Bumper hotel delivery precedes age of inertia
If business jet-setters haven't yet had their socks knocked off by the extravagant hospitality and meeting venues in the United Arab Emirates, the incoming supply of hotels might just do the job; set to break new records and cater to every possible (and impossible) whim of future visitors, the billions of dollars currently being poured into the emirates' hospitality sector will change the face of regional tourism.
According to STR Global's February 2011 report, 432 new hotels containing some 118,454 rooms are in the MENA pipeline, the bulk of which are under construction in the UAE, (62 percent as of 2010) followed by Saudi Arabia and Qatar. By 2013, more than $6 billion [AED 22.03 billion]of hotel development and construction should be delivered in the region, creating new niches for business, leisure and religious tourism in expanding markets like Saudi Arabia, Oman and Morocco.
For now, as bank financing in general is tight for real estate projects in the UAE, the seasonal peaks and troughs of the hotel industry mean that investors, operators and government officials need to be creative in order to expand and diversify the tourism market in the emirates, so that each player may complement the others in a mutually beneficial way.
Playing catch up
Though the capital has wisely never been in the same hurry as Dubai to get things done, Abu Dhabi is working hard to create tourist attractions and infrastructure to support the upcoming hotel boom and diversify its cultural and marina tourism.
Major projects such as the Formula One circuit and Ferrari theme park on Yas Island, together with the museum district on Saadiyat Island, which will have the Louvre and the Guggenheim setting up shop by next year, will help to ensure adequate demand for the area's large pipeline of hotels; some 1.5 million visitors are expected yearly once Saadiyat Island is completed in 2018.
Lawrence Franklin, strategy advisor at Abu Dhabi Tourism Authority (ADTA), said the current projects in the works may lead to an oversupply of accommodation, but will allow for a fundamental shift in tourist attraction capabilities.
"This year we're going to have about another 4,000 hotel rooms added to the stock we already have, which is over 19,000. In 2010, we had 2,300 rooms added to our accommodation stock. All of our supply was quite needed; we were already running at a very high occupancy rate and had very high room rates, which was impacting our ability to compete as a business destination and particularly as a leisure tourism destination."
According to Franklin, the ADTA attempts to control supply by regulating the distribution of hotel licenses so that general occupancies are maintained at a range of 65 to 75 percent to maintain a healthy return for investors.
Here come the big guns
Abu Dhabi is flexing its muscles to bring glamorous names to its hospitality industry, a must if it is to compete with Dubai. As Sowwah Square will be the new financial center of the emirate, its master developer, Mubadala, has aligned with well-known hospitality names to bring Viceroy (of which Mubadala owns a 50 percent share), the Four Seasons and Rosewood hotels to the area. In April, Abu Dhabi-based Reem Investments made its debut into the hospitality market with the first Nobu Hotel, a partnership with the eponymous famous sushi retreat of London which will be built at Najmat, on Abu Dhabi's Reem Island.
Not to be outdone, Dubai is to welcome the largest owner and operator of gaming venues in Las Vegas, MGM Resorts (of which Dubai World owns a 5.3 percent share). MGM will manage non-gaming versions of its famous three brands -- The MGM Grande, Bellagio and Skyloft -- in Dubai Pearl, providing a total of 630 rooms and suites which will be linked to the retail and entertainment aspects of the $4 billion development. MGM Mirage, the hospitality division of the company, will operate the resort-like projects on the 1.858 million square-meter city-within-a-city, while Dubai Pearl will own the properties and finance the operations.
David Vely, MGM Hospitality senior vice president of operations for the Middle East and North Africa, said that because the brand's proportion of revenues relies more heavily on food, beverages and entertainment (mainly driven by celebrity chefs) than the typical 20 percent generated by most other hospitality groups, it is important for them to count on a high-end, mixed-use location to attract both leisure and business tourists to their entertainment venue.
MGM Hospitality was also to have its three brands in Mina Zayed (an upcoming waterfront mixed-use district in Abu Dhabi), but is now re-assessing with investor and developer Mubadala, as the plan for the MGM Grande hotel is being reviewed.
Also forging an empire in the region is Kempinski Hotels -- owner and operater of 62 hotels globally -- with plans to open nine properties in the next three years in the UAE, Bahrain, Saudi Arabia, Oman, Lebanon, Syria and Egypt. Though 82 luxury serviced apartments and 10 villas were planned for completion on Palm Jumeirah in June, the project will be delayed by two years, with the company blaming authorities for issuing too many hotel licenses and creating a supply-demand gap.
