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May 02 2013

Dubai World Expo 2020 - what impact would it have on Dubai's accommodation sector?

In this article PKF The Consulting House summarise recent research into the likely impact of a potential World EXPO 2020 award on Dubai's hospitality industry. In particular, the analysis focused on and quantifies the associated change in supply and demand patterns in the Emirate by 2020.

Introduction

Although some less famous previous World Expo events did not necessarily fare all too well, there is no doubt that the ones that left a global mark had a significant impact on the host countries' economies and hospitality and leisure sectors.

The unique setting of Dubai, given its globally established hub position between East and West, means that it will perform at the global level. As with its generic business and tourism patterns, the comparably small population base (currently Dubai counts just above 2 million and the UAE in total approximately 8 million) indicate that Expo visitation will be driven primarily regionally and internationally.

An estimated 30 percent of all visitors (out of a total target of 25 million) are expected to come from the UAE, whereas the remaining 70 percent of all visitors will be international (according to EXPO 2020 Dubai organizing committee projections). Historically, the share of international visitors to World Expo events has been comparably small, e.g. Expo 2012 in Yeosu, South Korea at 5.5%, Expo 2010 in Shanghai, China at 5.8% and Expo 2008 in Zaragoza, Spain at 3.6%, whereas the international share for Expo 2015 in Milan, Italy is projected at an increased 30%.

According to projections by Oxford Economics, Expo 2020 Dubai is expected to account for a total economic output of nearly AED 142 billion with 277,000 employment opportunities being created between 2013 and 2021.At first sight, Dubai appears to be well geared towards hosting a mega-event, such as the Expo even within its city limits. Dubai's strategic location in between East and West with a third of the world's population living within three hours flight radius of the Emirate and the fact that Dubai International Airport is already one of the world's largest transit hubs and Al Maktoum International Airport will be ready to receive excess passenger traffic once the existing hub runs out of space over the next decade, all would ensure that Expo 2020 will be accessible to a wide potential audience.

Dubai's Hospitality Sector - Historic and Future Supply and Demand Dynamics

To assess a potential impact of the Expo award on Dubai's tourism and hospitality sectors, PKF have analyzed the "status quo" scenario by looking at the historic evolution of supply and demand patterns, as well as the short- to mid-term economic prospects of the Emirate, to determine likely future growth until 2020 (excluding the Expo event). The following summarises the key aspects for this scenario:

In 2012, the total number of guest arrivals to Dubai across all accommodation products stood at approximately 10.2 million, representing a 9% increase from the previous year.

Historically guest arrivals have grown at a compound annual growth rate (CAGR) of nearly 8% since 2002. Note: the total guest arrival figure captures both international and domestic demand (by nationality); the latter historically accounts for approximately 10% of the total.

According to latest DTCM data sets the total number of hotel and hotel apartment rooms in Dubai (hereof defined as hotel establishment rooms) stood at approximately 80,000 (across nearly 600 properties) at the end of 2012.

Historically, the number of hotel establishment rooms has grown at a CAGR of nearly 10% since 2002; Note: this figure includes a significant surge of new room supply associated to numerous projects which had been commissioned during pre-crisis years and completed between 2007 and 2010 (at an increased CAGR of approximately 18%).

Excluding these accelerated supply growth rates, the room supply growth growth since 2002 stood at a CAGR of approximately 7%.

When projecting annual demand (hotel establishment guest arrivals) growth forward at a prudent CAGR of 6% (similar to long-term World Travel & Tourism Council projections for the UAE and slightly below the historic CAGR), over 16 million guest arrivals could be expected in Dubai in 2020 even without an Expo.

Assuming a conservative CAGR of 6% for supply growth, by 2020 an additional estimated 50,000 hotel establishment rooms (or 200 hotels and hotel apartments based on an average size of 250 keys per property) could potentially come online in Dubai. This estimated figure includes the confirmed 17,500 rooms in the pipeline over the short-term (as widely stated in third party industry reports) and the additional supply growth associated to mega-projects, such as Mohammed Bin Rashid City.

Given the above (and irrespective of a potential Expo award), Dubai can likely sustain / absorb a significant increase in room supply over the mid-term. Under this scenario - based on a realistic average length of stay of 3.6 nights - the market-wide occupancy at hotel establishments would exceed 80% in 2020.

Thus, in this scenario (assuming that all "existing" demand for hotel establishment rooms in 2020 has already been met), approximately 25,000 rooms per day (the 20% unoccupied rooms) would remain available across the market and all categories to accommodate increased demand driven by dedicated Expo visitors to Dubai.

Dubai's Hospitality Sector - Impacts of Potential World Expo 2020 Award

In a next step PKF assessed a scenario where the World Expo 2020 is awarded to Dubai and analysed the potential impacts on the city's tourism and hospitality sectors.

