Development approaches its peak

02 May 2008
With the Gulf outperforming many parts of the world in terms of tourism growth, the number of hotels in the region is increasing rapidly. But by 2010, supply will catch up with demand.

Hotels and holiday apartments are being built right across the Gulf, from the suburbs of Mecca to the headlands of Mussandam, and from Kuwait City to Salalah on the Indian Ocean. For every new project that appears, a dozen more are unveiled, accompanied by new financing ventures and strategic partnerships.

The figures are staggering. Studies by UK trend consultant Fast Future show the Middle East has $651bn worth of new tourism ventures under way. According to Gulf projects tracker MEED Projects, in the GCC alone there are $194bn worth of tourism-related construction projects in progress or planned. By 2010, the UAE will have an extra 97 hotels, Qatar 39, Kuwait 19, Bahrain 15 and Oman four.

Meanwhile, the latest figures from Dubai-based leisure and hospitality consultant TRI Hospitality Consulting show the GCC added 2,319 hotel rooms in the first quarter of 2008: 1,482 in the UAE, 340 in Saudi Arabia, 240 in Qatar and 175 in Kuwait.

Today, there are 95,095 hotel rooms/apartments in the GCC, and this is expected to reach 135,664 by 2012.

Credit concerns

Such developments in the region have led the World Travel & Tourism Council (WTTC) to predict the Middle East will be one of the few regions in the world to produce more than
5 per cent tourism growth in 2008, as global credit worries have forced a reduction in tourism investment and spending, particularly in Europe and the US.

However, although regional forecasts are all demonstrating healthy growth, a peak is predicted in 2010. “The arrival of a number of new hotels in 2010 may lead to a period of correction in the market, but it is not likely that the market will go from boom to bust,” says Jean-Paul Herzog, president of Hilton Hotels, Middle East & Africa.

“There is a lot of cash around the Middle East and investors see great prospects in hotels,” says Andreas Mattmuller, senior regional vice-president at Switzerland-based Movenpick Hotels & Resorts. “There is a consensus that demand will be stronger than supply up to 2010 - but some believe it could take even longer.”

One of the biggest investors in the region is Dubai World’s Nakheel Hotels, created through the merger of Nakheel and Istithmar Hotels. It has a $3.5bn portfolio of 30 current and developing properties worldwide.

Nakheel has partnerships with Kerzner and International Hotel Investments. Flagship Dubai ventures include berthing the QEII cruise ship and building the Trump Tower.

“There are huge opportunities in the GCC,” says Joe Sita, chief executive officer (CEO) of Nakheel Hotels. “In Dubai alone, we are doubling our room supply within three years.”

There are 42,000 hotel rooms in Dubai, but the vast $64bn Dubailand project will add 51 hotels, or 60,000 rooms, when it opens in 2016. Dubai aims to attract 15 million visitors a year by 2012. Visitor numbers have increased by
5-7 per cent a year and because of shortages of hotel rooms, year-round occupancy rates average 83 per cent.

The downside of the GCC hotel construction boom is that costs are escalating. Samson says returns on investment (ROI) in hotels are being eroded by spiralling land prices, and the soaring costs of labour and materials. Competition for land and contractors is slowing the pace at which new properties are delivered.

In 2007, 30 Dubai hotels were delayed because of construction problems. Mattmuller says several GCC Movenpick properties are two or three years behind schedule “for reasons beyond our control”.

“Growing numbers of projects are running out of money and will have to be refinanced,” says Hala Matar Choufany, director, Middle East, at US hospitality and leisure consultant HVS Hospitality Services. “Construction costs per room in Dubai have risen from $500,000 to $1.5m, a threefold increase, in 18 months.

“This is forcing developers to put projects on hold, to redesign their plans, or to seek new finance. It is happening in Abu Dhabi, too, though less so in other GCC markets.”

Competitive rates

Based on current delivery rates, by 2010, UAE occupancy rates are expected to fall to 65-70 per cent, making room rates more competitive. But more urgent perhaps than any likely shift from under to oversupply is the ability of regional infrastructure to keep pace.

“If you have a new hotel, that means an airline seat to be filled, an airport terminal on arrival, the road network to the hotel, the right utilities to flick a switch and turn on the lights,” says Ivor McBurney, vice-president for development, Middle East, at Hilton Hotels.

“But if the rest of that package is in place, there is no reason at all that growing hotel supply should not be positive.”

As the hotel investment market matures, new niches are emerging - Islamic hotels, boutique properties and themed residences. No-frills hotels catering for budget travellers are enjoying particularly strong growth.

Hilton is looking to launch its luxury brand Doubletree, mid-market brand Hilton Garden Inn and economy Hampton hotel chain in the Middle East. Rotana plans to open 25 Centro economy properties for corporate travel-lers by 2014.

In January, Intercontinental Hotels Group (IHG) signed a franchise deal with Siraj Capital to build 12 low-cost Holiday Inn Express properties in Saudi Arabia by 2013. IHG opened its first regional Express Holiday Inn in Dubai Internet City in 2007.

Managing properties

Nakheel Hotels has a $400m regional franchise agreement with Stelios Haji-Ioannou’s Easygroup to build and manage 25-35 Easyhotels. “To date, most of the regional hotel supply has been in the upscale segment,” says Sita. “There is a huge opportunity to develop the mid-scale, economy and budget segments.”

Here, Sita acknowledges Nakheel has had to “re-educate planning authorities” about a new class of room sizes, food and beverage provision, and service levels.