Meanwhile, home-grown hotel operators such as Rotana Hotels, based in Abu Dhabi, and Dubai-based Jumeirah Group are not letting the international chains steal their thunder. Rotana's Middle East expansion will see 72 hotels open by 2012 (see interview page 34), while Jumeirah Group plans to open a more modest three new hotels in the GCC this year, though the hotel operator confirmed by email that they were targeting future development plans in Jordan, Qatar, Al Ain, Morocco, Egypt, Oman and Syria.
Financing falls behind
Though Jones Lang LaSalle predicted in a March UAE real estate trend report a shift toward budget hotels and smaller community center malls, rather than extravagant large-scale projects, the new 1,614-room JW Marriott Marquis Hotel Dubai, and Al Habtoor Group's 2,000-room hotel plans on a nearby plot on Sheikh Zayed road suggest that large-scale projects are still in the works for the time being.
The UAE's Al Habtoor Group, which owns seven properties between Dubai and Beirut, announced in January that it will finance, build and manage what will be the emirates' largest hotel, with the first tower of about 800 rooms to open later this year. But this may be the last of its kind for a while. The current crop of projects were all funded before the crisis of 2008 and investors in todays market are far more reserved.
"Most of the 'mega-projects' left from the boom do not have such commercial logic to them. I would expect to see few other mega projects of this kind opening in the UAE for the foreseeable future, as they don't make much sense in the current commercial climate," said Guy Wilkinson, partner and general manager at hospitality consultancy Viability Consultants in Dubai.
Experts predict the staggering hotel pipeline for the UAE will be met by increasing demand in the long term but Wilkinson doubts any immediate resurgence of confidence in the hotel investment sector, with many projects on Palm Jumeirah still stalled.
"The investment system itself has changed a lot as a result of the recession, with banks remaining highly reluctant to lend on even relatively 'sure-fire' projects, so I expect hotel development to remain slow and cautious," he said.
In fact, one of the only major signs of returning confidence for hotel investors was the $115 million loan from Standard Chartered in December 2010 to complete the Fairmont Palm Jumeirah by the first quarter of 2012, the first foreign debt deal to a Dubai hotel since the sector plunged after the financial crisis.
The investment arm of IFA Hotels & Resorts owns Dubai's Fairmont Palm development and is one of the largest hotel investors and developers of mixed-use properties worldwide. Joe Sita, president of IFA Hotel Investments, said that the lack of liquidity is changing financing strategies in the region: "What we're seeing is that companies who may have previously considered diversifying into the sector are reassessing and deciding instead to focus on their core strengths," he said, adding that private equity is becoming more of an option as investors cannot count on debt from banks.
Wallet opportunities
The operational profits of many hotels have reduced significantly since the boom; rates have spiraled downward, creating a similar pattern in investment return expectations. As institutional ownership is far less prevalent than in other developed tourist markets (there are no portfolios owned by pension funds), investors "should distinguish between luxury hotels and mid-market or economy hotels, which have arguably come into their own in the current price-conscious conditions," said Viability's Wilkinson. "Due to their lower construction and operating costs, their profitability is significantly higher in percentage terms than that of luxury properties, and their investment returns will surely have been much less affected [by the financial downturn] as well."
Though many Dubai projects stalled in the first quarter, Sita said he still believes that "Dubai is a great investment market right now because its political climate is stable, its values are still suppressed and yet tourism continues to increase."
IFA offers promised returns through condominium ownership in the Middle East, where the majority of its investors pay cash.
"Our product is unique in that our customers buy directly into a branded hotel room, so it's not really comparable to similar products in the MENA market which normally focus on apartments," said Sita. In the case of IFA's Movenpick Hotel & Residence Jumeirah Lakes Towers, investors are guaranteed a rate of return of 8 percent for the first three years. Though few investors are biting at hotel ownership deals these days, according to Harbinjer Singh at CBRE Hospitality in Dubai, most are waiting for a period of sustained month-on-month growth to demonstrate that the market is indeed back on track.
Bird's-eye view
While the UAE has been largely unaffected by the surrounding turmoil, the ripples have reached its shores. "I see Turkey and Sub-Saharan Africa as being of more interest to investors while the unstable [regional] situation continues," said Mark Wynne Smith, chief executive officer of Europe, the Middle East and Africa at Jones Lang LaSalle Hotels. For both business and traditional tourism markets in the region, infrastructure improvement throughout much of the MENA has the potential to heighten competition between neighbors and possibly dilute potential profits. According to Wynne-Smith, who sees Chinese and Indian travelers as providing increased demand in the near future, regional economies will be aggressively jockeying for visitors. "It is a question of continuing to fight for a share of the growing market for accommodation," he said.
© Executive 2011
