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The year 2009 was quite challenging for the hospitality industry – globally as well as in the Middle East – with RevPAR (revenue per available room) declining by 20 per cent on an average. Though this year does not look too promising with financing unclear and other such factors, hospitality experts are expecting some level of recovery.
Emirates Business talked to Ernst & Young's global leaders Howard Roth, Partner and Global Head of Real Estate; Dean Hodcroft, Partner and Head of Real Estate-Emeia (Europe, Middle East, India and Africa); and Paul Arnold, Principal and Transaction Real Estate Advisory Services Leader, Mena. They looked at the sector's concerns and promises this year at a regional as well as a global level.
Are markets such as Dubai and the Middle East worst hit when compared on a global scale, especially with regards to room rates?
Howard Roth: 2009 has been one of the most challenging years in history for the lodging industry globally. RevPAR declined across all regions around the globe by approximately 15 to 20 per cent from the previous year, as corporations tightened their belts and leisure travellers stayed home. In terms of regions, the Asia-Pacific was the most adversely affected, followed by North America, Europe and then the Middle East and Africa.
Dean Hodcroft: While there are a few exceptions, 2009 has generally gone into the history books as one of the worst years for the hotel industry. Lower discretionary income forced decision-makers to analyse their travel priorities, cutting down the number of trips and the average length of stay. Long-haul was replaced by short-haul, although poor summer weather in Europe led to a last minute surge in demand, particularly for the Eastern Mediterranean (for example Turkey) which became more affordable due to the weak lira. Destinations priced in euros suffered given the relative strength of the currency. Business travellers with reduced travel budgets traded down to midscale and budget-branded hotels because of their companies' cost-saving measures and also sought alternatives to client meetings such as video conferencing. Across the Emeia region, conferences and exhibitions had to cope with fewer delegate numbers and meetings were scaled back significantly.
In Europe, Spain's hotel market was the most adversely affected by the credit crunch and the overall weakness of the pound, which brought leisure travel to a screeching halt. Spain has also struggled with major oversupply issues in both the lodging and residential second-home markets. With fewer leisure tourists last year, Athens, Prague and Moscow faced similar challenges and annual declines in RevPAR above 20 per cent. More optimistically, the United Kingdom was less affected by the financial crisis. Markets such as London, Glasgow and Edinburgh witnessed declines in RevPAR of less than five per cent in 2009 compared to 2008.
India was particularly hard hit, with double-digit falls in RevPAR in 2009. After several years of unprecedented RevPAR growth, the country witnessed declines of up to 40 per cent in the first half of 2009 and more modest ones of 20 to 30 per cent in the remaining half of the year.
Paul Arnold: In the Middle East and North Africa [Mena] region, most hoteliers are glad that 2009 is over. While major declines in RevPAR were registered around the world, the Middle East fared relatively well compared to most regions, with an estimated decline of 15 per cent from 2008.
Individual markets were impacted differently and there were also some exceptions. Beirut, for example, achieved an increase in RevPAR of about 80 per cent due to the renewed political stability in Lebanon, which brought in a record number of visitors, while Jeddah witnessed growth in RevPAR of approximately six per cent, driven by strong increases in corporate demand coupled with limited supply.
Dubai saw the most significant decline in performance across the region, marked by approximately 35 per cent reduction in RevPAR. Corporate belt-tightening, leisure travellers seeking discounted packages and booking at the last minute, as well as new supply additions resulted in significant downward pressure on occupancy and average room rates in Dubai during 2009.
When do we see a recovery in hotel room rates globally? How long do you think markets such as Dubai will take to actually recover average room rates?
Roth: While the duration of the downturn is still relatively unclear, it is anticipated that the current down cycle may last longer than previous cycles. It is generally believed that the US lodging market is expected to bottom out in 2010, with an expectation of seeing some signs of recovery beginning in 2011 and beyond. RevPAR for the US industry is still expected to remain below its historical peaks that were achieved in 2006 and 2007, at least for the next several years, until 2013.
Hodcroft: There is some comfort from the knowledge that the hospitality and leisure sector is highly cyclical and, albeit with a slight time lag to the general economy, recovery may be in sight. It appears that we may be at the end of the trough in the current cycle and prospects are starting to improve in Europe.
It will be a tough year ahead and we anticipate RevPAR will mostly stay flat across Europe generally during 2010 as the corporate sector continues to drive some hard bargains. A faster rebound is predicted for Europe, mainly due to economic growth forecasts across the region (which are closely correlated to hotel demand), coupled with the slowdown in the supply pipeline and pent-up demand in certain areas. Revenue levels will eventually return and hotel operators and investors should act accordingly.
The long-term fundamentals in the developing regions across Emeia are nevertheless still favourable in the medium- to long-term as local wealth accumulates and the propensity for international travel increases.
In the Middle East and Africa, tourist arrivals are slowly showing signs of recovery. External factors such as fluctuations in oil prices and currency markets will be key to the speed of economic recovery for the sector.
Arnold: A recovery in demand for Dubai is strongly linked to a recovery in the global markets, as these are major feeder markets for the emirate. The government's recent strategic focus on alternative source markets (such as China) will help mitigate further downside risk. While forecasts indicate that visitation to Dubai is anticipated to increase in 2010, new supply entrants this year are expected to create further pricing pressures for hoteliers and lead to further declines in RevPAR in 2010.
In the short to medium-term, a major concern is also the impact of the liquidity crunch on private developers, mainly those who were taking part in building the tourism demand generators for Dubai. The delay or postponement of these projects, coupled with a plethora of new room supply already under construction and expected to enter the market in the near future, will likely delay the speed of recovery for Dubai's lodging sector.
