The region’s hotel construction market remains active despite a global decline in tourism, with local and international brands moving into the budget sector and emerging markets such as Libya.

But the effects of the economic boom that preceded it are still apparent in the Middle East and North Africa, where hundreds of hotels are scheduled to open between now and 2012.

According to a report from US research firm Lodging Econometrics in mid-2008, 67,000 hotel rooms were expected to open in the Middle East by the end of 2010.

Many of the hotels are being developed by smaller operators, but MEED’s research shows that the major global and regional firms plan to open more than 100 large hotels in the next four years, adding about 26,970 rooms or serviced apartments to the region’s inventory.

Building boom

All this is the result of a hotel building boom that began in the Middle East six years ago. In most cases, the drying up of credit across the globe over the past year has not affected projects that are close to completion. Hotel construction activity may have declined from a peak of more than 550 projects in mid-2008, but there were still 503 projects being planned or developed at the end of last year, which between them will add 147,488 rooms. Of those, 53 per cent are already under construction.

The sustained level of activity means international and local hotel groups are having to compete aggressively for market share, particularly now that the number of visitors from key international markets that have fallen into recession has dropped. This in turn is driving many to search for opportunities in sectors of the market that were often ignored until now, including budget hotels and secondary markets such as Syria and Libya.

The large volume of ongoing projects still represents a huge opportunity for the major global hotel operators, which manage hotels under their own brands once construction is completed. Lodging Econometrics reports that of the projects being planned in mid-2008, 65 per cent had already signed an agreement with a brand owner. This makes the Middle East one of the most important areas of the world for operators seeking new business opportunities, especially when it comes to large, luxury hotels. For example, US hotel operator and owner Starwood Hotels & Resorts Worldwide plans to open four of its St Regis hotels in the region (see table, page 32) by 2012, which will act as showcases for the luxury brand.

Neil George, vice-president of development and acquisitions in the Middle East and Africa at Starwood, sees hotel branding in the Gulf market, which makes up 79 per cent of the company’s Middle East operations, as extremely important. “Our footprint historically catered to the business travel market, but in recent years we have diversified into resorts, opening, for example, the Westin Dubai Mina Seyahi in 2008,” he says.

“We are also diversifying into the lifestyle segment, introducing the first W Hotel in the region earlier this year in Doha. Once all the hotels we currently have under construction open, the Middle East will become the second region in the world to have Starwood’s complete portfolio of nine brands.”

Other international hotel operators are concentrating on the middle market. French hotel group Accor Hotels, for example, has major plans for its Ibis brand in the region. It opened its first two Ibis hotels in the UAE in 2008, and in March this year, the 480-room Ibis Barsha in Al-Barsha opened with a promise to deliver economy room rates throughout the year.

Accor’s focus in the Middle East is predominantly on the UAE, but it has 16 Ibis hotels with 3,535 rooms in total under development in the UAE, Bahrain, Jordan and Kuwait.

The company also has major plans for Saudi Arabia. It currently manages eight hotels in the kingdom, and has plans for its wholly owned subsidiary, Saudi French Company for Hotel Management, to manage 20 hotels with a total capacity of 5,000 rooms by 2010.

Expansion plans

The UK’s Intercontinental Hotels Group (IHG), which owns the Holiday Inn and Holiday Inn Express brands, among others, is also significantly expanding its mid-market offering. In partnership with the UAE’s Ishraq Gulf Real Estate Holding Company, it opened its 193-room Holiday Inn Express Jumeirah in Dubai in November 2008, the third Express hotel to open in the emirate. “A lot of investors in the Middle East continue to build five-star hotels,” says John Bamsey, chief operations officer, Europe, the Middle East and Africa, at IHG. “IHG sees a huge opportunity for Holiday Inn and Holiday Inn Express.”

Another brand in IHG’s portfolio, Staybridge Suites, which is aimed at business travellers staying for longer periods, is also expanding into the region, with a 165-suite project on Abu Dhabi’s Yas island.

