Mid-range invasion in Dubai's hospitality industry

Dubai Hospitality IndustryImage Credit: Courtesy of IHG

Dubai's hospitality sector is fast evolving into a mixed-category market as developers are finding it more rewarding to build properties in the mid-to-affordable segments, thanks to a changing market landscape and the emirate's increasingly diversified visitor profiles.

Around 11 million tourists visited Dubai last year, up 11 per cent from 2012, and the ambitious target of 20 million tourists per year by 2020 is further fuelling demand for hospitality properties.

"Dubai has historically been seen as a luxury destination, although we are now starting to see this change with the emirate serviced by an increasing number of budget carriers, while the number of three- and four-star hotels is also on the rise,'' says Mat Green. Head of Research and Consultancy UAE at CBRE Middle East.

To achieve its 2020 targets, the government says Dubai not only needs to increase the overall stock of hotel rooms across all price points, but also widen the range of options for visitors.

"While Dubai's image as a luxury destination is important, it is more important for us to show the world what else Dubai has to offer," says lssam Abdul Rahim Kazim, CEO of the Dubai Corporation for Tourism and Commerce Marketing (DCTCM).

Currently, Dubai has approximately 85,000 hotel keys and targets to add 140,000-160,000 keys by 2020. Between three- and four-star hotels, there are more than 25,000 keys or 29 per cent of the total stock. Dubai has also announced to build more than 22,200 hotel rooms by 2018. Of these, about 7,900 are in the mid-range segment

"In 2020, it is likely that the hotel supply will continue to have a tendency towards upscale offerings," says Chiheb Ben Mahmoud, Executive Vice-President and Head of Hotels and Hospitality, