Dubai has emerged as one of the three most expensive Middle Eastern markets to develop hotels in the five- and four-star categories, according to a recent hotels investment study conducted by global hospitality consultancy HVS International.
The emirate is followed by two other markets in the region – Abu Dhabi and Doha.
The three least expensive regional markets to develop a hotel in are Damascus, Amman and Cairo in the same hotel categories.
"There is some variation among the remaining markets. There is a wider variation in RevPAR (revenue per available room), an industry benchmark, in the four-star market, yet Damascus has the joint-lowest RevPAR ($85/Dh312) and Doha the highest ($173), in keeping with their rankings in terms of supportable investment," stated the HVS report.
Taking into consideration the current demand characteristics of each market, the HVS study reveals although the market in the past was accustomed to seeing five-star hotels charging $500,000 to $800,000 a room in Dubai, the current global economic conditions as well as hotel market realignments regionally, would make such investments "non-viable" for a few years to come.
"With the cost of raw materials fluctuating and the global economic conditions shifting the types and patterns of demand, developers are becoming sceptical about when to build, what to build and whether to commit to construction contracts," said the report.
The wide range of minimum and maximum supportable investments across the asset classes would force a developer to make a compromise between its class of property and its market, it said. "For example, an investment of $150,000 a room would allow the development of a four-star hotel in Damascus but would be absorbed by a two-star property in Doha," it explained.
It further adds that on account of its high average rate and high F&B (food and beverage) revenue contribution, Doha commands the highest investment among five-star properties and Damascus the lowest.
The average supportable investment for a five-star hotel for this set of cities is $330,833 a room, as per the HVS statistics. However, Damascus has the second-lowest RevPAR, just ahead of Cairo, which has a RevPAR of $117.
Abu Dhabi, meanwhile, has the highest RevPAR, of $215, and Dubai the second-highest ($192), the HVS report cites.
The hotel consultancy further warns that RevPAR could be "misleading" were it is used as a basis for deciding on where to invest. The report explains how: "RevPAR would be a direct indicator of current hotel market realignments. If we were to rank these investments, we would note a misalignment between a city's ranking according to its maximum supportable investment and its ranking by RevPAR. This misalignment is a result of the different rooms to revenue ratio that different markets enjoy."
It added that the methodology followed by HVS includes deriving maximum supportable investments by asset class across markets, and comparing these to the respective RevPAR resulting from projections of occupancy and average rate.
"Although Goppar (gross operating profit per available room) would be the preferred profitability indicator," the report said.
Moving on to other categories, the three-star sector of hotels has been revealed to have the widest range of maximum supportable investment per room, as per the HVS research, primarily because most markets witness a huge gap in average rate among this class when compared to the four-star standing. According
to the HVS study, both
two-star and three-star classifications are relatively
new, as most markets are used to positioning themselves as luxury destinations, leaving the budget hotel concept to local management companies.
"However, changing financial times are working in favour of international budget and economy brands which, once inserted in the markets, would raise marketwide average rate," the study said.
It added: "As Mena opens up to international investors and businesses, and with intra-regional travel on the rise, we can assume that some convergence in average rate is bound to happen."
While projecting the potential, HVS study said the relatively cheap destinations of today will be able to retain more of the international traveller's willingness to pay, and the currently expensive destinations will have to cut room rates as the competition among cities in the Mena grows.
"Long-term investors developing a hotel today in Damascus, Amman or Cairo will reap the rewards in due course," it stated.
Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.