Check­ing in with the hospi­tal­ity in­dus­try

Af­ter a tough year, hote­liers are hop­ing to see the Gulf ho­tel mar­ket re­turn to form in 2017. We find out from the ex­perts about the state of the hospi­tal­ity mar­ket; speak with Emaar Hospi­tal­ity, RAKTDA and SalamAir about their re­cent de­vel­op­ments; and fi

Gulf Business - - CONTENTS - By Robert An­der­son

In days gone by the Gulf Co­op­er­a­tion Coun­cil was the dar­ling of the global ho­tel in­dus­try. Record rev­enue per avail­able room, some of the world’s high­est oc­cu­pancy rates, gov­ern­ment in­vest­ments in tourism in­fra­struc­ture and mega events on the hori­zon at­tracted hote­liers from ev­ery corner of the globe keen to gain their slice of the ac­tion.

“Seven to eight years ago there was so much de­mand into the des­ti­na­tion and much less sup­ply. Ho­tels were used to very good oc­cu­pan­cies, sky rock­et­ing rates, very good prof­its and that was the way it was,” says Chris­tian Pertl, re­gional vice pres­i­dent of sales op­er­a­tions for the Mid­dle East and Africa at Hy­att.

“You didn’t nec­es­sar­ily need to think a lot about strate­gies, and where is the busi­ness com­ing from and what you needed to do. Busi­ness was there. That has ob­vi­ously changed. “

First quar­ter data from mar­ket re­search firm STR serves as an in­di­ca­tor of this chang­ing cli­mate faced by re­gional hote­liers as the lower oil price, re­duced eco­nomic sen­ti­ment and gov­ern­ment aus­ter­ity mea­sures con­tinue to im­pact the in­dus­try.

Re­duc­tions in rev­enue per avail­able room (RevPAR) – a key met­ric of ho­tel per­for­mance – ranged from 30 per cent in Jed­dah, to 22 per cent in Riyadh, 17 per cent in Manama, 16 per cent in Doha, 15 per cent in Mus­cat and 8 per cent in Abu Dhabi.

Dubai, hailed as one of the few Gulf bright spots, saw a more mod­er­ate de­crease of just un­der 4 per cent.

“2016 was a very tough year across pretty much all mar­kets and 2017 started in a sim­i­lar fash­ion,” says Robin Ross­mann, man­ag­ing di­rec­tor of STR.

“Saudi has had the tough­est of it, Qatar is also strug­gling to cope with all the in­creased sup­ply that’s go­ing in there, and like­wise Bahrain which is heav­ily de­pend- ent on out­ward bound Saudi de­mand has had a tough time.”

Are things as bad as they seem?

Amid these gloomy con­di­tions, some hote­liers stress that con­di­tions are not as bad as some would have you be­lieve; par­tic­u­larly given rates are de­clin­ing from high lev­els in a global con­text.

“For me the big thing about the Mid­dle East is that it might be com­ing down but down off a high base and so the mar­ket is still in gen­eral prof­itable,” notes Ross­mann.

This is sup­ported by the com­pany’s data. An anal­y­sis of gross op­er­at­ing profit per avail­able room (GOPPAR) for 2016 re­veals mar­gins are above 45 per cent in Kuwait City, above 40 per cent in Dubai and Riyadh and around 35 per cent in Doha. While even in worse per­form­ing mar­kets like Abu Dhabi and Manama they stand at around 30 per cent.

In light of this, some ho­tel groups stress that it is not all doom and gloom in the re­gional hospi­tal­ity in­dus­try, even if con­di­tions are not as favourable as they once were.

“It’s true that for two to three years rates have come down in Dubai,” says Guy Hutchin­son, COO of Abu Dhabi-based Rotana. “How­ever, the un­der­ly­ing base of how the mar­ket ac­tu­ally per­forms is in the top five des­ti­na­tions glob­ally.”

“There are prob­a­bly 300 des­ti­na­tions around the world that would give their right arm for Dubai’s num­bers so we’re ac­tu­ally blessed with how the mar­ket has de­vel­oped in the space.”

Oth­ers too sug­gest that de­spite the blip in per­for­mance in re­cent years, the fun­da­men­tals of the Gulf re­gion re­main at­trac­tive for hote­liers.

“We are re­ally very con­fi­dent for the mar­ket, and there will al­ways be ups and downs, that’s the cy­cle of the busi­ness es­pe­cially in the Mid­dle East where the volatil­ity can be quite om­nipresent,” says IHG COO for In­dia, Mid­dle East and Africa, Pas­cal Gau­vin.

“Op­er­a­tors that have been here a long time un­der­stand the mar­ket well and how to man­age it and mak­ing sure that for our in­vestors it is still prof­itable even when times are a bit more dif­fi­cult.”

But there is also a sense that the “good times” – as Gau­vin de­scribes the pe­riod of record high rates in Dubai over the last decade – may be over, as gov­ern­ments seek to boost tourist ar­rivals.

“It was not sus­tain­able, we knew that,” he says. “We had many leads for large con-

fer­ences we could not take. Hon­estly it was quite tight. So we knew at some point we needed to build more and the gov­ern­ment re­alises that.”

Sup­ply and de­mand

On top of chal­leng­ing eco­nomic con­di­tions in some mar­kets, one of the key fac- tors sup­press­ing ho­tel rates is new sup­ply.

Mid­dle East data for March from STR shows 153,298 rooms in 546 ho­tels un­der con­tract, in­clud­ing the con­struc­tion, fi­nal plan­ning and plan­ning stages – a 1.1 per cent rise on the pre­vi­ous year. Of this, more than 42,000 rooms are un­der con­tract in Dubai alone, giv­ing the city the largest ho­tel pipe­line in the world.

The chal­lenge for many re­gional mar­kets will be ab­sorb­ing this ca­pac­ity with­out im­pact­ing ho­tel per­for­mance.

As Yousef Wah­bah, MENA head of trans­ac­tion real es­tate at EY, notes, some 2,000–2,500 ho­tel keys have en­tered the in­ter­na­tion­ally branded four and five star cat­e­gory in Riyadh and Jed­dah alone in the first quar­ter, partly ex­plain­ing why rates in those mar­kets have been hit par­tic­u­larly hard.

“Sup­ply is com­ing into the mar­ket and that’s ob­vi­ously not help­ing when the mar­ket is soft,” he says.

“I do see a risk [of over­sup­ply] in a city like Jed­dah, and to a lesser ex­tent Riyadh and Doha.”

De­spite these con­cerns, re­gional op­er­a­tors show no sign of slow­ing down.

Mark Wil­lis, area vice pres­i­dent for the Mid­dle East and Turkey at Rezi­dor Group, says the brand could even ex­ceed its 17 con­firmed open­ings across the re­gion this year, in­clud­ing 11 in Saudi Ara­bia.

“We look at things in a pos­i­tive man­ner. Q1 has been rel­a­tively good across the en­tire GCC. Saudi re­mains a lo­ca­tion where sup­ply has in­creased dra­mat­i­cally. Things are flat – we haven’t seen any year on year growth – but I still think we’re look­ing at pos­i­tive trends.”

But the fact that five of Rezi­dor’s prop­er­ties in Saudi Ara­bia will be un­der its mid­scale Park Inn by Radis­son brand is also a clear sign of chang­ing strate­gies in a re­gion tra­di­tion­ally dom­i­nated by lux­ury ho­tels.

Of the Mid­dle East March pipe­line, some 20,983 rooms are un­der con­tract in the lux­ury seg­ment, com­pared to 43,619 in the up­per up­scale, 32,213 in the up­scale, 16,415 in the up­per mid­scale and 10,813 in the mid­scale. STR pre­dicts that this in­creas­ingly di­verse ros­ter will mean mid­mar­ket sup­ply will match lux­ury in the re­gion by 2021.

Brands in­clud­ing Emaar’s Rove and Rotana’s Cen­tro re­flect a dif­fer­ent mind­set from op­er­a­tors in the re­gion – seek­ing to di­ver­sify their port­fo­lio and cater to a wider au­di­ence in­line with gov­ern­ment ef­forts to boost tourism.

Another hote­lier em­brac­ing the mid­scale seg­ment is France’s Lou­vre Ho­tels, which was bought by China’s Jin Jiang In­ter­na­tional Hold­ings Co in 2015.

The group’s re­gional plans in­clude 5,000 rooms across 40 prop­er­ties in the bud­get friendly seg­ment by 2020.

