The year in review

Industry experts look back on the highs and lows of the Middle East hotel sector in 2010 and comment on the trends expected to continue to impact development and operations in 2011

There are two words that crop up repeatedly when looking back on the performance of the Middle East hotel industry in 2010. These are supply and demand. Generally speaking, it is largely this relationship between the number of hotel rooms available and the number of people that want to stay in them that has dominated the hotel landscape over the past year. For more developed markets, such as Dubai and Doha, it posed real challenges when it came to increasing occupancy and RevPAR, but for other upcoming or evolving destinations, namely Beirut and Cairo, the hotel industry has flourished.
According to MKG Hospitality director of development Vanguelis Panayotis, the impact of the economic downturn was intensified in the region because it coincided with “the middle of a supply boom” and affected major feeder markets.

“The region also heavily relies on international tourism, and in most cases, upscale (i.e. up market leisure and corporate). These were the two worse affected areas by the global crisis,” said Panayotis.

As a result, the main challenge faced by hotels in 2010 was to build average daily rates up again and control operating costs in the meanwhile, according to Viability director Guy Wilkinson.

“This problem was exacerbated for hotels in weak or oversupplied markets, and especially those in secondary locations, which also had to fight for occupancy,” he said.

Destinations with a strong domestic market were a lot more resilient, added Panayotis.

“Countries outside the GCC have performed best thus far this year (year-to-date September 2010), such as those in the Levant, North Africa and Turkey,” continued Panayotis. “These destinations are a lot more focused on mass tourism, able to offer very attractive and usually all inclusive packaged deals — a decisive factor for foreign travellers during the economic hardship, who also opted to stay closer to home. These destinations are also quite successful with intra-regional travel, for similar reasons and due to their cultural similarities. Furthermore, they tend to be much larger markets, therefore have greater domestic input, particularly relevant for business related segments.

“Overall in the MENA region, greatest RevPAR growth was recorded in Tunisia at over 20%, followed by Turkey at 18%, Egypt 15% and Morocco 8.5%,” revealed Panayotis, referring to MKG’s market observatory HotelCompSet.

“In the Middle East, only three countries record growth. Jordan proved to be the star performer, with RevPAR increasing by almost 11%, followed by Saudi Arabia at 9%, boosted recently by a major increase in prices during Ramadan, and then Bahrain with 5% RevPAR growth. Meanwhile, the UAE has recovered much ground from its sluggish performance, with demand growing and the drop in average prices slowing down.

“Overall, occupancy rate (demand) is generally stabilising in the region, and the decline in average daily rate slowing down. RevPAR growth should continue to improve for the rest of the year and pick up pace in 2011 and beyond,” Panayotis observed.

Sector leaders

An increase in budget offerings in many Middle Eastern countries has made a major impact in 2010, our experts noted.
Both Roya International chief operating officer Gerhard Hardick and HVS Global Hospitality Services Dubai managing director Hala Matar Choufany identified budget and four-star hotels as the best performing sector in 2010.

Panayotis added: “Economy and midscale hotels seemed to have produced more promising results, as they were in the best position to receive the spill over demand from higher categories when the corporate sector and leisure travellers cut back on expenses. Hotels that focus more on business segments certainly suffered more, whilst those that were offering affordable all inclusive packages were able to maintain more respectable demand levels”.

Interestingly though, TRI managing director Peter Goddard said that “four star hotels oriented towards business travellers” performed best in 2010.

Charles Bott, executive director, hospitality at British Arabian Chartered Surveyors, noted achievements in a range of sectors, including: “budget hotels, because these hotels reached their stabilised trading occupancy and rate during 2010; resort hotels, because the hotels on Jumeirah beach achieving 90%+ occupancy speaks for itself, but they had to drop their rates by up to 20% to do this; and serviced apartments, which had a successful year because international travellers saw them as an alternative means of accommodation with greater flexibility and superior value for money”.

Rate war
Limited service hotels may have performed well in 2010, but their growth also contributed to the Middle East’s much talked about and analysed “rate war”.

