Hotel rates in Mideast have bottomed out

As sentiment in the capital market continues to improve, the hospitality sector too, is in for a pleasant surprise.

The room rates and revenue per available room (RevPAR) that were under pressure since 2008 will now stabilise and improve gradually. Meanwhile, budget hotels are all set to grow in the region, Arnaud Andrieu, Vice-President, CB Richard Ellis Hotels (Middle East), told Emirates Business in an exclusive interview.

What is your take on the present situation of the hospitality sector in the region, Dubai and the UAE in particular?

If we benchmark Dubai's hotels against the global markets, Dubai has been performing quite well. We have observed that recently there has been an increase in Dubai and in Abu Dhabi a high RevPAR has been recorded. There could be some new supply in the market, too, as some property owners are now planning to restart their projects. If you compare the hospitality industry to other industries [in the region] the former is performing well. Because of the right strategy, the sector was able to perform well even during the crisis.

Do you think the hospitality sector in the region will ever be able to reach the levels it had reached around 2007?

I am not sure about that but we [the hospitality sector] used to be in an embryonic market where the sector was not mature and not too developed. For the past five years, the developers have been focusing on the luxury segment but now new properties are coming in the market with different positioning.

Many properties [real estate] are converted to hospitality properties – sometimes this makes sense, sometimes it does not.

The sector is just going further into the cycle and the market is getting more developed in terms of supply, in terms of different categories and profiles. Earlier, we only had travellers from Europe. But this is not the case anymore, now travellers from other parts of the GCC and the Middle East form a prominent part. However, I think the growth driven by active participation of investors will commence after 2011.

Many hospitality players have reduced their room rates by as much as 40 per cent to increase occupancy levels. Do you think the rates will fall further or will they stabilise?

The main thing was when the demand decreased, occupancy fell and the market became more competitive.

So you have to put pressure on the prices and that is what happened.

I think the prices have bottomed out and from here on they will only increase. With better revenue management strategies, the hotels will do better, especially as now their positioning is clearer.

You mean to say that the markets have hit a nadir and that the room rates will not fall further?

Frankly, it depends on properties. But generally speaking [for the hospitality industry] prices have hit the lowest point and cannot dip beyond this. The price is actually a good value for money with regards to destination Dubai. I would say that prices are very attractive. Even the airfares to the emirate are really attractive. More tourists will be attracted to this part of the world due to the competitive pricing.

How is the investment scene in the sector?

There is still parity between the price that owners expect and what buyers are willing to pay. Many buyers are holding on to their properties and are not willing to exit. There are very few, big distressed properties on the block. And you have to be careful while looking at these properties. That is where we come in the transaction. We differentiate these properties and point out which are the properties that could be a good opportunity to invest in.

Lately, a lot has been said about the budget segment of the hospitality sector. What is the growth potential for budget hotels in the region?

I see great potential. First of all, we have to understand that only about 20 per cent of the total hotels in the region are budget hotels.

This means there is a good opportunities for investors and the mid-scale operators.

We have seen great development of some brands and how they differentiate themselves for the price they are offering and the services they offer vis-à-vis the luxury segment. Like a Dubai-based two-star hotel is asking around Dh400 for a room per day. Against this, the four-star hotels are asking Dh650 per day.

So if you see the difference in the way they are positioning themselves – the budget segment – it may not justify the price they are asking for. Having said that, the budget segment is becoming more prominent in the market today. Every hotel is positioning itself and targeting its own niche.

How do you compare the Middle East hospitality sector against other developing markets such as the Asia Pacific?

When you look at Asia-Pacific you see our colleagues in Singapore are quite busy on investments. That means the cycle in terms of investments is more advanced than what we are experiencing in the Middle East. This is mainly because you have more institutional players and liquidity in that part of the world.

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