Despite all the growth, hotel groups are adapting their strategies to suit the current economic climate. At the end of 2008, for example, IHG cut the number of hotels it plans to develop around the region by 14 to 173.

US-based Hilton Hotels Corporation says its strategy is based on expanding into all segments of the market in the Gulf. It has identified the GCC as one of its top 10 global development markets, and has a pipeline of 18 hotels and 5,379 rooms planned for the region.

“We will be aiming to double our portfolio in the Middle East” says Elie Younes, vice-president for development at Hilton Hotels Middle East. “Our main strategy in the Middle East is to explore the complete extent of hospitality requirements here and not scale down our focus to one or two specific markets or products. The region has a strong potential for most hotel products, and each market has its own characteristics.”

He adds that Hilton is “actively looking” at opportunities to introduce its Denizen brand to the region, especially in Abu Dhabi. Hilton aims these boutique, luxury hotels at both business and leisure travellers.

In Saudi Arabia, which is still relatively under-served in terms of hotels, Hilton signed two management agreements in March under which it will develop 2,500 rooms. The group will work with local leisure company Al-Hokair Group to launch the first two Hilton Garden Inn properties in the Middle East in Riyadh. These hotels are a mid-priced brand that will be aimed at domestic business travellers.

As they expand around the region, the large international hotel groups are having to compete not just with each other but also with regional operators, which continue to plan projects. Saudi Arabia’s Kingdom Hotel Investments in particular has a reputation for entering new markets before the international hotel companies. Kingdom opened the Four Seasons Damascus, for example, in the Syrian capital in December 2005. However, it is also looking to the more established market.

Fairmont Raffles Holdings International, which is partly owned by Kingdom, is building two hotels in Abu Dhabi, with the Fairmont Abu Dhabi Creek set to open this year and a sister hotel in Abu Dhabi Marina scheduled for completion in 2011. Next year, Fairmont’s 76-storey, 1,005-room Mecca Clock Royal Tower is due to open as part of the Abraaj al-Bait complex next to Islam’s holiest site, the Masjid al-Haram, in Mecca.

The UAE’s Rotana Hotel Management Corporation, which has 67 properties in the region, has one of the biggest portfolios of planned projects in the Middle East and North Africa, with new hotels planned for Bahrain, Egypt, Iraq, Lebanon, Oman, Qatar, Saudi Arabia, Syria and the UAE.

Budget hotels

Rotana launched its Centro brand, which is aimed at budget business travellers, in 2005 -further evidence of the wider trend for hotel companies to expand their range of mid-market and budget properties.

With almost half of the Middle East’s hotel projects in the early planning stages, developers and international hotel companies still have a choice of whether to continue building some of their luxury hotels or delay them in favour of budget and mid-market alternatives.

“The major hotel companies are targeting budget hotels more and more -the three-star market in particular,” says Amine Hamdani, vice-president of the US’ CBRE Hotels, which advises institutional investors on asset management for hotels and carries out and feasibility studies. “There is still an undersupply of hotels in the budget categories in the GCC.”

Local companies are partnering with international brands to exploit this area of the market. In 2006, Dubai-based Istithmar Hotels announced a tie-up with the UK’s Easy Group to open a chain of 27 budget EasyHotels across the region. The first, in Dubai, is scheduled to open in the summer and five more are planned for the city.

Profit margins on such hotels are often high by international standards. Three-star hotels in Dubai for example, typically record earnings of up to 55 per cent before interest, tax, depreciation and amortisation, compared with European city averages of 10 per cent. This, combined with falling construction costs in the region, is encouraging companies to build more budget hotels.

Developing a hotel today is far cheaper than it was this time last year, according to analysts, thanks to the wider slowdown in the construction industry. Not all companies are able to raise the necessary finance to develop projects in the current market, but those that have funding in place stand to make considerable cost savings.

“Those developers who have opted to go ahead with their projects are benefiting a lot from the slowdown, thanks to the lower construction costs,” says Hamdani. “With costs down by 30 per cent, this is having a huge impact on hotel companies’ investment plans.”

