washington-based IMF, the Qatari authorities are in the middle of a $200bn infrastructure programme to ensure it can cope and, at the same time, help diversify the economy. For the hotel sector, the main target is clear enough. According to guidelines set by football’s governing body Fifa, the country will need at least 60,000 hotel rooms available by November 2022, when the tournament starts.

Alpen Capital says there are currently some 15,000 hotel rooms in the country, so the target represents a large increase, but it says that by 2022 Qatar should have 95,000 hotel rooms in place. According to MEED Projects, there are some 60 hotel projects under way around the peninsula, worth a total of $9.9bn.

All that activity in turn prompts a bigger question for the country’s hospitality sector, as to what happens once the last football boots are packed up and the Fifa circus moves on. Will there be enough tourists to fill the hotels that are built, or will the country be left with some empty resorts?

Recent history suggests Qatar may have problems. South Africa was left with an over-supply of luxury hotels following the 2010 World Cup and average room revenues declined substantially in some host cities in the years that followed.

That may well be the fate awaiting Qatar hoteliers too. The country has set itself a target of attracting 7 million visitors by 2030. According to Saudi bank Samba, Dubai had 84,534 rooms at the end of 2013, attracted 11 million visitors and achieved an occupancy rate of 82 per cent. With potentially more hotel rooms but fewer visitors than that, the market in Qatar looks like it may suffer from large-scale overcapacity in the years after the World Cup.

Expo preparation

The UAE is the most dynamic tourist market in the region, with Dubai at its heart. According to the emirate’s Department of Tourism & Commerce Marketing, more than 11.5 million people visited in 2014. The main source markets include India, the UK, Russia, China and the rest of the GCC.

For hotel developers, it has proved to be an irresistible market and there are now 88,680 rooms available across 634 hotels. But far more will be needed if the country is to hit its target of having 20 million visitors by 2020, the year it hosts the Expo. According to Alpen Capital, there is a need for between 140,000 and 160,000 more rooms by then.

The Expo organisers say they are expecting to attract 25 million visits to the event between October 2020 and April 2021, with 70 per cent of them coming from overseas. However, unlike Qatar, Dubai has a good chance of being able to accommodate the additional visitors without being left with huge amounts of oversupply once the event ends. The city has one of the healthiest hotel sectors in the region, with several years of unbroken growth.

“Demand growth for the emirate has been positive in every month for the past five years,” says STR Global’s Elizabeth Winkle.

That helps to explain why there are so many hotel projects under way in the emirate. According to data from MEED Projects, there are currently some 113 projects moving ahead in Dubai, worth a total of more than $20bn.

Egypt recovery

Egypt has long had one of the most important tourism markets in the region, but in recent years it has been a case study in how political violence and instability puts tourists off. According to the World Tourism Organisation, more than 14 million people visited Egypt in 2010. The following year, the figure dropped to less than 9.5 million. It rose again to 11.2 million in 2012, but then fell back again to 9.2 million in 2013. Overall tourism receipts were $6bn in 2013, less than half the level they had been in 2010.

What is perhaps more remarkable, however, is how resilient the Egyptian tourism industry has proved to be. This year, the country’s hotel sector has posted strong levels of growth as political conditions have improved. According to Colliers, RevPAR in Cairo was up by 97 per cent in the first quarter of this year compared with the same period last year, and by 35 per cent in the resort town of Sharm el-Sheikh.

Figures from STR Global offer further evidence. RevPAR across the Egyptian market as a whole has risen by 33 per cent over the past year to $36.75, while the average daily rate has climbed 29 per cent to $78. These figures are still low, but they are at least heading in the right direction.

Adding to the cautious optimism is the apparent willingness of some of Egypt’s allies to provide some financial underpinning to the nascent recovery. At the Egypt Economic Development Conference in Sharm el-Sheikh in March, four of the Gulf states alone pledged $12.5bn to help Egypt put its economy back on track.

The government, meanwhile, has set a target of 15 million tourists and $15bn in revenues by 2017/18, and 30 million tourists and $30bn in revenues by 2020. It presented a number of tourism projects to delegates at the conference, which, if they go ahead, will help the country reach those targets. They include the development of Gamsha Bay, north of Hurghada, and the Marsa Wazar Tourist Centre at Marsa Alam.