The year in review

Guy Wilkinson and Gerhard Hardick identified Makkah Clock Royal Tower ? A Fairmont Hotel, as one of the most important openings of 2010. Wilkinson us

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.

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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.