Business focus

Hamdani identifies hotels that focus on business visitors as being most likely to succeed in the current financial climate. Often planned for city centre locations, they are seen to be a stronger investment than large leisure resorts.

With major hotels taking an average of three years to build, there is an added incentive to go ahead with projects now despite the worldwide downturn. Companies that can push ahead with projects hope that the global recession will have passed by the time the hotels welcome their first guests.

But despite the investment opportunities still in the market, some plans have nonetheless fallen victim to the drying up of project finance, often at the luxury end of the market. According to Lodging Econometrics, Dubai in particular has suffered a high number of project cancellations and postponements, in part because of the high number of large, luxury projects planned for the emirate, for which funding is now difficult to find. Some 20 projects, with a total of 7,477 rooms, were cancelled in Dubai in the final quarter of 2008.

Developments including the Trump International Hotel & Tower on Palm Jumeirah and the Asia Asia Hotel in Tatweer’s Dubailand are both understood to have been put on hold, although the developers have yet to confirm this.

With a risk of oversupply in some well-established destinations, hotel firms are also spreading into newer markets. In December, for example, Rotana signed an agreement to manage its first hotel in Baghdad, a five-star, 250-room project that is due to be completed in 2012. IHG’s first hotel in Syria will be the 370-room Damascus Intercontinental. The company signed an agreement with Kuwait’s Mak Hotel Holdings in May last year to develop the site.

One of the effects of the global financial downturn has been to spur hotel companies into signing development agreements in emerging markets that would previously have been considered too high risk. Markets including Algeria, Libya and Syria are all attracting the attention of major hotel companies.

The Syrian Tourism Ministry recorded 23 per cent growth in visitor numbers in 2008, to 5.9 million. The number of people employed in Syria’s tourism industry is expected to rise from 1.1 million in 2008, equivalent to 15 per cent of the total workforce, to 1.95 million, just under 18 per cent, in the coming years, according to the UK-based World Travel & Tourism Council.

Libya is also recording high levels of hotel investment, with major hotel companies expanding into the country for the first time. Four major branded hotels are due to launch in Tripoli by 2011, adding more than 1,000 new rooms to the Libyan capital. Starwood is launching a Sheraton and Four Points by Sheraton, the company’s mid-market brand, while IHG has plans for an Intercontinental and a Holiday Inn for Tripoli.

Dubai projects

But much of the growth will still come in the better established markets of the Gulf. Despite some high-profile cancellations, Dubai still has the largest number of planned hotel projects, with 50,000 rooms either under construction or scheduled to be built.

Abu Dhabi’s tourism ambitions have also fuelled a wave of hotel investment. The government is aiming for 2.7 million tourists by 2012, compared with 1.5 million in 2008. The emirate’s hotel stock will need to increase by 13,000 rooms to 25,000 to meet this projected demand.

Much of the emirate’s tourism aspirations are focused on Yas island, which will host a large number of new hotels. Local developer Aldar Properties has commissioned seven hotels on the island, all of which are due to open in time for the first Formula One Grand Prix at the island’s new racetrack in November this year. The hotel companies involved in the project are IHG, Rotana and Belgium’s Rezidor Hotel Group, which operates Radisson SAS and Park Inn hotels. Between them, they will provide an extra 2,298 rooms in four five-star hotels, one four-star and two three-star.

Elsewhere in the emirate, Starwood is due to open four hotels in Abu Dhabi city including Aloft Abu Dhabi, which is aimed at business and leisure travellers, and Element Abu Dhabi, which is focused on extended stays for business travellers.

Occupancy rates in the Gulf have been dropping from the highs recorded in early 2008, when Dubai hotel occupancy hit 90 per cent. With fewer travellers visiting the UAE because of the economic downturn, occupancy rates have now dropped to an average of 70 per cent.

The future success of the many hotels being built in the UAE and the rest of the Middle East depends on an economic revival to coincide with their scheduled openings. If that does not happen, the UAE market in particular risks having an oversupply, and hotel operators will have to continue cutting their room rates.