Hotel room rates may drop further before a recovery

Even though it is possible that hotel room rates and therefore RevPARs [revenue per available room] in Dubai as well as the Middle East may decline further in the next few months, there are several factors that will shorten the time it takes the region to recover, according to the latest report by Deloitte.

"The Deloitte Executive Report: Winter/Spring 2009" highlights that strong fundamentals will help the region emerge as an even stronger contender among the world's top tourist destinations.

"Due to macro economic reasons [regional or international] and the addition of new hotel rooms that will enter the market and fight for market share, it is possible that hotel room rates and therefore RevPARs may decline further. But due to the addition of more hotel rooms, the leisure segment will become even more important for Dubai hotels," Costas Verginis, Consulting Director at Deloitte in Dubai, told Emirates Business.

"It is critical for the local hotel industry to try to increase the average length of stay of the hotel guests, and the number of return guests," Verginis said.

Tourism is both a driver and a beneficiary of economic growth in the Middle East, according to the Deloitte report.

It states that several Middle East destinations now appear towards Deloitte's 'Top 20' RevPAR league table, challenging Europe's traditional dominance.

"Dubai, of course, has taken much of the limelight in the past couple of years, attracting more than seven million visitors in 2008, and enjoying some of the highest RevPAR rates in the world. But other Gulf destinations, including Doha, Abu Dhabi and Muscat have been steadily moving up the league for both revPAR and occupancy, while other Middle East countries such as Saudi Arabia and Egypt have been extending their appeal to broader demographic groups," the report said.

Meanwhile, occupancy in the Middle East hotels has fallen and continues to fall, with STR Global reporting a 10 per cent year-on-year decline in December 2008. January has seen this continue, with Dubai being hit by a 30 per cent decline in RevPAR, according to Deloitte statistics.

The report further said although the region may have been protected by pre-bookings, high-profile launch events and a positive view of business opportunities, the combination of a recession in source markets, pressure on currency exchange rates and an economic slowdown in the Middle East are now making themselves felt.

More rooms, lower rates

Dubai had been accustomed to one of the strongest average room rates in the world and, with occupancy levels of more than 84 per cent, the emirate was used to being in the top league, Deloitte said in the report.

It said: "Towards the end of 2008, though, with demand falling as the economy weakened, we have seen unprecedented 40-60 per cent discounts and a surge in advertising campaigns to entice more visitors.

"Price has become critical to travellers' decision making, especially with the changing values of the dollar against sterling and the euro, yet customers expect the same level of service and five-star quality for reduced rates."

The report said even before the credit crunch's global domino effect, hotel industry analysts were expecting occupancy rates for Dubai hotels to drop to around 60 per cent, with an accompanying fall in room rates. "And, given the current situation, Dubai is considering revising its target of 15 million visitors a year by 2015 – almost double last year's total," the report stated.

But while Dubai, like many other holiday destinations, is experiencing cost cutting among its target markets, there are other contributory factors – mostly expected – that are adding to a drop in profitability, the report said. It said the supply of new hotel rooms, for instance, had been forecast to exceed demand from mid-2008 onwards, having a subsequent hit on both rates and occupancy.

Even though many projects have been delayed or cancelled recently, Deloitte report said it has still seen a staggering increase in the number of rooms coming onto the market.

Keeping in mind the dramatic decline in hotel occupancy and rates towards the end of 2008 and early 2009, asked if the stability is expected to return to the Middle East hotels market anytime soon, Verginis said: "Stability will depend on mostly external factors (demand from source countries). Most analysts anticipate the global tourism, hospitality and leisure industries will stabilise in 2010."

The right connections

With the region's airports well connected to Europe and Asia and every Middle East airline expanding operations and reach, Deloitte is positive that the flexibility and responsiveness of the Middle Eastern countries will see them through despite the current economic pressures.

"While routes are being cut or closed elsewhere to contain costs, Emirates, Qatar Airways, Etihad, Air Arabia and flydubai are all opening up new routes, expanding their airport hubs or increasing flight frequencies. Major European and Asian carriers also see the market as a key destination, and are increasing their schedules to the Middle East. This gives passengers greater availability and choice, which will intensify competition but also promote the region more widely as a preferred destination," the report stated.

It added: "If we add this increased availability of flights to the high quality product on offer, plus the region's easy accessibility, and the year-round sunshine, we would expect demand to retain strength, especially as the price of a room comes down."

Furthermore, since arrivals in 2009 are not likely to match the exceptional growth over the past four years, tourism organisations in Dubai will need to widen the emirate's appeal to lure more leisure travellers, who currently make up around 65 per cent of arrivals, "and less expensive rooms should help", according to Deloitte.

"It will be a challenge for hotel owners and operators to maintain the service and quality levels that travellers expect in the Gulf, yet still keep a tighter control on budgets, and it will need a fine balance. A wrong move either way could damage tourism in the region," said Deloitte consultants.

However, increased interest from nearby Arab and Asian countries will be a bonus, with demand from India and Iran, for instance, said to be growing at more than 10 per cent, the report said. "Even small increases from new source markets can boost overall profitability."

"We expect the realities of a less affluent society to drive new business models, but as the market picks up again, these changes will help the Middle East consolidate and prepare for phase two of its dramatic transformation," the reports stated.

Enormous potential

It will not be surprising to see the Middle East take a more prominent position in the global tourism, hospitality and leisure landscape of the future, Deloitte said.

"This year is not going to dazzle the world in terms of tourism numbers, but the underlying potential within the GCC remains strong. Tourism in the Middle East is part of an established plan to deliver future revenues," the report stated.

"There will be a change of perspective, with the reliance on real estate to fund tourism and entertainment projects ending, and development across the sector becoming operationally sustainable in its own right," it added.

The Deloitte consultants are of the view that as the regional markets stabilise and confidence returns, there will be plenty of opportunities for serious investments. "And those who have positioned themselves correctly will be able to capitalise on the attractive valuations we are starting to see," the report highlighted. "The governments must also recognise that the wider economic benefits of tourism can only be achieved through a structured, coordinated strategy."

Fundamentals of success

Even though the economic activity in the GCC has slowed, with stock values having plummeted, oil prices falling to below $40 (Dh146) a barrel from a peak of $147, property prices tumbling, and M&A [mergers and acquisitions] transactions grounding to a halt, there is an emerging consensus that the downturn in the Middle East will be short, Deloitte said. "That would be thanks to continued investment, tactical government intervention and the amount of private liquidity in the region," the report said.

Deloitte further said the fundamentals for continuing success within the GCC's tourism sector remain unchanged, listing below some of the key ones:

- The region's geographical position: Its location, mid-way between Europe and Asia gives it a competitive advantage when it comes to attracting travellers from both East and West – appealing to both holidaymakers and corporate visitors

- A diversified mix of source markets, regional and international, contribute to the number of arrivals

- Although some states and Emirates are now well developed in tourism terms, others are just starting. This means there is still considerable scope for expansion and diversifying into new target markets

- The region is gaining a worldwide position as an aviation hub. This ambition was led by Emirates and is now supported by other airlines, including several low cost carriers

- The six nations within the GCC have diversifying economies with secure medium-term wealth and significant budget surpluses

- Millions of dollars have been invested in infrastructure – hotels, resorts, roads and airports – and investments are continuing.

What the future holds

Projecting the performance of Dubai hotels in the second half of 209, Verginis said it would depend on a couple of factors.

These include the recovery of the economy of the typical source markets (e.g. northern Europe). "This will particularly affect the hotel demand from the discretionary segments such as leisure, VFR and Mice," Verginis said.

"And secondly, it would depend on the recovery of the UAE and GCC economies. This will particularly affect the hotel demand from the business segment," Verginis added.

Meanwhile, according to the United Nations World Tourism Organisation, the Middle East has seen the world's fastest – and most spectacular – growth in tourism since 2000, with approximately 46 million tourists visiting the region in 2007, marking a rise of 92 per cent on 2000, giving the region hotel profitability that other regions could only marvel at, Deloitte stated.

"That year was a good one for hoteliers globally, with all major regions seeing an excellent performance in room rates and revenue per available room," it pointed out.

"By the middle of 2008, however, the credit crisis was making its presence felt, holding annual growth at under three per cent, and the United Nations World Tourism Organisation expects the deepening recession to keep this figure below two per cent for 2009, possibly even zero per cent," the report further highlighted.

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