Room rates to remain depressed in the UAE

01 February 2011

Despite tourist arrivals in the UAE recovering after the economic crisis, an oversupply of hotel rooms will continue to put downward pressure on prices

In numbers

6 per cent: Rise in tourist arrivals in Dubai in the first nine months of 2010

68,654: Total room supply in Dubai at the end of October 2010

49,000: Hotel rooms under construction in the UAE

Sources: DTCM; MEED; STR Global

Last year saw glimmers of recovery in the UAE tourism sector. Dubai’s hotels reported a 6 per cent year-on-year increase in tourist numbers in the first nine months of 2010, attracting nearly six million guests, according to the emirate’s Department of Tourism and Commerce Marketing.

Tourism generates nearly a fifth of Dubai’s gross domestic product. But it was one of the worst-hit sectors during the financial crisis of 2009. Visitor numbers fell and developers shelved new hotel projects.

Looking forward, analysts agree that UAE demand will grow this year, but room rates will remain depressed.

Hotel oversupply in the UAE

In the past three years, Dubai and Abu Dhabi have swung from being markets with an acute shortage of hotel rooms to being oversupplied. Dubai increased its hotel and apartment supply 6 per cent in the first nine months of 2010, and is expected to add 5,000-10,000 new hotel rooms this year.

Dubai room rates will come under continued pressure… the market average is set to fall to $300

Hala Matar Choufany, HVS Dubai

In January 2010, Dubai had 533 hotel properties. By October, the figure had increased to 565. The new properties that opened during the year include One & Only The Palm and the Armani Burj Khalifa. Combined, the 32 new hotels brought more than 9,000 rooms and apartments to market, raising Dubai’s total supply to 68,654 rooms.

Figures from UK consultancy firm Deloitte show that Dubai achieved average occupancy levels of 69.3 per cent in the first nine months of 2010. The figure represents a 2.9 per cent improvement on occupancy rates over the same period to October 2009. But Dubai’s average revenue per available room (Revpar) fell 4.4 per cent to $146, as supply heavily outweighs demand. The fall is less steep than the 35-40 per cent drop seen in 2009, and suggests the market is finding a floor.

The key factor undermining the strength of the hotel sector is the new supply coming on stream

“In the last year, Dubai’s hotels have seen an improvement in occupancy levels, even though they are not back to the 80 per cent occupancy seen in the market in 2007-08,” says Hala Matar Choufany, managing director of local consultants HVS Dubai. “Occupancy levels for Dubai’s five-star beach and city properties fell to 65 per cent in 2009. Hotels were feeling the pressure last year. Business was slow, leading many to cut their rates, in the first half of the year in particular. However, the second half of the year saw demand improve.”

Traditionally, visitors to the UAE came from mature economies such as Scandinavia, Germany and the UK. But recession has hit these economies hard. The numbers of European visitors have fallen. Instead, new demand is coming from developing countries, including neighbouring GCC states, India and China.

UAE average daily room rate (AED)
Abu Dhabi1,150850
Source: TRI Hospitality Consulting

Lower hotel rates have made Dubai more affordable than it was two years ago, when the emirate suffered shortages of hotel capacity during peak holiday season. Now, with space to spare, Dubai is using special offers and package deals to boost visitor numbers. There will be more deals to come this year, as new supply drives room rates down further.

“Average room rates fell to $320 in 2010, down from $355 in 2009,” Choufany says. “Dubai room rates will come under continued pressure in 2011. The market average is set to fall to $300 by year-end, before recovering in 2012.”

Analysts say it will take at least five years before the UAE can get back to its pre-2009 room rates. Choufany expects the average room rate in Dubai to stabilise at around $350 a night over the next five years. She also predicts a widening price gap between city properties charging about $200 a night and beach properties charging $400.

“There was a widening gap between these two segments,” Choufany says. “In 2003-07, beach properties were charging room rates double the level of city properties. But in 2007-08, shortage of rooms saw all Dubai’s city hotels push up their rates to close the gap. As the market stabilises, we will see the gap start to widen again.”

Abu Dhabi hotel market

In the past, Dubai dominated the UAE tourism sector. But Abu Dhabi is implementing its own ambitious tourism development strategy. Targeting high-end travellers, Abu Dhabi’s attractions include Formula One racing, indoor theme park Ferrari World and a calendar of events that spans golf tournaments, film festivals and live music.

The government launched Abu Dhabi Tourism Authority in 2004 to promote the emirate as a tourism destination and created Tourism Development & Investment Company (TDIC) to drive hotel construction. TDIC delivered 4,000 new hotel rooms in 2007-10 and will add 13,000 new rooms by 2015.

