Investors bet on budget hotels in the region

For the owner of a well-known three-star hotel in Bur Dubai, the past few months have been really good as the occupancy and revenue per available room (RevPAR) increased. But a recent call from an investor left him bewildered.

The investor had called to inquire if the hotel was up for sale. The owner, who did not wish to be named, is now evaluating options and may officially put the property on the block.

"The 190-room hotel has been doing quite well lately and we may fetch a good price. There are investors who are bullish on the budget segment in the hospitality sector in the present market situation and that may work to our benefit," the owner told Emirates Business. This paper could not confirm the price quoted for the hotel or the name of the investor.

And the story of budget hotels does not end here. There are some investors who are now considering to convert their planned luxury projects into budget ones.

"Only about 20 per cent of the total hotels in the region are budget, so there is a huge growth opportunity," said Arnaud Andrieu, Vice-President, CB Richard Ellis Hotels, Middle East.

Many analysts expect the number of mid-segment hotels in the region to gradually grow over the years. Many industry experts also say the aggressive strategy of the global budget chains in the region, too, is responsible for the growth of the segment.

So while only about two years ago all the investors were making a beeline for luxury hotels, the trend is in for a major change. The new mantra is, "comfort at affordable price".

"Earlier most of the investors were keen on developing luxury hotels. The trend is changing and many investors who have invested in land or want to enter the hospitality sector are now exploring the budget segment," said Andrieu. The sector may also see some tie-ups between global mid-segment brands in the region by the end of this year."

Several global brands such as Premier Inn, ibis and Citymax are already present here and are bullish on the budget segment in the region. Some analysts point out that the entry of international brands on the regional scene signifies a maturing tourism market in the Gulf. The no-frills hotels have also been witnessing better occupancy levels lately.

According to an industry expert, the rate of return on capital in the mid-segment is comparatively better. While a return on capital in the luxury segment is pegged at 12 to 15 years, for the mid-segment hotels it could be about 10 years, said an analyst.

"Dubai has become affordable due to an increase in focus on the mid-market concept. This combined with the low-cost carriers has opened completely new markets," said Michael A Weyland, General Manager, Hotel Division, Landmark Group, which recently launched its Citymax Hotels budget brand in the region.

The latest figures released by the international hospitality sector analysts show that occupancy is better when compared to other global destinations. Although no official figures of budget hotels have been released separately, those made available are indicative of the mid-market hotels. The global hotel index by STR Global, the international hospitality research firm, indicates that the Middle East and North Africa (Mena) region tops both in occupancy and average daily rate (ADR).

Meanwhile, in the Mena region, the UAE continues to be one of the frontrunners as far as ADR and occupancy rates are concerned in the hospitality sector.

According to MKG Hospitality, the UAE's RevPAR was only second to that of Lebanon. "The increase in RevPAR in Lebanon shows that mid-market hotels hiked their room rates at the expense of occupancy to boost bottom-line profits, since occupancy rose only by three per cent to 56 per cent on 2008. Therefore, RevPAR growth in this sector was nearly 50 per cent to just under $90 [Dh330]," hospitality consultancy HVS said in a recent report.

The growth potential in the hospitality sector has also attracted several investors, if market trackers are to be believed. And some private equity deals in the region are actively being explored, said an analyst.

"Investors who were not even considering deals in the region till some time back are now exploring," Ahmed Ramdan, Chief Executive Officer, Roya International, a consultancy and services firm in the hospitality sector, said earlier.

No major deal in the region has been finalised lately, however, some major properties have been put up for sale. It is in public domain that Union Properties had put its Ritz-Carlton DIFC property on the block. In February, the company, in a statement to the Dubai Financial Market, said the Ritz-Carlton DIFC might sell at a price close to Dh1.5 billion. The hotel is expected to become operational by the second quarter of 2010.

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