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Budget hotels make flying start in region

By Anjali Sharma




As the construction industry starts to raise its head from the glitz and glamour of luxurious projects, the hospitality industry has been quick to align its development plans with a cost-effective approach so as not to miss the lucrative growth opportunities available in fast-growing Middle Eastern economies. The list is already long and growing.


Accor has set a minimum target of 20 Ibis properties in the Middle East by 2020, with 10 confirmed deals even as it draws the expansion plan for another of its budget brands, Novotel. Ishraq, one of the first regional hotel investment funds, is spending $150million (Dh550m) to open 20 of the Express by Holiday Inn brand hotels from InterContinental Hotels Group. Tulip Inn’s plans for the region are riding on nine properties currently under development.


Yotel, an innovative concept to offer lean accommodation at airports, with the financial backing of IFA Hotels and Resorts also has firm plans for the budget sector. Another major player is expected to be Nakheel Hotels through the easyHotel brand, for which it has acquired the master franchise for the region. As many as 26 properties carrying the easyHotel brand will be operational by the end of 2008 and another 12 over the remaining three years.


The UAE, as usual, is attracting the maximum attention. Local company Rotana Hotels will open four properties in the UAE under its new limited-service brand, Centro by Rotana. A Dubailand development – the $505m America Hotels and Resorts – will have 500 rooms and a three-star rating. Looking at overall supply, approximately 23,000 rooms are estimated to have entered the market in 2007, 27,000 will be available in 2008, 18,000 in 2009 and 13,000 in 2010.


The UAE accounts for 50 per cent of the new supply, followed by Qatar, Saudi Arabia and Jordan. Within the limited service category, this branded movement is being complemented by the unbranded ones. Twenty-three properties are expected to be built in Jordan and Lebanon and a further 12 in Saudi Arabia.


Most of these properties work on a business model, which focuses on minimising operational and fixed costs, while ensuring a pre-defined scope of service to its customers. While opting for not-so-premium locations keeps the cost down, limited food and beverage facilities and a lower employee-to-room ratio helps manage operational costs. 


For instance, the employee-to-room ratio for limited-service properties hovers between 0.5 and 1.0 as compared to the range of 1.5 to 2.0 for full-service hotels. With search for talent an endemic issue, the favourable employee-to-room ratio offers yet another benefit. For competition is not only from within the sub-sector of limited-service properties but from some 82,000 rooms from 253 hotels that are anticipated to enter the market between 2007-2011.


The large expatriate population, increasing inflow of tourists in the mid-price segment from neighbouring countries and the expanding catchment of transit passengers across the region are helping the strategy by allowing impressive growth projections. So much so that established players from other sectors are diversifying into hotels. Emirates airline, in partnership with Whitbread, a UK-based hospitality firm, is planning to open 5,000 rooms and apartments across the GCC in the next five years.


The promise of higher margins and profitability appears even more attractive due to greater resilience of mid-price properties to economic downturns – a looming threat in any market. Although the sustained upward pressure on oil prices mitigates any threat of immediate or medium-term downturn to a great extent, the sheer supply of hotel rooms that is expected to become available in the region might have a dampening effect on the current high levels of occupancy, which are running at more than 85 per cent for UAE hotels.


The cascading wealth effect of the regional oil-led economies is also supporting the shift. For now, the consistently rising room rates across the region is diverting a big part of this new traffic to the value offerings, even though they come with restricted choice of services. More importantly, these hotels are creating demand by tapping into the growing recognition for travel and holidays as a family event.


A related development has been the increasing popularity of shared ownership models, such as condominiums and hotel residences. But the still-evolving regulatory environment in most markets for these types of investments has kept the growth from realising full potential.


It is not to say that luxury is on discount in the region. In fact, the limited-service options for the hotels have been upgraded to suit tourists’ expectations. Also, the majority of $18bn of committed projects in GCC are in the luxury segment. To give an indication of the top end of developments, the upcoming MGM Grand Hotel in Abu Dhabi with a budget of $3m, is one of the biggest projects in the region. 


The entry of limited-service option would, however, mean luxury properties, especially the ones that cannot draw on the support of an established brand, will have to adopt a more cautious approach in identifying a target segment and their positioning in this volatile market. Perhaps the well-recognised luxury brand, Hilton, will introduce its economy brands – Double Tree and Hilton Garden Inn – into the region.



The numbers


$150m will be invested by Ishraq to open 20 Express by Holiday Inn properties from the InterContinental Hotels Group.


26 easyHotel branded properties are scheduled to open this year in the Middle East.


5,000 hotel rooms and apartments will be built across the GCC in the next five years by Emirates in partnership with UK-based hospitality firm Whitbread.