Abu Dhabi hotels hosted more than 1.6 million guests in the first 11 months of 2010 and looked set to end the year with a 12 per cent increase in annual visitor numbers, according early analysis. But occupancy levels plummeted due to the deluge of new properties.

Average occupancy levels in Abu Dhabi plunged nearly 57 per cent in the first nine months of 2010, down from 72.3 per cent in the first nine months of 2009. Average Abu Dhabi Revpar fell to $108 during the first nine months of 2010, down from $207 in 2009.

Room rates are expected to remain depressed in the months ahead as new hotels try to win market share. But Abu Dhabi’s prospects are not altogether bleak.

Observers say the emirate’s tourism market will grow as national carrier Etihad adds new routes. Etihad is positioning Abu Dhabi as a hub for passengers transferring between intercontinental flights. This represents a lucrative market for Abu Dhabi if it can persuade transit passengers to turn a stopover into room nights.

New hotel stock in the UAE

The key factor undermining the strength of the UAE hotel sector is the new stock coming on stream. Estimates vary greatly about how many rooms are in the pipeline.

Marko Hytonen, area vice-president for Brussels-headquartered Rezidor Hotel Group, estimates that there are 30,000 new rooms under construction. To absorb this new stock, he says, the UAE would need to increase its visitor base from 9.5 million travellers a year to more than 12 million.

Middle East hotel development pipeline*
Abu Dhabi13,239
*=Cities that will add more than 1,500 rooms. Source: STR Global

US-headquartered hotel consultancy STR Global sees this as a conservative estimate. “Our pipeline data suggests that the UAE is adding 49,000 rooms,” says Konstanze Auernheimer, STR Global director of marketing and analysis. “This represents the rooms due to open within three years, at hotels being planned or already under construction.”

In its January hotel construction report, STR Global estimates that Dubai has 27,102 rooms in the pipeline – nearly quarter of the total 116,152 rooms for the Middle East and North Africa. Abu Dhabi had the second-largest number of rooms in the pipeline, with 13,239 rooms.

Although thousands of new rooms are set to come on stream, the pace of new hotel projects has slowed over the past couple of years. Many schemes were cancelled or shelved during the downturn and most of these remain on hold. While some hotels will seek refinancing this year, completion dates for others remain uncertain.

Confirmed new properties include Ritz-Carlton’s new Dubai International Finance Centre hotel that launched in January. Rezidor Hotel Group will open the 242-room Radisson Blu Dubai Downtown by the middle of the year. The Palazzo Versace Dubai and its fully air-conditioned beach will open in 2012.  

What the UAE still lacks is non-luxury accommodation and this is seen as a potential area hotel chains could exploit. Growing numbers of visitors now come from developing countries and corporate travellers have become more cost-consciousness than before. Both these segments represent a new niche for UAE hotel properties. “Mid-market business demand held up well in 2009-10,” says Peter Goddard, Dubai-based managing director for TRI Consulting. “Many companies required personnel to downgrade from five-star to four-star hotels, with reduced daily allowances and economy-class travel.”

Analysts say the UAE needs to focus on specific rather than general market segments. Until the recent crisis, Dubai was a popular venue for meetings, incentive travel, conferences and exhibitions. Other promising segments include medical tourism, cruise travel and sports. But all too often, new projects position themselves in the same five-star/luxury segment.

Luxury focus for UAE hotel market

“Too many Dubai and Abu Dhabi properties are geared towards the luxury end of the market,” says Julian Kemp, associate director in the UK for investment advisers at consultancy firm CB Richard Ellis Hotels.

“So even if visitor numbers recover, it will be at the expense of room rates. That makes it difficult to justify building any new five-star properties in the UAE during the year to come. But the emergence of new tourism destinations will boost demand for budget-friendly properties.”

The US’ Hilton Worldwide is one chain expanding its three and four-star properties in the UAE. The company will double its capacity between 2010-13, from nine properties to 14. Although it will launch an upmarket Conrad property in Dubai, it will also introduce its mid-market Doubletree and Hilton Garden Inn brands to the UAE.

“There is a real opportunity for mid-market brands to target Dubai and Abu Dhabi,” Kemp says. Among corporate clients, there is growing reluctance to book staff into five-star hotels, especially when it comes to conferences. 

“Firms struggle to justify putting staff in five-star hotels and are looking instead at four- or even three-star properties,” says Kemp. The UAE still has enough land to offer among the largest hotel rooms. The world’s biggest hotel groups have budget-friendly brands in their portfolios and would welcome a chance to introduce these to the UAE market.”

The question is whether Dubai in particular is prepared to give up its attachment to high-end properties.

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