Owners and operators of many Dubai-based hotels are renegotiating the proposed investments and the payback period, said industry analysts.

As the market equations, including the revenue and costs, in the hospitality sector went through a sea change in the past two years, owners and operators are renegotiating several operational aspects.

In some cases, operators are recalculating the expected revenue from the projects and the payback period. In other cases, owners are taking a cautious approach towards planned investments.

In a recent case, an owner of a premium Dubai-based hotel and his operator renegotiated the expected revenue from the project and payback period.

"In this particular case, the owner was not lowering his expectations on revenue and asking the operator not to reduce the room rates, pointing out that the latter had promised a particular return and room rate, when they entered into a contract three years ago. But fetching that same high rate is absolutely impractical and impossible in today's situation," said Ahmed Ramdan, Chief Executive Officer of Roya International, a Dubai-based hospitality consultancy firm that has operations all over Middle East. However, the operator and owner, after a detailed analysis by the hospitality consultant, agreed that room rates should be cut.

Room rates of hotels throughout the world, including the Middle East, have fallen in the past two years. Most of the hotels, in a bid to increase demand, have cut room rates.

As a result, occupancy went up in January and February, but ostensibly revenues were affected.

Room rates in most of the Middle East hotels were cut majorly, in some cases as high as 40 per cent.

Occupancy has increased since January this year, but the revenue per available room (RevPAR) has been hit.

While some industry pundits say the pressure on rates will continue for some time, others are optimistic that despite the pressure, the occupancy levels may remain high until the year end.

"It was not possible to maintain high room rates for many hotels. The reduction in room rates has come at a time when the hospitality sector will also witness an over supply, but I think Middle East hospitality sector will tend to benefit in the long run," said Faras Eid, Partner consulting with Deloitte & Touche, Middle East.

And it is not just operators who are renegotiating; in some cases, owners too have altered investment plans.

"In another case, an operator of a particular project wanted the owner to invest $200 million (Dh734.55m), as the former wanted everything to be grand. The owner, however, was only willing to invest $100m in the project," said Ramdan.

The owner had to renegotiate the proposed investment looking at the current market situation.

In this case, some of what was planned earlier on investments changed, and investment in the project reduced.

The hospitality sector has witnessed change in the payback period too.

While some time ago, payback period in the region was considered to be around eight-nine years, the same is now calculated to be anywhere between 12 years to 15 years, said Ramdan.

Recently a lot of consolidation have been going on in the sector throughout the world. Apart from this, the investors who were shying away from investments are again started to explore deals in the market, said industry trackers. Though no major deals have been struck recently, this may happen by the end of this year.

In some cases, negotiations are on with the foreign investors. Emirates Business last week reported that two foreign investors from the US and Qatar have initiated talks with Union Properties, one of the country's leading developers for buying Ritz-Carlton Hotel at the Dubai International Financial Centre. According to earlier media reports, UP expects a price of about Dh1.5 billion from the sale of this property.

Due to an inadvertent error HVS Global Hospitality’s Hala Matar Choufany’s quotes were included in the article ‘Hotel owners renegotiate planned investments’, in the March 14 edition. For the record, Mrs Choufany did not contribute to the article.