Counting the cost of recession

As a hospitality market, Dubai was perhaps hit harder than many destinations during 2009, and while all indications are that the worst is over, questions remain as to how supply growth will affect recovering rates — and if summer will be the ‘bloodbath’ predicted. Kathi Everden reports

The sun continued to shine, residents revelled in the easing of traffic congestion and the availability of restaurant reservations, and the disappearance of some of the cranes that littered the landscape added to the attraction of Dubai as a destination.

But, for hoteliers, developers and investors in Dubai, 2009 was anything but a stellar year as they watched the real estate market collapse, corporate and government debts rack up, demand shrink and the emirate making global headlines for all the wrong reasons.

Certain aspects of the situation were not unique, with the hospitality sector worldwide seeing rates retract to those of 2003, but the pain was acute in a city where a certain arrogance among hoteliers had prevailed, borne out of spiralling demand and hence room rates, and a faith that the bubble would not burst.

Twelve months on, and a fragile confidence has been returned to the Dubai market, with early indications for 2010 demonstrating an upward trend, but perhaps the principal effect of the recession has been to inject a new realism in to the sector.

Certainly, times were bad, particularly through the sweltering summer months when Ramadan crept back in to August — traditionally a sluggish time for overseas traffic and now compounded by the slow-down in regional business.

The figures reveal all; STR Global’s trend report for Dubai shows occupancy percentages in the mid 60s from May through to August 2009, plummeting to just 56.5% in September, with the average daily rate (ADR) dropping from $302 in January down to a low of around $157 in August, while revPAR was squeezed from $204.60 in January to a staggeringly low rate of $99 in August and September.

Such numbers make the year end performance all the more impressive with recovery to 81.9% for occupancy; $291.61 for ADR and revPAR of $238.70 during November.

It was the averaging out of these roller coaster numbers that hit the headlines, with hotel figures cited to underline the collapse of the Dubai success story — revPAR was down 31.4%, the largest fall in the region and nearly double the global average for 2009, while occupancy dropped around 10 per cent to 69%.

All this in a city where the only way is up...

However, a second look at the figures reveals that while Dubai was demoted from its position as the world’s most expensive city for bed and board — a somewhat dubious honour in real terms — it was still up among the top echelons.

An annual average room rate of a highly respectable $235 might have pushed it below those of neighbouring cities such as Abu Dhabi, Muscat, Doha and Riyadh, but revPAR was second only to Abu Dhabi.

And, if hoteliers were among those ringing in the New Year with fervour, it was justified as 2010 has seen Dubai back on to positive territory.

Occupancy average was 72.5% in January, rising to 86.2% for February, according to STR figures, and while ADR was still depressed on the previous year (when the effects of the global economic downturn were not yet in full force), revPAR reverted to an upward trend in February, rising 7% to $219.

These levels were achieved despite an injection of new inventory of around 4000 rooms in to the market, with particular expansion in the branded budget sector at a time when corporate travellers were looking for value accommodation.

A period of convalescence

So while the jury is out on a return to business as usual during 2010, there are buds of optimism that a recession that saw supply overtake demand, rate transmogrify in to best price and corporate largesse laid to rest, will be tempered as economic recovery takes hold.

While markets such as the UK may be depressed during 2010, the fall in room rates has opened up potential in countries such as India and China, and Dubai authorities are already taking steps to ignite demand through comprehensive marketing strategies to target the GCC for the summer months, as well as international clientele through the rest of the year.

“Dubai is positioning itself by re-offering its ‘Kids Go Free’ campaign this summer,” says Rob O’Hanlon, partner for Travel, Hospitality & Leisure (THL) at Deloitte in the Middle East. “DTCM, Emirates Airline and hotels and attractions have joined together in promoting Dubai by offering free flights, hotel stays, visas and other benefits for two children when they are accompanied by two adults.

“Dubai’s geographical positioning presents a significant opportunity this year with landmark events such as the FIFA World Cup in South Africa in June, the Commonwealth Games in Delhi in October and the Shanghai World Expo from May to October — many travellers are expected to use Dubai’s position as a leading connecting hub during their visit to these events.”

So, with a cautiously optimistic outlook for numbers, for many hoteliers the future is about the financials, and with this in mind, 2009 was a year for housekeeping in terms of businesses cutting costs.

“We have taken stock, restructured our business and consolidated,” says Marriott regional director of sales & marketing Jeff Strachan.

“It has been extremely difficult, particularly in areas such as conferences, banqueting and F&B, and hotels have ended up competing for different needs: occupancy or rate.

“Real analysis of the situation has been challenging as the market has changed completely in the past few years with the mid sector coming in with a new layer that will, by its very nature, bring down average rates — how much of the drop last year was caused by new supply and how much driven by economic circumstances remains to be seen.”

