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Dubai: According to a recent hospitality report by Knight Frank, the first quarter proved to be lucrative for the industry. The report states that despite the completion of several new hospitality establishments last year, occupancy rates of Dubai hotels and hotel apartments rose for the fourth consecutive year to 80.5 per cent, the highest since 2008.
With the strong level of occupancy, operators are now in a position to command higher rates. Between 2010 and last year, the average daily rate rose at an annual average of 5.6 per cent.
The Knight Frank report also suggests that, according to the Airports Council International, the number of passengers passing through Dubai International Airport (DIA) doubled between 2007 and 2013. More timely data from DIA shows that in the first quarter, passenger traffic rose by 11.3 per cent year-on-year to 18.4 million.
With such a flourishing hospitality sector, Dubai is witnessing a knock-on effect on real estate. Harmen de Jong, the Dubai-based Director of Development Consultancy and Research at Knight Frank, explains associating with the right hospitality brand is key to this growth.
“Real estate developers in Dubai have come to realize that reputable hospitality brands have the potential to add premium value to their residential projects. More specifically, developers have been successful in selling residential apartments on the back of these hotel brands," he says. “A recent example of a new and upcoming area where developers have been successful in deploying this strategy is Business Bay. Projects that affiliated themselves with a hotel brand not only achieved significantly higher capital values, but also saw more aggressive off-plan absorption rates compared to single-use residential buildings.
"This was a particularly fruitful strategy for relatively new developers with a limited track record in the market of delivering a quality product. It must be noted that not all hotel brands are suitable. Investors in branded residences are willing to pay a premium only if the brand represents a desirable lifestyle."
De Jong adds that hospitality real estate has been a safe bet over the past five years or so and clearly outperformed other real estate asset classes in Dubai.
“The demand drivers have not significantly changed and still very much rely on Emirates Airlines' aggressive expansion strategy. Dubai's ability to deliver on its promise to build more attractions and a favourable investment climate that drives companies and their employees to Dubai," he says. "However, given that the hotel sector was relatively resilient to the recent financial crisis, some prospective hotel real estate investors could become overenthusiastic and not pay enough attention to the fundamentals.
“The hospitality market in Dubai is becoming increasingly mature, making it critical to deploy a viable development strategy with a suitable market positioning. This ensures that the proposed hotel concept is aligned with the future market situation, while maximising the owner's returns.”
In Abu Dhabi, a Knight Frank report shows the capital continues to attract a rising number of visitors. Data from the Tourism and Culture Authority shows that, in the 12 months to March, the number of room nights rose 21 per cent year-on year and were up almost 84 per cent compared to the corresponding period in 2008.
Remarking on the difference between the markets in Dubai and Abu Dhabi, De Jong suggests, "Investor sentiment in hotel real estate in Abu Dhabi is more muted compared to Dubai. In terms of branded residences, the supply in Abu Dhabi is very limited with probably the St Regis Residences as one of the few exceptions. This product was very well-received and as such commanded the highest sales price: per square meter of any residential apartment project in Abu Dhabi."
De Jong says Abu Dhabi's hospitality market is much more corporate driven.
"However, with the government of Abu Dhabi trying to diversify its economy [including investment in tourism infrastructure], the capital's hospitality sector should benefit from greater demand from leisure travellers in the medium to long term."
It seems that the real estate and hospitality sectors in Abu Dhabi and Dubai are benefiting from a tourism boom, but what does the rest of the year have in store for real estate?
"Overall, residential real estate prices have seen very moderate growth [around 5 per cent] over the first five months of the year," says De Jong. "With the summer and Ramadan period coming up, we don't expect much volatility as transaction volumes tend to be at their lowest.
"Our view is that the residential real estate market will witness weaker, but potentially more sustainable capital value growth, this year when compared to the last couple of years."
Hotels linked to malls prove lucrative
Given Dubai's reputation as a world-class shopping destination, it is not surprising that there are a number of hotels connected to malls. These include Kempinski and the Sheraton at the Mall of the Emirates, The Address at Dubai Marina Mall and Ibn Battuta Gate Hotel by Mövenpick.
Average occupancy levels for these four hotels rose from 76 per cent in 2012 to 80 per cent last year.
Meanwhile, following a 24.1 per cent increase in 2012, revenue per available room rose by 16.2 per cent to Dh766 last year. It is important to note that the destination appeal of Mall of the Emirates means that average daily rates at Kempinski and Sheraton are higher compared to most other hotels attached to malls.
Moreover, these types of hotels are popular among GCC families and transit guests and tend to perform relatively well during the summer.
Knight Frank Abu Dhabi and Dubai Hospitality Report, Q12014
Source: Helga Jensen-Forde, Special to Property Weekly