Pre-downturn hotel sales may not return soon

Dubai room rates were high before the global financial downturn. (EB FILE)

As Dubai hotels continue to drop room rates in order to boost occupancy levels in the times of the global economic slowdown, it may be difficult for them to revert to their peak-rate levels, said a top industry player.

In an interview with Emirates Business, Derek Gammage, CB Richard Ellis Hotels' Managing Director for Emea (Europe, Middle East and Africa), discussed the challenges that lie ahead for the region's hospitality sector.

The Richard Ellis group is the world's leading full-service real estate company focused exclusively on the hospitality industry.

Gammage been trained as a surveyor with more than 20 years of experience in the hospitality real estate market, Gammage's specific focus has been on multiple asset transactions, and in particular, those in key gateway cities or markets.


Having slashed room rates owing to the global financial downturn, do you see Dubai hotels returning to their peak-rate levels of 2008?

During a downturn hotels tend to discount heavily in order to maintain occupancy. However, recovery takes several years and may not get back to rates achieved previously.

In our opinion, it is unlikely that Dubai hotels' will be able to achieve rates experienced before the downturn. This will be compounded by the future pipeline in Dubai and the ability of people to negotiate better rates on both corporate and leisure basis.

Dubai room rates were high before the downturn but with a high proportion of five-star deluxe rooms, the achieved rates were not surprising, due to the fact that there are little mid-market or budget properties to dilute the ARR (average room rates) compared to other global cities.

In respect of whether or not Dubai hotels will be able to achieve the rates of 2008 in the future, the following points should be considered:

- The continuing development of five-star deluxe hotels within the emirate will place pressure on occupancy levels and thus the ability for hotels to charge high rates with many offering significant discounts.

Hotels that occupy a prime location such as on the beach or attached to a significant tourist attraction or mall should be able to improve rate better than those properties that are considered to have a secondary location.

- The London market has been affected by the current economic climate, especially in ARR with rate decreasing from £117.92 (Dh670.2) to £110.82 a drop of six per cent. Before the current downturn, based upon research we have undertaken using TRi Hospitality Consulting HotStats performance indicators on a real growth basis (ie with inflation stripped out). RevPAR has not recovered to the highs experienced in 1998-1999. 

- Since this period, a number of global events have occurred and while both occupancy and ARR improved after each event, rate has yet to get back to levels achieved pre-2000. This is due to greater levels of room stock available and the difficulty hotels have had in increasing rates over the period.

How do you see average RevPar and occupancies faring for hotels in Dubai this year?

The RevPar in Dubai is likely to decrease further in 2010, due largely to expected rate cuts. Occupancy levels may level out but with increased supply there is a danger that this key performance indicator may also decrease. RevPar in Dubai dropped from $238.19 (Dh875) in 2008 to $163.31 in 2009 – down 31.4 per cent.

What about hotel financing in 2010 – in the Middle East as well as globally? Where does it stand this year for Dubai and Middle Eastern markets as a whole?

Development finance, from a UK perspective, for new projects is difficult in the current market and it is unlikely for a loan-to-cost-ratio in excess of 50-60 per cent to be achieved.

Funding for developments as a whole is still very low and that related finance is almost impossible to source. Further, we understand that substantial equity remains in the market. However, investors require "opportunity fund" IRRs (internal rate of return) of around 20 per cent, a level unachievable without gearing.

Given the current economic situation in Dubai, it is likely that financing new projects will be difficult.

Keeping in mind the fact that liquidity has been a major concern for hotels of late, will the hospitality sector witness more distressed sales now compared to earlier?

Not necessarily. There is no doubt that there are a number of distressed assets but due to the current trading levels, values of these operations, including strong assets, are also significantly reduced compared to values pre the downturn.

Banks are approaching the issue with a strategic mind and many are looking at holding assets and restructuring debt to help owners.

Many operators and owners have imposed cost reduction strategies into their properties to help generate a positive cash flow. If the opportunity exists it is likely that banks and owners will only turn to a sales process if absolutely necessary.

Which segment of the market – budget, mid-scale or luxury – do you see growing the most in 2010 and why?

In respect of development of new hotels, with the constraints of capital/debt in the market place there is likely to be limited development in the luxury market, except those developments that are fully funded and under way. With the debt market as it is, it is likely that there will be growth in the mid-scale and budget markets only.

What are some of key trends that the Middle East hospitality sector is likely to experience this year? How would that compare to the global hotel markets?

The continuing economic uncertainty in the world and, more specifically in Dubai, will increase pressure on global tourism (both corporate and leisure related).

International passenger numbers are likely to be down and, therefore, countries will rely on their domestic markets for tourism income. In addition, those who are travelling abroad, especially on vacation, are spoilt with offers from tour operators and countries offering incentives to visit.

Dubai has been proactive in promoting itself within the global market place. An initiative undertaken in 2009 by Emirates (airline) and DTCM (Department of Tourism and Commerce Marketing) and was to invite key frontline travel staff from around the world to visit Dubai on a familiarisation trip.

These kinds of initiatives have to continue throughout 2010, to maintain Dubai's position as a destination. Other countries and cities will be undertaking similar initiatives to generate demand.

The development of hotels has, in the large, been at the luxury end of the market. This may be seen as risky to many investors and that Dubai is ready for the development of more mid-scale and budget properties, thus increasing the appeal of the emirate to a wider spectrum of the world's population.

Therefore, a trend specific to the UAE may be the development of further internationally branded budget and mid market products.

What are some of the factors that can help Dubai stimulate hotel demand further?

Passenger numbers through Dubai International airport are set to continue to grow as the Emirates' fleet increases. However, Dubai airport has become an international hub linking the East to West and vice-versa. Therefore, many of these passengers do not alight at Dubai. There are a number of initiatives to persuade people to stay in Dubai for one or two days instead of transiting straight through.

We believe that more of these initiatives should be offered to help stimulate hotel demand in Dubai, although the rate likely to be achieved will be heavily discounted.

Dubai has developed itself as a major international destination and the brand 'Dubai' is well known worldwide. With various initiatives to help generate more demand it should be well placed to come out of the current economic environment on a stable footing.

 

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