Starwood too has been focusing on cost reductions to keep margins in the black, and regional director and VP, Guido de Wilde, said that the priority now was to focus on growing the top line.

“The main consequence of the slowdown was the drop in rate, but Dubai still has the highest occupancy of any Starwood destination,” he says. “Overall, as a market, we see the trend for 2010 as stagnation or minimal growth with plus numbers starting in 2011.

“Generally, city hotels are down in Dubai, given the cut back on individual corporate travel and meetings, but the beach hotels have seen less effect on numbers — although one trend was for ‘bleasure’ where cheaper rates encouraged business travellers to stay in a different environment where they could still work, and the traffic was easier.”

In the city, Fairmont management too is cautiously optimistic, hoping for early revPAR gains in 2010 to be consolidated during the rest of the year: “We struggled in the early part of 2009, but changed strategies in sales and marketing and restructured the department to facilitate that change,” says general manager and regional VP, Philip M Barnes.

“Leisure business has held up relatively well year on year, but corporate travel has suffered...and incentive travel is still present but in smaller quantities and at significantly lower yields as the destination competes more globally,” he adds.

“The UAE and GCC overall continue to be our strongest feeder markets but as the destination has started competing more aggressively on pricing globally, we are seeing more price sensitive markets like China, for example.”

With lead time on bookings significantly shortened, Barnes says the crystal ball is hazy, but while generally confident, he stresses it would be new supply that would have the biggest effect in 2011.

On the beach

While the sands of Dubai still seem to retain their appeal, new inventory here may well inject more market segmentation as the Jumeirah Beach Residence area in the south welcomes Rotana, Mövenpick and Sofitel resorts, while The Palm Jumeirah takes shape with Rixos, Mövenpick, One&Only, Kempinski and Jumeirah resorts all set to debut during 2010, and Fairmont and Taj also have resorts under construction.

These neighbours for Atlantis The Palm will add to the overall marketing muscle of The Palm Jumeirah, said SVP sales, Brett Armitage: “As a maturing destination, we need more hotel offerings, and across Dubai there is a need for the full gamut of projects and packages, from the residence hotels through to the all inclusive resorts so we can reach in to more markets.”

Finishing 2009 with occupancy in the high 70s, Atlantis remained strong on leisure and has also reported positive group business from the last quarter, says Armitage, but he notes pressure on rates for the latter as more hotels compete for the existing traffic.

“What has changed in Dubai is that everyone wants groups now, even beach hotels that previously didn’t have the capacity,” he says.

On the positive side, Armitage says rates had stabilised at last year’s pricing, and while traffic was good out of Europe and Russia as predicted, targeted marketing had engendered success in the GCC and wider Middle East markets, and India came good too.

“India really exceeded expectations in 2009 and through in to 2010, with large groups as well as FITs, and we see huge potential in high end leisure and MICE, while for the future, we will be looking at China, Japan and new European markets as Emirates expands its network.”

Generally, the reports from European operators at the trade show ITB indicated that Dubai, while not flavour of the month, was back in the frame and viewed as a more complete destination, a view endorsed by Guy Epsom, Mövenpick business development director charged with launching two new resorts on The Palm Jumeirah as well as Ibn Battuta Gate and Deira hotels.

“The interest in Dubai is there,” he says. “But what is happening is that operators tend to be consolidating brochures, reviewing hotel features and focusing more on USPs.”

For Mövenpick’s Royal Amwaj, what will be its USP is packaged pricing, with half board or fully-inclusive, a move already taken up by Jebel Ali Golf Resort & Spa and indicative of the imperative to stand out from the crowd.

“Reaction has been phenomenal and it is possible that this will set a trend as hoteliers sit back and watch the effects — being new to the market it is easier for us to implement,” says Epsom.

“Another thing that will make a difference in the market is the price comparison websites in Europe, which means we will have to be more creative in our approach.”

With hotels at the Ibn Battuta mall as well as in downtown Deira, Epsom said every property had to make its mark, from creating an Arabic themed destination at Ibn Battuta Gate through to targeting stopover and budget travellers in Deira: “We will have to chase markets but there is room for everyone with new routes to Europe and Japan, for instance, more interest from India and potential for China and South America.”

Certainly at the very top end of the market, Al Maha Desert Resort and Spa saw steady demand, the return of small groups, and revPAR down between 10% and 16% following a tactical campaign to promote add-ons rather than drop rates, according to Tony Williams, SVP, Emirates Hotels & Resorts.

“We did ‘four for three’, spa specials and included transfers, but held our rates — we are fortunate that as a stand-alone resort, we don’t have rate parity issues and could stick with one plan over 12 months,” he says.