The award of the World Expo 2020 would add a major attraction to destination Dubai and the UAE, whose tourism industries are already growing significantly faster than the world average, according to a recent report released by the World Travel & Tourism Council (WTTC).

Based on data from past World Expos, visitors not only visited the exhibition on multiple days but also commonly extended their trips to visit other attractions in the region. Similarly, visitors to other nearby tourist destinations, such as Oman, or transit passengers at Dubai's airports, would likely extend their stay and travel to Dubai to explore the World Expo. All these factors point towards a significant potential for increased visitation of destination Dubai even if not all of it would be totally new business.

The benefits to Dubai's tourism industry would be manifold. The accommodation sector would likely be one of the largest beneficiaries of the Expo event, whereas an influx of visitors would mean increased demand on Dubai's hotel establishment room supply. The food and beverage and retail sectors are also expected to benefit significantly from an increased traffic of leisure and business travellers congregating in Dubai for the duration of the Expo.

The next section summarises the key points PKF have taken into consideration for the analysis of a scenario where the World Expo event would be staged in Dubai in 2020:

Whilst no official data of previous World Expo's is available which tracks the exact increase of international visitor arrivals solely driven by an Expo event, PKF's research indicates that it would be a prudent assumption that an additional 20% of annual international guest arrivals would come to Dubai over the six (6) months period attracted by the World Expo 2020.

Given that and the estimated supply and demand dynamics for 2020, most hotel establishments would operate at close to full capacity with market-wide occupancy levels reaching approximately 90% in this scenario. Any increased demand levels over and above would put even more pressure on the limited room inventory during the Expo period.

Whilst the estimated total demand for rooms in Dubai could barely be met during the Expo period under that scenario, there will likely be peaks where all hotel establishments in the city would be fully booked. Hotels in other Emirates (primarily Sharjah and Yas Island and Saadiyat Island in Abu Dhabi) are the likely beneficiaries of excess demand (spill-over effect).

It should also be considered that international (Expo) visitors / tourists are likely to have a preference to stay in 3- to 5-Star hotels and standard to deluxe hotel apartments, resulting in an increased pressure on the existing supply or even a supply shortage (i.e. 100% occupancy) in the "better quality" segment.

Summary and Conclusions

Based on the outcomes of the preliminary analysis above (the "base case") it can be argued that Dubai's hospitality sector presents a potential development opportunity for further additional hotels and hotel apartments (mid- to long-term) over and above the gradually increasing "normal" room supply, in particular when taking a potential World Expo 2020 award into consideration.

To test the potential development opportunity, PKF have factored in an additional 5,000 - 10,000 rooms - beyond the already projected upcoming supply - to be developed in between 2016 and 2020. Under this scenario an estimated additional hotel establishment room supply of approximately 55,000 - 60,000 units (equivalent to 220-240 hotel establishments at 250 keys per property) would come online in between 2013 and 2020.

With an estimated increased cumulative room supply (as presented above), Dubai's hotel establishments would likely be able to absorb and accommodate additional demand growth driven by the World EXPO 2020 event. Under this scenario, market-wide occupancy levels (across all hotel establishment categories) would still exceed 80% by 2020 (with the 3- to 5-star segments outperforming other categories.

Exhibit 1 illustrates the historic evolution and future projection of supply and demand patterns at Dubai's hotel establishments (hotels and hotel apartments) between 2002 and 2020. The scenario accounts for the potential award of the World Expo 2020 to Dubai.



The "base case" scenario presented throughout this article and in the graph above, summarises the outcomes of a preliminary analysis. Further detailed analysis will have to be undertaken to assess the implications of potential increased and decreased room supply scenarios as well as demand growth patterns.

PKF emphasise that additional analysis looking into peaks and troughs during the Expo period should also factor in the neighbouring Emirates' potential (in particular Abu Dhabi and Sharjah) to accommodate any spill-over demand from Dubai. In return, it should be assessed if visitors predominantly staying in other Emirates in 2020 would also present potential additional demand for the World Expo 2020 event and Dubai's accommodation sector.

Given the discussions relating to Qatar and the FIFA event, it will also be essential to assess the post-Expo scenario and the long-term impacts for destination Dubai (and its corresponding tourism and hospitality industries) of hosting such a prestigious mega-event in the city. Based on the research summarised herein, it appears that Dubai has nowhere near the issues that Doha has in terms of having to develop additional hotel supply which then has to be sustained post event in innovative models.

PKF The Consulting House are business advisors to the hospitality and property sectors based in Dubai and operate under the oldest established brand name in the industry. Their services are focused on the needs of owners, investors and developers of hotel and tourism related real estate projects. Core services cover real estate strategy, fully fledged project development management, business valuation, operator selection and feasibility & market studies. For details please refer to www.pkf-tch.com.

© Press Release 2013


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