In response to soaring visitor numbers in the Middle East, there has been a massive increase in hotel and tourism-related construction over the past five years.

In April 2008, figures from Gulf projects tracker MEED Projects showed that projects worth a total of $194bn were planned or under way in the GCC region alone. But as credit lines evaporate and forecasts for the travel industry turn increasingly gloomy, developers are re-examining the business cases for new real estate projects.

At the end of the third quarter of 2008, 53 per cent of all new hotels being planned or under construction in the Middle East were in the UAE, according to US-based hotel real estate analyst Lodging Econometrics (LE).

A total of 556 new hotels are in the project pipeline in the Middle East, according to LE. A total of 246 projects are under construction, 181 are scheduled to start in the next 12 months, and 129 are in the early planning stage.

Dubai development

The bulk of this new capacity is destined for Dubai, with 155 projects and nearly 57,390 rooms either planned or under construction. This exceeds the amount planned for any other city in the world, according to LE.

But the negative sentiment in the marketplace means that many of these projects face delays or being put on hold indefinitely, as developers wait for improved access to debt and an upturn in demand. The seemingly endless stream of new project announcements has also dried up.

“We can expect to see a slowdown in projects, especially for mixed-use developments,” says one sector analyst based in Muscat. “Projects that are three or four years down the line and rely on off-plan sales will be cancelled or slowed down.”

As the majority of tourism-related construction projects are planned for the UAE, it is here that most of the changes to project timetables will be made.

Several high-profile projects have already fallen into difficulty in Dubai, most notably the $64bn Dubailand project, which lies at the heart of the emirate’s ambitions to boost visitor numbers to more than 15 million in 2012, from an estimated 8 million in 2007.

Launched in 2003 by government-owned developer Tatweer, Dubailand was originally scheduled to open by the end of 2007. But the launch date for phase one of the development has since been revised to late 2010, as contractors struggle to meet challenging deadlines.

The 278-square-kilometre development, which is estimated to be the largest tourism project in the GCC, includes 45 megaprojects, such as theme parks, hotels and resorts.

Parts of Dubailand are already open, such as Dubai Autodrome, the Polo & Equestrian Club and Dubai Outlet Mall, but others have been postponed due to the hostile economic climate.

One landmark Dubailand project, the Asia Asia hotel, is understood to have been delayed by at least 12 months (MEED 31:10:08). Sources involved in the project tell MEED that the ongoing global financial crisis is forcing the client, Bawadi, to suspend the start of work on the scheme.

Bawadi had been preparing to appoint a contractor for construction work. The 6,500-room hotel, which will be the world’s largest, was scheduled to open in 2010, forming the centrepiece of the AED200bn ($54.4bn) Bawadi development, a 10 kilometre-long boulevard in Dubailand.

The Bawadi development is planned to host more than 50 hotels, accommodating 60,000 rooms, as well as amusement centres, shopping malls, theatres, restaurants and convention centres.

Another flagship project that has hit problems is the Trump International Hotel & Tower. Building work was halted on the landmark project, which was being developed by state-owned Nakheel and the US’ Trump Organization on Palm Jumeirah island, at the start of December. The 270-metre-high tower, comprising 378 hotel rooms and suites, 385 condominiums and 12 townhouses, as well as retail and office space, was scheduled for completion in May 2011. Construction had only begun in July 2008.

On January 6, it emerged that redevelopment of the Nad al-Sheba Dubai racecourse has also run into trouble. Malaysian construction firm WCT was forced to suspend trading of its shares following the termination of the contract to build the 1km-long, 60,000-capacity grandstand that it had been awarded jointly with the local Arabtec Construction.

The grandstand is intended to be the main attraction of the Meydan City development, which will cover 7.5-million square metres and include a 4km-long canal, which will run from Dubai Creek to the racecourse. The facilities will include a luxury hotel, marina, business park, shopping mall, museum and golf course. The grandstand was scheduled for completion in October 2009, in time to stage the world’s richest horse race: the 2010 Dubai World Cup.

Projects are also under review to fill the gap in supply and demand for hotel rooms in Abu Dhabi, which, with its well-documented budget surplus, had expected to be shielded from the global economic downturn.