“Feedback from ITB was that Dubai hotels were still having a kneejerk reaction to the situation which was not helpful with rates flooding in to the market and changing daily.”

New names

For those coming in to the Dubai market last year, it was perhaps the best of times as well as the worst of times, according to a phlegmatic Daniel Hajjar, CEO of Layia Hospitality, which had a roll-out plan for a network of three-, four- and five-star hotels and residences.

“We still have 11 signed management agreements, of which four to five will go ahead but the rest will be on the back burner,” he reveals.

For 2009, launching with a new company and a new hotel where access was through a construction site in Tecom, Hajjar said it was ‘challenging’ but they survived by managing costs and going back to basics to source market share in the GCC market — which now perceives Dubai as more affordable with competitive hotel rates and low-cost air travel.

“The days of revenue first and costs second have gone,” he says. “However, looking ahead for 2010 we are going to be up on last year and already for Q1, we ended up around 84% occupancy.”

This is good news for another new entrant, Citymax Hotels by the Landmark Group, which has two three-star properties with nearly 1000 rooms in total opening in Al Barsha and Bur Dubai this year, and, according to general manager, Michael Weyland, will focus on transparent pricing and location as USPs of its properties.

“We have always looked at entering the market at a price point below AED 300 ($82) a night and this has not changed,” he says. “We have marginally adjusted our occupancy expectation but it is still above 70%.

“There is definitely potential for more mid market brands, especially in the economic environment we are in when business travellers are trading down and are willing to accept a more ‘no frills’ hotel experience,” says Weyland.

At the top end, another new name opening this spring with 23 floors of premium hotel apartments is Fraser Suites, located on Sheikh Zayed Road and targeting global corporates in the first instance, says general manager David Brown.

“We have 32 properties worldwide and number 80% of the Fortune 500 companies among our clientele so we will be looking at leveraging these contacts,” he explains.

“Here, the GCC markets will be another segment for us and our challenge is to create awareness at grassroots levels.”

Promising accessible rates that still reflect the positioning of Dubai as a high-value destination, Brown says these will reflect the overall experience of service delivery and quality.

“Dubai has to price itself sensibly and we have realigned our thinking in the wake of events last year to offer competitive leisure and corporate packages,” adds Brown.

Managing expectations

It is this realignment of commercial expectations that is key too for developer/investor/operator relations in the brave new world of Dubai hospitality, where ROI has plummeted from dizzy heights to reach more standard global levels.

According to Sami al-Ansari, CEO of Ishraq Gulf which holds franchise rights for Holiday Inn Express, the challenge now is to align operator vs. owner interests following a situation when many owners sustained losses on investments while operators continued to make money.

“I believe a new world order will emerge in hospitality that will lead to operators only making money when owners do, a much more sustainable equation for the industry,” he says.

“However, gone are the days when investors expected to make a three to four year payback and we are seeing a more realistic approach of 10-12% ROI, which is still higher than returns elsewhere.”

Joe Sita’s IFA Hotels & Resorts concurs that the risk premium is now higher and there is a lack of liquidity, but stresses that Dubai remains an emerging market which has a great deal of potential.

“The market has seen a decline in revPAR and investors have to be extremely selective about projects ... these need to have premium locations, strong partners and good sponsors,” says Sita.

Operators with a track record in the emirate say it is now a question of hand-holding to walk owners through the bad times.

“Everything was driven by real estate in the past with ROI better for hotels in the boom years, but these returns were not market standard and owners have to understand it is a long term business, not a quick buck, and the location needs to make sense and the brand needs to make sense,” says Starwood’s de Wilde.

“In the old days, we were overwhelmed with offers in new areas such as Jebel Ali Airport, Business Bay, Dubailand – these have gone quiet now but it will come back.”

CEO of Hospitality Management Holdings, Michel Noblet, concurs on this upbeat note, and stresses that what is happening is a rebalancing of the destination portfolio.

“It is a logical move for any metropolitan city to sustain the appeal it has by widening the product offering,” he says.

“Here, recession has made the market less complacent, more professional, and hotel investors are now less dependent on the operator as they come in with ideas of what they want, what is working internationally ... and this means they are in it for the long term.”

Hospitality consultant Rmal, which is currently working on bringing to market brands such as Bellagio, Baccarat and MGM Grand at the Dubai Pearl, stresses the need to import appropriate brands to suit market demand.

“The key is to work the inventory effectively and match customer needs with the product and while market conditions have an influence on rate decision, it is up to operators to decide where they draw the line and build their own strategies, rather than tamely follow what the rest of the herd is doing,” says CEO Anthony Liddiard.