A shortage of available properties is affecting growth. “Profit margins are being squeezed tighter by the dramatic increase in the cost of land and materials,” says Panos Loupasis, regional director of Brussels-based hotels group Rezidor. “Many operators want to penetrate the limited service market, but these projects are less lucrative for developers. Clearly, the pressure on costs remains less intense for upscale properties.

“At the moment, the Middle East is mainly an operator’s market, not a developer’s market, subject to location and property classification.”

Another new development is the rise of fractional ownership, where developers sell stakes in the venture to individual investors, who are then entitled to use or rent the facility on a timeshare basis.

Kuwait-listed IFA Hotels & Resorts has invested $2.5bn in Dubai property. The lar-gest investor in the Palm Jumeirah, it is developing a fractional ownership venture, Laguna Tower, next to Dubai Marina, to be managed by Movenpick.

A second fractional ownership scheme is under way at the Fairmont Heritage Place at the Palm’s Kingdom of Sheba hotel.

Meanwhile, with surplus liquidity in the market on the one hand, and the US economic slowdown on the other, local executives are also considering ventures overseas.

By 2011, Jumeirah Group expects to have a portfolio of 60 hotel management contracts, 55 per cent outside the Middle East. With its Dubai Holdings sister companies it is thinking global, says Gerald Lawless, the company’s executive chairman. “We see opportunities in the US, the Caribbean and throughout Latin America to build our international luxury brands, both resorts and city centre properties,” he says.

“We are very satisfied with organic growth, and are considering 120 different offers without having to invest in acquisitions.”

Recession in the US could bring new opportunities to buy into the biggest North American hotel brands at a low cost, particularly for government-owned sovereign investment funds wishing to diversify, according to Rohit Talwar, CEO of Fast Future.

“Recession fuels new property development,” agrees Roland Obermeier, regional vice-president of sales and marketing at German luxury hotels group Kempinski. “The depreciation of cash value in the GCC, where the currency is pegged to the US dollar, encourages investors and developers to reinvest in projects with good ROI rates.

“A good example would be tourism and hospitality projects in the region and beyond. For example, many government and non-government organisations are currently investing in Africa, such as Dubai World Africa.”

Mattmuller says that with growth comes new pressures on staffing and operations. “As it becomes harder to hire people, it becomes a question of re-engineering operations, making smarter use of IT for back-of-house operations,” he explains.

“In future, there will be fewer back-of-house staff, and an increased focus on improving the guest experience front of house. It will be a case of fine-tuning operations in the event of a downturn at some point in future.”

Closing deals

What the plethora of projects demonstrates above all is that developers have to be con-sistent, committed and discerning, says Nakheel’s Sita.

“We started slowly but have grown quickly over the past year,” says Sita. “We have demonstrated to the investment community that we have the resources to follow through and close deals.

“Often in hotel investment there are many tyre kickers - companies that promise to do things then don’t deliver. To grow, you need the best teams, the right strategy for the market and the ability to execute.

“It is not possible to look at every single opportunity out there. You will have to invest-igate 10 opportunities to find one. But you have to be careful or you won’t have enough bandwidth to deal with all the possible transactions. It is always better to go back to the developer and say ‘sorry, we can’t do this right now’.”

Choufany says predictions that the market will level by 2010 are correct. “It is not that the market will crash, but that it will correct itself,” she says. “That means that in the five-star segment, average annual occupancy rates will fall to the 74-76 per cent considered normal in the mature markets of the West.

“As travellers have more options, the take-it-or-leave-it attitude of five-star hotels will change. Everything depends on governments’ ability to match budgets to forecast demand. The UAE has succeeded so far. But it is valid to compare Dubai and Macao, Las Vegas or Orlando, in that all those destinations have had to make adjustments. That is simply part of the normal development cycle. And why should Dubai be any different?”

Regional development

Saudi Arabia and Abu Dhabi are identified by hotel operators as upcoming hotspots. Saudi Arabia is starting to promote domestic and religious tourism, while Abu Dhabi has placed hotels and leisure at the centre of its 2020 masterplan.

Abu Dhabi’s tourism megaprojects are creating new beachfront resorts, aiming to attract 3 million visitors by 2015.

There is also substantial growth expected in Oman, says Gavin Samson, director of Dubai-based leisure and hospitality consultant TRI Hospitality Consulting. The state is establishing a niche for eco-tourism and adventure travel.

In Kuwait, hotel growth is driven solely by business demand. However, the world’s first Hotel Missoni opens in the Salmiya area in 2009. Licensed to Brussels-based Rezidor, owner of the Radisson and Park Inn chains, luxury brand Missoni will have 10 hotels worldwide by 2010, up to half of which will be in the Middle East.

The Kuwaiti government is understood to have issued 80 new hotel licences, with 20 properties already under construction in a market that has few growth drivers. Occupancy rates in Kuwait fell from 84 per cent in 2003 to 64 per cent in 2007. However, a raft of new projects such as the $77bn City of Silk are intended to act as attractions for visitors and business travellers.

Qatar is the smallest regional tourism market, but its hotel provision is nevertheless growing from a low base. In April, it announced its bid to host the 2016 Olympic Games, having successfully hosted the 2006 Asian Games. It aims to have more than 80,000 hotel rooms by 2016, with 22 properties opening by the summer.

In terms of earnings, markets showing strong growth in revenues earned as a ratio to rooms available include Muscat, Jeddah, Abu Dhabi and Riyadh, and these are all still under-supplied, says Panos Loupasis, regional director for Middle East business development at Rezidor.

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