As the world's economy slows down, how is Dubai's previously thriving tourism sector holding up? Philip Fenton reports
The UAE, and Dubai in particular, is a haven for tourists. With Dubai the name on everybody's lips, thanks to an extraordinarily successful marketing campaign, the biggest problem the emirates seemed to be faced with was building hotels fast enough to accommodate all the would-be tourists.
As a result, Dubai had the world's highest average room rates in August this year at US$290 a night, according to a report by STR Global. That's August, when temperatures can reach the 50s and hotel taps offer a choice between hot and really hot water. With the much-publicised opening of Atlantis to look forward to it, appeared that the UAE was well on track to reach its tourism prediction of 18 million tourists by 2015, with 15 million of those heading to Dubai.
But things have changed in the second half of this year.
The collapse of sterling and the dramatic increase in the strength of the dollar, and therefore the dirham, has meant that visitors from Europe the UAE's key market are suddenly finding prices in the UAE about a third higher. And that comes at a time when people worldwide are worried about their jobs.
Although it is too soon to know any figures, the result has been a noticeable downturn in the number of tourists.
Deloitte has revised its growth prediction for the nation's tourism industry for next year from 15 percent to five per cent. Meanwhile The National reported, as Commerce went to press, that Russians another key market are cancelling their winter breaks in droves.
"We've had near 100 per cent cancellations from tour groups in Russia," said Mahmoud Saffarini, the business development manager at The Cove Rotana. And the general manager of one Dubai hotel says occupancies are down.
"We've noticed a downturn and we are re-forecasting for next year. We're looking at what the worst case scenario could be and trying to control our costs.
We were projecting 14 per cent growth year on year and we've now cut that to three per cent. That's still not a disaster, but we'll have to wait and see if we need to cut it more."
One hotel manager tells Commerce privately that he doesn't want to drop his rates because it will take a long time to put them back up when the market picks up "in a few months".
However, the manager of another hotel, which has cut its rates already, says many of his colleagues appear to have their heads in the sand.
"Some hotels are in denial, I have no doubt about that," he says. "We've had a fantastic run over the past few years and there are some who don't seem to believe it could end. Ever since the summer, the industry has been having to work harder, but there's been a reluctance to drop rates because there's a feeling that could devalue a hotel and the whole brand of Dubai."
He believes it is only a matter of time before rates start to come down, whether hotels like it or not.
"That argument will only last for so long as revenues start to drop. My argument has always been to get people on the door then try to make money out of them from F&B. You need to look at all aspects of the business, not just rooms, and I think you'll see more of that."
The head of interior contractor DEPA says that hotel developers too appear reluctant to face up to the changing market conditions. "We are at the denial stage where lots of developers know for a fact that their projects should be cancelled and they're either not announcing it or they're saying it's going to be delayed," CEO Mohannad Sweid, told the Nasdaq OM X Investor Conference.
"What we have had in the GCC in the past three years is the difference between reality and nonreality.
Our market research showed there will be 280 new hotels built over four years within the GCC . That was advertised all the time... If we look at the reality how many hotels have been delivered it's hardly more than five or six hotels a year," he said.
Budget hotels may well prove to be the winners though. No matter how bad the economy there will always be visitors to the UAE, whether holidaymakers, business people or those visiting relatives it's just that they may not want to stay in a five-star hotel.
According to a recent study by Lodging Econometrics, just 15 per cent of hotels in the region are budget properties.
Christophe Landais, the managing director of Accor Hospitality group, told The National that apparent shortage, coupled with the current economic situation, could be good news for hotels like his.
"That's why I believe that this is a boom time for the budget operators to fill in this gap," he said.
As Commerce has previously reported, developers have been reluctant to invest in cheaper hotels, in part because of their lack of prestige. As a result they have earned a questionable reputation in the UAE, with many three-star hotels privately owned and poorly maintained.
John Airey, the executive director of Nakheel Hotels, which bought the regional franchise of easyHotels, told The National that he believes mid-market hotels are the way forward.
"That's it, the gloves have come off and the tables have been turned in this market and we will see a lot more doors open for budget hotels because this is the product that people want right now," he said.
Mark Lee, the general manager of the three-star Arabian Park Hotel, feels he is comfortably placed to weather any storm. "The mid-market hotels will do better because people will be looking for value.
Some of the five stars have lowered their rates, but we haven’t seen summer prices yet, when the five stars lower their rates to the point that they begin to compete with us,” he said.
“If it’s a race to the bottom, we’re quite well positioned because our fixed costs are lower than theirs.”
It is far too early to tell whether the downturn in hospitality is temporary or not, but rumours of people being asked to take their annual leave now, unpaid leave and even job cuts have begun to circulate.
True or not, the perception of falling on hard times can be damaging for morale. The manager of one Dubai hotel told Commerce how he had to call a meeting with his housekeeping staff to convince them that they weren’t about to be made redundant. Occupancy in that hotel was down from just over 98 per cent in November 2007 to 88 per cent in November this year.
The current economic climate is not the only reason that hoteliers are finding it harder to fill as many rooms: there are simply more rooms to fill. Dubai has set itself an ambitious target of attracting 15 million visitors a year by 2015, and that has necessitated an enormous building boom. The planned Bawadi development alone will add 6,500 rooms to the city.
Most of the planned new hotels are not yet open, and in the current climate developers could be forgiven for taking their time. However, slowly but surely the number of rooms is on the increase. That’s a factor that some hotel managers blame for spreading the UAE’s guests thinner. Visitors might argue that some competition might be a good thing if it brings to an end the days when hotels could, to a large extent, charge what they liked and still enjoy occupancies in the high 90s.
The general manager of one Dubai hotels believes those days may already be behind us. “Hotels here are becoming more dependant on travel agents to bring them business,” he says. “Until recently you could work with one or two and to some extent ignore the rest, but we have to work much more closely with them now.”
His sales and marketing manager used to have travel agents come and visit her to ask for more rooms to sell.
Now she has to visit them herself, sometimes waiting her turn alongside representatives of other hotels, all hoping the tour companies will throw them some business.
“There was a time when you could almost name your price and the travel agents had to accept it,” she says.
“Now we’re starting to see travel agents saying ‘we want this rate, take it or leave it’.”
© Commerce 2009