“What we have re­alised to­day, with the pres­sure on the GCC economies and on the de­mo­graphic of travel, the great mo­ti­va­tor is def­i­nitely the bud­get ho­tel sec­tor and the mid­scale,” says Amine Moukarzel, pres­i­dent Lou­vre Ho­tels Group MENA.

“The old good days that we have wit­nessed in the last three to five years, I’m not go­ing to say they have gone by, but there is a pres­sure be­cause of two ma­jor fac­tors. Num­ber one is sup­ply and de­mand and num­ber two con­sumer spend­ing.”

While these fac­tors con­tinue to have an im­pact, Gulf hote­liers are hop­ing for an im­prove­ment in con­di­tions by the end of 2017 as fac­tors in­clud­ing the UAE’s grant­ing of visas on ar­rival to Chi­nese and Rus­sian trav­ellers, and Saudi Ara­bia’s de­ci­sion to re­store fi­nan­cial al­lowances to gov­ern­ment work­ers, bear fruit.

“There are pos­i­tive signs in the mar­ket – whether in UAE or Saudi – that would sup­port a growth in RevPAR to­wards I would say the last quar­ter of 2017. But we will still see an over­all drop in RevPAR in 2017 and then in 2018 we’ll start to see a pos­i­tive in­crease in RevPAR," says Wah­bah.

STR’s Ross­mann shares a sim­i­lar fore­cast, cit­ing signs of re­cov­ery in Dubai in par­tic­u­lar as an in­di­ca­tion con­di­tions may be im­prov­ing faster than ini­tially ex­pected. Dur­ing the first quar­ter occu- pancy rose by 2.7 per cent to 86.3 per cent, and overnight vis­i­tors in­creased 11 per cent to 4.57 mil­lion.

As a re­sult of these im­prove­ments, he says the firm will likely im­prove its fore­cast made at the start of the year of an av­er­age 8 per cent de­cline in RevPAR across the Mid­dle East.

“It’s prob­a­bly still go­ing to be down this year but hope­fully this will put us in a good place and next year we can start see­ing growth,” he adds.

But, while the ac­tions of re­gional gov­ern­ments are fuelling op­ti­mism there are also con­cerns that they have just as much po­ten­tial to dampen fu­ture growth.

As a re­cent panel ses­sion at the Ara­bian Ho­tel In­vest­ment Con­fer­ence in Dubai em­pha­sised, the 2018 in­tro­duc­tion of a 5 per cent value added tax rate in the Gulf re­gion is mak­ing many op­er­a­tors ner­vous, par­tic­u­larly given the un­cer­tainty sur­round­ing how it will be ap­plied to hospi­tal­ity.

“VAT is a grey area,” said Ig­nace Bauwens, re­gional VP for Mid­dle East and Africa at Wyn­d­ham Ho­tel Group, cit­ing a lack of clar­ity sur­round­ing the tax’s in­tro­duc­tion along­side ex­ist­ing mu­nic­i­pal­ity, ser­vice charge and tourism dirham fees.

“We will po­ten­tially be adding 25-30 per cent on a guest’s tax bill,” he sug­gested, adding there was a risk of mak­ing an al­ready ex­pen­sive des­ti­na­tion like Dubai more ex­pen­sive.

While a se­cond po­ten­tial pit­fall could come from the in­tro­duc­tion of ad­di­tional ho­tel levies as lower oil prices lead gov­ern­ments to seek ad­di­tional rev­enue sources.

“There is noth­ing yet an­nounced but I did hear cer­tain coun­tries are con­sid­er­ing as an al­ter­na­tive source of in­come to go and levy cer­tain tax­a­tion or fees on ho­tels,” says Wah­bah.

“If this is some­thing in­signif­i­cant, it can be ab­sorbed and passed on to the end user. But if it is some­thing re­ally sig­nif­i­cant then that will neg­a­tively im­pact the hospi­tal­ity mar­ket.”

These and other chal­lenges will need to be nav­i­gated as op­er­a­tors eye a po­ten­tial re­turn to form later this year.

“We a r e r e a l ly v e ry con­fi­dent f o r t h e mar­ket, and there W i l l a lWays b e u p s and doWns, t h at ’ s t h e cy­cle o f t h e b u s i n e s s es­pe­cially in the mid­dle e a s t Where the v o l at i l i t y c a n b e quite om­nipresent”

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