Bringing in new ideas is key, according to Michael Scully, MD of Seven Tides as well as First & Foremost Hotels, the latter having recently signed up to develop two new brands in the GCC region.

“First & Foremost will bring in a major apartment operator, as well as a family hotel brand (see page 6) that will help extend Dubai as a destination and Seven Tides also has the rights to use the name of Dukes Hotel in London in order to develop five-star boutique hotels which have character,” says Scully.

“Opulence is not the way forward and the future has to focus on points of difference, analysis of the market and where the gaps lie ... we have to go out and make Dubai a fully rounded destination, give visitors a resort experience rather than inflicting corporate mores on leisure travellers, and perhaps one catalyst would be to move Dubailand to The Palm Jebel Ali,” he suggests.

Ishraq’s al-Ansari goes further, calling for government legislation in order to sway the market away from marble palaces.

“The branded budget segment has risen to nearly 10% of the current room supply — from 2% only three years ago — but this is not enough.

“I believe the unabated continuing supply of high end hotels will hurt the destination overall, unless the government steps in to regulate the issuing of hotel licences, while also encouraging investment in more affordable accommodation.”

The end game

Meanwhile, Dubai itself has recaptured some of its brio with the opening of the Meydan Grandstand and Race Course at the end of March (see page 75), teleporting its usual extravaganza on to television screens worldwide during the launch Dubai World Cup event, while a ferocious winter in Europe saw leisure perk up with hotel comparison website Trivago.co.uk citing Dubai as the most requested destination for Easter bookings.

Aviation figures also underpin this optimism as traffic through the region continues to grow, with passenger numbers at Dubai International Airport up 9.2% during 2009, reaching 40.9 million, while in February 2010, traffic grew 22.6%.

But, and it’s a big but, the pace of hotel openings will to a degree impact on how the hospitality sector in Dubai can rebuild revPAR, with STR Global pipeline reports citing some 30,000 rooms in the ‘total active phase’ and 15,563 which are under construction.

Estimates of how many will actually come to market in 2010 vary from 5000 up to 20,000 but the list of incomers (see page 72) makes ominous reading for both existing and new hoteliers, particularly with another torpid summer season on the near horizon.

With other tourist destinations equally affected by an influx of supply and lower demand, competition is another important factor as savvy travellers look for long-haul bargains and resorts in Egypt, the Indian Ocean and Asia, which will respond with deep discounts.

Already, major tour operators are calling for a change in mindset from Dubai hoteliers in order to woo premium leisure travellers, citing apparent high room rates and F&B costs as prime obstacles standing in the way of translating stopover business into longer stay holidays.

But, while some analysts predict a slow period of convalescence for Dubai hotel revenues, this very tampering down of inflationary rate rises could serve to stimulate demand to fill those new beds.

Dubai’s draws

• Strategic location and business hub
• Regional population of 1.4 billion
• Dubai is politically stable with excellent communications and services
• Expectations of 2.5 annual GDP growth during the next few years
• Rescheduling of Dubai World debt and new board expected to prioritise project development
• Developments at Dubai Marina, Business Bay, DIFC and Dubai Pearl still on track
• Airport and airline expansion continues to be robust, with second airport opening this year at Jebel Ali

Surviving the downtown: the hoteliers’ view

“Real analysis of the situation has been challenging”
Jeff Strachan, Marriott

“Continuing supply of high end hotels will hurt the destination”
Sami Al-Ansari, Ishraq

“One catalyst would be to move Dubailand to The Palm Jebel Ali”
Michael Scully, Seven Tides

“Hotel investors are now less dependent on the operator”
Michel Noblet, Hospitality Management Holdings

“Investors have to be extremely selective about projects”
Joe Sita, IFA Hotels

“Business travellers are willing to accept a ‘no frills’ hotel experience”
Michael Weyland, Citymax

“The days of revenue first and costs second have gone”
Daniel Hajjar, Layia Hospitality

“Dubai hotels’ kneejerk reaction to the situation was not helpful”
Tony Williams, Emirates Hotels

“We will have to be more creative in our approach”
Guy Epsom, Movenpick

“India really exceeded expectations in 2009”
Brett Armitage, Atlantis The Palm

“New supply will have the biggest effect in 2011”
Philip Barnes, Fairmont

“The priority now is to focus on growing the top line”
Guido de Wilde, Starwood

DUBAI HOTEL INDUSTRY FACTS AND FIGURES

Average performance 2009:
RevPar $i63.31, down 31.4% on 2008
ADR $235.48, down 23.7% on 2008
Occupancy 69%, down 10% on 2008

Aviation traffic at Dubai International Airport:
Passenger numbers up 9.2% during 2009, reaching 40.9 million,
In February 2010, traffic grew 22.6%