Dubai's mid-market hotels offer surprising returns

01 May 2016

US consultancy says cash flows to bottom lines can be just as attractive for mid-market hotels

Analysts say mid-market hotels can be just as profitable as the luxury segment despite the perceptions of developers in Dubai.

A report published by US consultancy PwC says a change in the type of visitors coming to Dubai coupled with increased room numbers in mid-range hotels means developers could find this segment just as attractive as luxury hotels have been over the past decade.

Mid-market hotel rooms are expected to make up 44 per cent of those being delivered this year, according to a report by PwC.

“There are about 20,363 expected to enter the market this year, with 56 per cent in the luxury segment,” says Vikram Loomba, real estate, hospitality and leisure adviser at PwC Middle East.

Dubai has historically set itself up as a luxury destination, with 51 per cent of rooms being in the five-star luxury segment, That figure is expected to increase to 53 per cent by 2020.

Analysts have predicted increased demand for mid-market rooms, with some even saying this demand is already piling up. Dubai is witnessing a change in the visitors it is receiving, as those from South Asia and China increase in number.

Developers have been reluctant to enter the mid-market, says Loomba. “Developer perception within the region focuses on the development of ‘trophy assets’ in the form of luxury hotels in prime locations,” he says. ”This trend is gradually changing, with prominent developers rolling out a portfolio of mid-market and budget hotels.”

Developers often attribute their reluctance to enter the mid-market to high land prices in prime locations. While five-star rates coupled with the current high occupancies enjoyed by the luxury market does make for an attractive investment opportunity, Loomba believes the development of the mid-market on the same plot of land can result in similar cash flows for developers and owners as the demand changes.

Illustrative example (land with allowable gross floor area of 22,500 square feet)

 Allowable GFA assumption
(square feet)
RoomsOccupancy (%) Average rates (AED)Room revenue (AED)Departmental profitability (%) Cash flows to bottom line (AED)
GFA=Gross floor area. Source: PwC 
Five-star hotel 22,5002507590061.6m8049.3m
Mid-market hotel 22,5005218535056.5m8548.1m

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