According to HVS’s Choufany, the rate war was the greatest challenge faced by hoteliers in 2010.

“Some considered this as a survival strategy and it has served a few hotels better than others, namely corporate hotels. However, rate war will not always necessary result in increased visitation as the hotel expense is only one expense when considering a holiday. Cities such as Dubai were able to offer even reduced airline fares in order to encourage intra-regional travel,” said Choufany.

According to Panayotis a “rate war” was inevitable considering the supply and demand ratio, but he says this was borne out of necessity rather than an actual desire to undercut competition.

“Over the last 16 months or so, HotelCompSet has revealed never-before-seen drops in average daily rate. Although this alone is evidence that there was fierce competition with prices, I would not say that it was a rate war, but rather a necessary revenue management strategy in order to capture a slice of demand,” said Panayotis.

“Operators have a lot of experience, and have faced previous downturns to know how to handle the situation. When demand decreases to a certain level, close to breakeven point, unfortunately it’s almost impossible to avoid a price war. It happens automatically,” Panayotis added.

“At some point, hoteliers were forced to lower their rates in an effort to stimulate demand and increase occupancy rates. Finding the right balance helped prevent RevPAR deteriorating any further. New creative packages appeared, together with greater emphasis on the domestic and intra-regional market. Soon, when demand is at the right level, hoteliers will be able to increase rates and boost overall revenue,” he asserted.

But according to Charles Bott, the war isn’t over.

“I think there will be a greater rate war in 2011 due to an increased room inventory, new brands coming to take their share of the pie and the current budget brands increasing their openings,” said Bott.

Continuing into 2011

Pressure on rates won’t be the only challenge to creep into 2011. Hotel openings and slow recovery (if any) from the main source markets will continue, affecting markets such as Dubai, Abu Dhabi, Bahrain and Qatar, said Choufany, while Bott noted the challenge of manpower supply for the new properties.

Generally though, the consultants Hotelier spoke with were upbeat, acknowledging that the market was in the recovery phase, with further stabilisation expected in 2011 — as predicted at the end of 2009.

“Each country is in a slightly different situation or position in terms of the hotel cycle. Generally, the main challenge will be to sustain demand,” said Panayotis. “We know from previous trends that once occupancy rate (OR) is well and truly stable and on an upward trend, hoteliers will be able to increase rates and in turn average daily rate (ADR).

“This will allow RevPAR to grow. However, the real test will come early next year, when hoteliers will have to compare key operating indicators to 2010, a year that experienced a recovery, albeit modest. Assuming the global economy remains stable, then there is no reason why progress in the sector cannot be maintained.”

At the development end of the hotel industry, there are also challenges, from low values per room to a lack of foreign investment, but in the long-term, the opportunities are still huge, asserted Guy Wilkinson.

“Non-availability of debt financing continued to hamper project development, forcing hotel developers to delay or cancel hotel projects, to reallocate equity funds from other projects, and in some cases vice versa, to resort to selling major hotel assets to cover other investment or debt commitments (like Union Properties’ Ritz-Carlton project at DIFC).

“Falling room yields in most Middle East markets over the past two years mean hotels take longer to pay back. Funding has been much more difficult to arrange and many people have started taking a longer-term perspective regarding their investment strategies.

“Hotel developers will, therefore, continue to open new properties at a more measured pace, in my view, wherever it is in the region that they are planning new projects, and I would expect to see more delays and postponed openings. Bear in mind that hotels typically last a good few decades, so if one is being built as patrimony for the next generation — as effectively many are — what’s the hurry?

“The hot markets for development include Saudi Arabia, Abu Dhabi, Doha and Egypt. Many people are interested in Libya, which has huge potential as a global beach and cultural destination. There is much debate about Dubai, but some, including myself, feel it has established such excellent infrastructure and evidently still has such strong market prospects that it may experience an under-supply of hotel rooms again in just a few years more,” concluded Wilkinson.