With the first Holiday Inn Express operating successfully at the Internet City in Dubai, Ishraq Gulf Real Estate Holding, the controlling company, has massive plans to take the brand across the region.
The company feels the sky is the limit for them as there is a huge gap in the market for branded budget hotels, which will be essential to maintain the target visitor figures for the next 10 years in the Gulf.
The growing importance of limited service hotels mark the development of tourism in the Gulf which, to date, has concentrated on iconic world-class projects.
In addition, from an operating point of view, this sector offers higher returns on investment than luxury properties, as a consequence of reduced investment and operating costs, said Sami Al Ansari CEO, Ishraq Gulf Real Estate Holding.
—What's the progress on Express hotel projects in the GCC? Are you on schedule?
—First of all, the name Express by Holiday Inn is being rebranded to Holiday Inn Express and in the next few weeks we'll be launching it. The progress has been very good when you consider that the company is less than three years old. We have already opened one Holiday Inn Express in Internet City and this summer we plan to open two more hotels in Dubai – one off Sheikh Zayed Road next to Safa Park and the other at the end of Diyafah Road known as Holiday Inn Express Jumeriah.
Next year we'll be opening two more properties, one in Bahrain and the other near Dubai International Airport. The following year we will open another three properties in Fujairah, Muscat and Dubai Studio City, which are currently under construction. Overall, we have been very successful and are actually ahead of our own development plans for the Holiday Inn Express brand in the region.
—How is the first Holiday Inn Express Hotel in Dubai performing?
—It has been doing exceptionally well. The property is less than one year old and we are already achieving above market occupancy rate. Dubai hotels sit on 88 per cent to 89 per cent occupancy rate and we are already in the 90 per cent plus bracket.
—What is the share of budget hotels in the UAE and GCC and what kind of scope do you see for growth?
—According to our research, in the UAE and the GCC, budget or branded limited service hotels have a share of less than three per cent. When you consider this figure there is definitely huge potential for growth. There is a huge demand for such hotels because we are offering quality lodgings at affordable rates.
—According to the Dubai Tourism and Commerce Marketing (DTCM) the number of hotel visitors to Dubai will rise to 10 million by 2010. Is the UAE's and the region's infrastructure – hotel rooms, roads and taxis – geared up to service this huge growth in tourist numbers?
—Yes. Currently there are nearly eight million visitors coming to Dubai in an year. So we are talking about a 20 per cent additional growth from now until 2010. We can cope with these figures as there are plenty of additional rooms coming on the market. By 2010 Dubai Metro will be ready and there'll be less congestion on the roads. For the rest of the region it is difficult to say because we don't have the expected numbers.
—By how much is the hospitality industry being plagued by soaring constructions costs and diminishing returns? What about human resources?
—This is one of the biggest challenges that developers face today. According to recent studies on construction price escalation, construction inflation for 2007 was 20 per cent higher than 2006, this year it will be another 25 per cent and it is expected for 2009 to remain at 20 per cent. If we take all this into consideration it is safe to assume a hotel developer who developed a property in 2006 would have to bear double the cost in 2009 if he constructs the same kind of property.
Construction inflation is not the only challenge that we face. Land cost inflation is a bigger worry now. Across the GCC it is very difficult to find land at reasonable rates.
For us – hotel developers and people in the real estate – it is not at all easy to find the right formula or the perfect financial model to succeed in business. And this implies to all kinds of hotels whether budget or high-end one. Ultimately these rising costs are going to affect us. It will no longer be what developers use to expect. The time of 16-18 per cent returns is past and now we have to get used to a six-eight per cent rate. This also affects the pay-back period for us. Earlier the pay-back period for developers on their investments was within four to five years but now it has doubled.
—But isn't it easy for you to transfer the cost to your customers?
— Yes and no. Yes, if the market can sustain these high rates. It is the simple question of supply and demand. If the demand remains high as we see these days we should be able to offset the rising cost by higher room rates. But can we sustain higher average room rates when in a couple of years thousands of rooms are added to the market? That is the question.