“Reprioritisation must be looked at in association with the government for pure tourism projects, such as hotels, which are hard to finance commercially,” said Lee Tabler, chief executive officer of state-run Tourism Development & Investment Company, addressing MEED’s Abu Dhabi conference in November. “We need to decide which hotel projects need to move full speed ahead compared with non-commercial projects.”

Project reviews

Tabler added that tourism schemes yet to be launched would be reviewed, but projects under construction, such as the Louvre and Guggenheim museums, would move ahead.

Since the turn of the century, the emirates have earned a reputation for building iconic tourism developments. Dubai and Abu Dhabi are home to some of the world’s largest, most luxurious and expensive hotels.

But analysts are predicting that tourists will become increasingly thrifty in 2009, choosing to travel with budget airlines and stay in low-cost accommodation.

However, the UAE has relatively few low and mid-range hotel rooms. Dubai’s Department of Tourism & Commerce Marketing says there are 343 hotels in operation, which includes 50 five-star hotels, providing a total of 16,174 rooms, 53 four-star hotels, with a total of 8,964 rooms, and 47 three-star hotels, with 5,096 rooms. The emirate has just 132 one-star category hotels, offering a total of 4,618 rooms.

Room rates in the UAE are also among the highest in the world. In October 2008, a hotel room cost an average of $377 a night in Dubai and $358 a night in Abu Dhabi, according to US hotel benchmarking firm STR Global.

“The UAE must continue its long-term development vision and the current conditions should not cause panic, but no one is immune from the global economic crisis,” says Alex Kyriakidis, global managing partner for tourism, hospitality and leisure at UK-based consultant Deloitte.

Kyriakidis says the UAE’s tourism sector must broaden its scope if it is to weather the economic downturn. “There will be increased emphasis on value for money and the UAE will be competing for European visitors, who account for more than 40 per cent of tourists, with Egypt, Turkey and Far East destinations that have not been affected by the strengthening of the dollar,” says Kyriakidis. “The mid and limited-service market is currently an under-developed sector in the UAE’s hotel supply, and should be addressed promptly.”

One company that is seeking to plug the gap for affordable accommodation in the Middle East is UK-headquartered InterContinental Hotels Group (IHG). In addition to the InterContinental and Crowne Plaza chains, the group’s portfolio includes Holiday Inn Express. The firm has three Holiday Inn Express hotels in Dubai, the latest of which opened in November 2008. IHG intends to expand the chain throughout the region and in November last year, it announced plans to build a branch in Damascus, Syria, which will open in 2011.

London-headquartered Millennium Hotels has also been investing in budget accommodation, opening three-star Kingsgate hotels in Abu Dhabi and Dubai.

Another development that will be important in supporting tourism demand over the longer term, and generating healthy volumes of return visitors, is Dubai’s new timeshare vacation initiative. Research undertaken by the emirate’s government shows that 20 per cent of the predicted 15 million annual tourists expected from 2012 will demand alternative accommodation to traditional hotel rooms, with many expected to look for timeshare options.

Currently, the Middle East accounts for less than 5 per cent of the world’s vacation ownership developments, an industry estimated to be worth $10bn annually.

In March 2008, a company called Dubailand Vacations was launched to develop a timeshare business for Dubailand, and it has taken the lead in formulating regulations on timeshare and other forms of shared ownership in Dubai in co-ordination with the Real Estate Regulatory Agency. When implemented, the new regulations will allow others to enter the timeshare market, giving added impetus to Dubai’s tourism sector.

Analysts have yet to obtain a clear sense of how weakened demand for international tourism has become, as many bookings for the final quarter of 2008 were made before the credit crunch hit home in major tourism markets, especially Europe.

But as a result of the global economic downturn, it is safe to assume that the growth in tourist numbers in the Middle East will not continue at the same level as in recent years.

To continue attracting the number of visitors it has enjoyed recently, the UAE’s tourism industry must learn to accommodate the needs of growing numbers of tourists with smaller budgets, be that by lowering room rates or by simplifying some of the ambitious projects that have characterised the Middle East’s tourism industry in recent years.

Key fact: The projected number of visitors to Dubai in 2012 - 15 million