The future looks bright for Dubai's budget hotel market according to a new report by industry body Jones Lang LaSalle (JLL), but high investment costs, economies of scale and performance across different demographics throws up several challenges.
JLL's Q3 2010 report indicates that the emirate's hospitality sector has largely been dominated by the luxury model, with over 60 per cent of the stock in four- and five-star rating.
Over the first nine months of 2010, the market broadened its scope with six additional budget hotels adding to the mix, with a total of 1,780 rooms.
Homegrown hotels
While international names such as Ibis by Accor, Express by Holiday Inn, Premier Inn and Easy Hotels invested into this market, Dubai also witnessed the growth of homegrown brands Centro by Rotana and Landmark Group's Citymax.
In an interview with Emirates 24|7 earlier, Landmark's Chairman Micky Jagtiani announced plans to launch 12 mid-market hotels this year.
Signalling a Dh1 billion investment across these dozen properties, or an estimated 2,500 rooms, the group's chairman also confirmed plans to launch new hotel brands in the near future.
"Our strategy is to open 12 mid-market properties in the UAE by October under our Citymax Hotels brand, combined with some joint ventures and acquisitions," he said, adding: "We have four Citymax Hotels planned - one of which will be a joint-venture with the established Byblos Hotel."
The investment is a significant increase from the Dh450 million and three mid-market hotels Landmark earlier announced.
Meanwhile, the Abu Dhabi-based Rotana plans to open 25 properties of its Centro budget brand by 2014, with five hotels based in the UAE alone. Another five have been signed across Oman, Saudi Arabia and Lebanon, while 15 others are under negotiation.
"We have already opened the Centro on Yas Island, Abu Dhabi, along with Centro Al Barsga," Omer Kaddouri, Chief Operating Officer of Rotana told Emirates 24|7 earlier.
"November will see the opening of Centro, Sharjah Airport, with another two planned for Abu Dhabi - near the airport, opening Q3 2011, and the Capital Gate."
Kaddouri added that once opened, its three-star brand should add 1,000 more rooms to the UAE market.
Challenges faced
Yet, even with major hospitality brands investing money into the market, the JLL report highlights that in order to be profitable, budget hotels need to apply a stringent cost model with low running and limited construction costs.
"The successful development of a budget hotel must comply with strict development guidelines - room size, public areas, food and beverage facilities. The sector often uses modular buildings to maximise efficiency and minimise construction time", the report states.
Economies of scale is another challenge that is underlined. With more limited profit levels per key but potentially higher profits per square metre than some mid-market options, the report states for a successful development in the budget and economy sector, companies will need to push more units into the same area in order to create the opportunity for economies of scale.
The JLL report further adds that the correction of average daily rates across all segments of the Dubai market has had an impact on budget hotels' performance. In the long term, budget hotels generally achieve relatively stable occupancy rates across both good and difficult economic periods. During periods of strong economic growth, they tend to profit from growing weekend and leisure demand, while weak economic periods are often characterised by a growing number of business guests looking to cut costs.
Strong future growth
Historically, the branded budget market segment had been largely non-existent in Dubai prior to the financial correction of 2008, which has increased the appeal of budget and economy hotels.
This resulted in the completion of nine projects with 2,700 rooms over the past two years, increasing the budget hotel stock by 175 per cent, according to JLL statistics.
This sector is better aligned with the more cost conscious mindset and has been perceived as the next investment opportunity in the hospitality sector.
And despite current problems highlighted, industry analysts predict the budget sector is expected to mature into an important sector of the Dubai market. This positive change is also expected to broaden the attraction of the emirate and open up the market to new sectors of demand that were previously being priced out of the market.
By Bindu Suresh Rai
© Emirates 24|7 2010