—So, do you see demand going down in the future?
—All indications are that demand will continue to rise by virtue of many factors. Let us consider air expansion. Emirates airlines has aggressive expansion plans and so is the case with Etihad. Then we have budget airlines such as Jazeera and Air Arabia. The numbers of businesses are increasing in Dubai and across the region, especially at DIFC. Leisure projects, such as Bawadi will fuel the number of tourists coming here. These elements will sustain demand. Having said that, I would like to add we have the remote chance of security risks and political unrest in the region and this could affect demand.
—But you have chosen the safest places in the region to invest?
—Sovereign risk is of the utmost importance for any business. Any body would consider the level of safety in the territory he/she is going to invest in. The UAE and the GCC are safe investment havens, politically stable as well as economically strong with excellent growth potential. Any unrest in the region will have an impact on business not just in the GCC, but across Eastern Europe and South East Asia. During the time of the first Gulf War we did see a drop in the number of tourists coming to the region because people in North America and Europe see us on the map and to them we seem to be sitting close to those troubled areas.
—What is the difference between the operating expenses of a five-star hotel property in the region and a budget one and whose profit margins are considered better?
—The operating costs of limited service hotels are considerably less than 5-star hotels. The world limited is self-explanatory. There are no room service, no huge recreational facilities or elaborate dinning options. All of these help to reduce operation costs substantially. For five-star properties operation costs depend of the size of the property and its positioning. Limited service hotels also stand market ups and down much much better than five-star hotels simply because operation costs are much lower. It has been proven that in times of recession limited service hotels perform better than full service hotels.
—After Holiday Inn Express are you looking at other hotel brands as well?
—Our business plan says we plan to build 20 plus Holiday Inn Express in the next three to four years. If market can sustain we will build more Holiday Inn Express hotels and the sky is the limit. We could have 20 Holiday Inn Express just in Dubai, 10 in Abu Dhabi and five in Bahrain. As long as there is the market we will continue to roll them out.
We are looking to diversify both in terms of territory and portfolio. We are in discussion with the InterContinental Group for opening Holiday Inn Express across the GCC in the major cities. We are looking at other brands as well. We also do not want to be limited to budget hotels, but I don't see us doing high-end hotels as there is enough of it in the market. In the future tourists will look for value for money proposition rather than simple luxury.
—Where do you feel there is more demand for limited service hotels – in Dubai or Abu Dhabi?
—Abu Dhabi is booming. It is a similar situation where Dubai was 15 to 20 years ago. There is a huge demand for high-end properties, but I feel in three to four years the city will require limited service hotels.
— Which markets within the GCC are you most bullish on?
— Oman is a very promising market now. Its hospitality industry is undergoing many developments. Last year we saw an increase in revenue per available room to more than 50 per cent. This is staggering and does not happen in the world. We have planned four Holiday Inn Express in Oman – two in Muscat, one in Sohar and one in Salalah.
Dubai, on the other hand is a very mature market. Here we have close to 40,000 rooms while in Muscat the figure is close to 3,000. Qatar is up and coming.
Bahrain is a very established hotel market and the government is trying to reposition the country as more of a family destination and financial hub. This will help generate huge demand. Kuwait is a difficult market because there are not enough demand generators. There is no tourism marketing despite the government's efforts. It is a long way to go before they can get a concrete share of the tourism market. Until then it remains a corporate and seasonal market.
PROFILE: Sami Al Ansari CEO, Ishraq Gulf Real Estate Holding
Sami is a seasoned hospitality and real estate professional, with more than 25 years of regional leadership experience in the industry. Prior to joining Ishraq, Sami was the country general manager for Radisson SAS Hotels & Resorts in Jordan for three years.
Before that, for more than two years, Sami held the position of general manager property management with development giant Emaar Properties, as well as acting as Chief Executive Officer of Arab Supply and Trading Company's Real Estate Development arm – Oasis Management Co in Riyadh Saudi Arabia.
He had also held numerous executive positions in hospitality, including the general manager position with Holiday Inn Hotels for five years.