News Analysis: UAE and Saudi Arabia's hotel investments

The Middle East hospitality industry — particularly that of Saudi Arabia and the UAE — is booming, with 583 hotel projects under contract as of August, according to data from STR’s latest Pipeline Report. According to the figures, the UAE and Saudi Arabia remain the region’s most active hotel construction hotspots.

The Kingdom has 40,020 rooms in 89 projects in the construction pipeline, while the UAE has 35,050 in 121 projects.

With the UAE enhancing its role as a global leisure, tourism, and entertainment hub, the country is set to welcome 25 million visitors for Expo 2020 Dubai, and draw US $44 billion in international tourism receipts by 2020, or 51% growth from 2016, according to a study by BMI Research.

Due to mega-projects, such as the UAE’s Bluewaters Island, Expo 2020 Dubai, and the Warner Brothers theme park, the Middle East and North Africa’s $4 trillion construction market is the world’s fastest-growing, according to reports by BMI Research and PwC.

So it comes as no surprise that owners wish to invest. Dubai recorded the highest RevPAR performance at $209 within the MENA region, according to The EY Middle East Hotel Benchmark Survey report. The emirate has continued to focus on increasing tourism by means of meetings, incentives, conferences and exhibitions  events, leisure attractions, exhibitions and conferences, a diverse hospitality supply, and revised visa policies, which have all contributed to its current performance.

Hotel brands, ranging from the Marriot conglomerate and Kempinski to Rezidor’s Raddison Blu, and the Address Hotel and Resorts, have all announced massive pipelines for both Saudi Arabia and the UAE. 

Emaar Hospitality Group, for example, revealed plans to build the 12th Dubai Address hotel project. With its two other hospitality brands, Vida Hotels and Resorts and Rove Hotels, Emaar Hospitality Group now has 11 operational hotels and 28 hotel projects in the pipeline, in Dubai and markets like Saudi Arabia, Bahrain, Egypt, and Turkey. 

Additionally, international brands such as Paramount Hotels in partnership with Damac and Bellagio are set to make a much anticipated debut in the UAE. Paramount Pictures, one of the oldest film production companies in the world, has stepped into the hospitality industry under the brand name ‘Paramount Hotels & Resorts’. Located in Downtown Dubai, the $1.35bn hotel and serviced residences project is being developed by Damac in partnership with Paramount Hotels and Resorts.

“Bringing a Hollywood-inspired lifestyle to Dubai to an iconic development in the heart of the city, Damac Towers by Paramount Hotels & Resorts offers everything that residents look for in a premium and fashionable living space — from easy access to high-end shopping and dining experiences, to all the luxuries that come as part of the Paramount brand,” Niall McLoughlin, senior vice president, Damac Properties said earlier this year.

A beachfront development in Dubai, featuring an MGM Hotel, MGM Residences, and a Bellagio Hotel, will mark the debut of the iconic MGM and Bellagio brand names in the Middle East.

So it looks like the next few years will be particularly busy. A majority of the new hotels entering the market will open before 2020, according to the Middle East Hotel Construction Overview report prepared by Tophotelprojects, which also found that 2017 promises to be the busiest year leading up to 2020, with 189 projects and 58,527 rooms forecast.

A recent Hotelier Middle East poll conducted at the AHIC Advisory Board found that mega-developments, such as Saudi Arabia’s Red Sea Project, or UAE’s Jewel of the Creek, are attractive investment options for hospitality. 

Spurred on by targets set out in Saudi Vision 2030 and related diversification efforts, developers in the Kingdom have joined the development spree, exploding onto the scene with a plethora of high-profile hospitality projects during the past year. Saudi has the most hotel rooms under construction in the MENA region, according to analysts STR.

Most of development, however, is contained to the two cities of Makkah and Madinah. Among the dozens of new hotels being built there, Abraj Kudai is expected to be the largest, with 10,000 rooms, when it opens later this year.

But it’s not just investors, it’s also operators who are keen to be in these countries. According to the data collected through the annual Hotelier Middle East GM Survey [see pgs 40-45], the UAE and Saudi Arabia were deemed hotspots by the general managers in terms of attraction of operating a property there. The GMs who answered our survey said Saudi Arabia, and specifically Makkah, is where they’d like to be. 

Marriott International, the world’s largest hotel operator, has more than 10,000 rooms in 30 hotels in its Saudi pipeline. Alex Kyriakidis, president and managing director, Middle East & Africa, Marriott International, said that the massive redevelopment of the holy cities was attractive to hoteliers and investors.

The UAE is not far behind in terms of hotel investment. Dmg Events Middle East reports that the total value of active hospitality projects in the UAE reached AED262.7 billion ($71.6 billion) at the beginning of September.

But it’s not just the luxury hotel market that is booming. The mid-market segment has seen an exponential rise in the region and it continues to be identified as offering significant opportunities for owners and operators alike. 

There are 40,231 rooms in the luxury segment in the Middle East and 60,909 in the upper upscale chain, compared to 17,914 rooms in upper midscale chains and 15,991 rooms in midscale chains, as of January 2017. There are 12,571 rooms under construction in the luxury chain segment and 2,897 rooms under construction in the midscale chains.

STR managing director Robin Rossmann at AHIC 2017 provided insight into mid-scale hotels’ pipeline and performance in the GCC, revealing that mid-market supply is set to match luxury by 2021. And major hoteliers in the region agree with his assessment. According to Rossmann, the mid-scale has out-performed the ‘upscale & upper md classes’ and ‘luxury & upper upscale classes’ since 2011 across the GCC.

“Testament to the potential for the mid-market in the Middle East is the launch of US-based hotelier Choice Hotels International in the UAE and Saudi Arabia, with a pipeline of seven signed hotels already and many more to come,” STR board director and AHIC co-founder Jonathan Worsley added.

IHG CEO India, Middle East and Africa, Pascal Gauvin, declared that while there will always be a need for luxury hotels in the region, the company was currently focused on the mid-market segment “in order to fill the gaps in the market”.

“It is clear that in the luxury segment, the capital costs are high and the ROI is not necessarily high and/or immediate. The mid-market segment on the other hand has lower capital expenditure and does provide high return on investment in a shorter span of time. Given that there is a lack of quality mid-scale hotels in the market, the returns can be delivered in a shorter period,” Gauvin said.

Mid-scale hotel brand Park Inn by Radisson debuted in the city of Makkah in Saudi Arabia with the opening in Makkah Al Naseem earlier this year. Mark Willis, area senior vice president, Middle East, Turkey & Africa for the Carlson Rezidor Hotel Group, and one of Hotelier Middle East’s Top 50 hoteliers, said in a statement, “This is a significant hotel addition not just for the Park Inn by Radisson brand but for the Carlson Rezidor Hotel Group, as we now begin to see our strong development pipeline across Saudi Arabia materialise, with multiple hotel openings coming to fruition in the next 18 months.”

The group also recently announced plans to open the world’s largest Radisson Blu and Park Inn by Radisson hotels in Makkah. The operator remains on track to achieve its target to operate 100 hotels across the Middle East by 2020.

However, with the implementation of VAT on January 1, 2018, it’s yet to be seen if its implementation will affect hotel investment decisions in the region. A question Hotelier Middle East asked to a pool of 30 members of the AHIC advisory board this year was whether the implementation of VAT from 2018 will affect hotel investment decisions — 47% said it would, while 20% were not sure yet. One-third said it would not.