A correction was required in the Dubai hotels' room rates, which were rather high before the downturn. Would hotels actually be able to return to their peak rate levels?
Roth: In some ways, the situation in Dubai is similar to what is presently taking place in Las Vegas. In Las Vegas, a significant amount of supply had entered the market at a time when both business and leisure demand was significantly down. That has created a number of challenges very similar to what Dubai is presently experiencing. Many condominium hotels in Las Vegas, for example, have been shelved.
Arnold: For many years, Dubai's lodging industry experienced abnormal market conditions. A severe shortage of supply coupled with robust demand as a result of strong economic growth allowed hoteliers to achieve average room rate increases of 15 to 20 per cent per year for several years in a row, which is unprecedented in many parts of the world. By 2007-08, the industry began to experience more compression in rate growth, mainly due to new entrants and the perception among certain segments that Dubai was becoming too expensive.
In effect, Dubai was pricing itself out of the market, particularly among the Mice [meetings, incentives, conferences and exhibitions] segment. As a result, meetings organisers began seeking other destinations as more affordable alternatives.
It is also important to note that the composition of hotel room inventory is changing in Dubai, as it begins to witness more regionally and internationally-branded economy and midscale products entering the market.
Therefore, Dubai (on a city-wide average basis) is not likely to witness a return to peak average room rate levels that were achieved in early to mid 2008 in the short to medium term (if we exclude the effect of inflation), due to the much needed branded economy and midscale supply additions entering the market.
In addition, a further rate correction in the upscale and luxury segments as a result of a significant influx of new luxury and upscale room supply will also further reduce rates to more reasonable levels for this market.
Speaking of condo hotels, is the Dubai or other Middle Eastern markets expected to see the concept taking shape in this part of the world?
Hodcroft: Absolutely. The reason why we see this as an opportunity in the long term – once demand begins to recover and the residential market also begins to show some signs of recovery – is that this concept resonates very well with the GCC market as this segment typically has a larger travel party size and prefers serviced apartment accommodation, ie, self-catering facilities.
For other market segments, it also works well due to having owner usage privileges, as well as the benefit of earning rental income, which defrays the cost of a mortgage. In some cases, there could also be capital appreciation in the long term from owning a unit.
Arnold: It is inevitable. In order for Dubai to achieve its visitor forecasts, it will require such innovative products. Similar to Orlando, Dubai is a tourist destination that offers a well-rounded experience for all types of visitors, particularly families.
Many visitors from the surrounding region and also further abroad will naturally gravitate towards having a pied-à-terre here in Dubai, whether it be a condo hotel, timeshare or fractional unit. Once the dust settles from the financial crisis and markets begin to recover, these projects will begin to emerge.
Will we see a lot more distressed sales taking place in the hotel sector now more than ever, since liquidity has been a big concern?
Roth: We have not seen a lot of acquisition activity globally in terms of hospitality assets. There are a number of reasons for this. Valuation is a significant issue in real estate generally. In the lodging industry, financing is still not clear in terms of what the new debt-equity paradigm is. Hotels are also still not clear about the ability of banks and other institutions to provide extensions to their debt for various reasons. Additionally, the whole CMBS [commercial mortgage-backed securities] market that drove a lot of acquisitions of all sorts of asset classes (including hospitality) in the past has virtually disappeared. And what is going to replace that CMBS market and that financing is also very unclear.
The flip side is that if hotels revalue properly, now is the time to buy, but with the offset of the lack of financing and liquidity crunch, there is still a significant bid-ask spread between buyers and sellers generally.
One of the interesting things that is happening certainly in the US, but also in other parts of the world, is that governments are actually becoming very involved in hospitality assets. For instance, I can think of a few situations in the US where there is hospitality debt on institutions, and most of these institutions were taken over by the government.
In other parts of the world, there is also a change in financing mechanism. In the hospitality industry, we are witnessing just the start of public markets, with public real estate companies becoming "the way out" for many of the distressed real estate assets.
There is also a general impetus towards greater transparency and a lot of general support from governments in terms of banks and financial institutions.
Hodcroft: Despite the downward trend in key performance indicators for this industry over the past 18 months, hotel closures and large-scale forced sales of distressed assets have not materialised in the Emeia region in any great number. Cash-rich funds continue to wait in the belief that the bottom of the market has not yet been reached. Similar trends are also being experienced in other regions of the world.
In the relatively near future, there will definitely be opportunities in the lodging sector in the UK and Europe for interested investors, where the leverage has started to cause distressed funding, and servicing debt is extremely difficult. And we are already starting to see the lodging sector starting to drift into some formal administration and receivership situations in the UK. For the right purchaser with a long-term mindset, there could be a tremendous opportunity there on the investment side.
What are some of key trends that the hospitality sector would experience in 2010 in the Middle East? How would that compare to the global hotel markets?
Arnold: In the Middle East, hoteliers need to focus on cost containment strategies. They need to focus on maintaining (and in some limited cases – rebuilding) their rate, pursuing alternative source markets, and focusing on providing value to the customer. For those owners of existing hotels who may not have liquidity challenges, now is also a good time to renovate and reposition their products. This will prove invaluable towards strengthening their competitive posture once new supply enters the market and demand begins to recover.
Hodcroft: That is absolutely true globally as well. Additionally, we expect that, as in previous recessions, the market will begin to consolidate and that this may start to happen in early 2010. Indeed, there are signs that banks are providing impetus to this process as they start to exert pressure on more highly leveraged owners. As such, while we may not see many hotel closures, we believe there is likely to be a shift in ownership, with smaller hotel owners at greater risk.
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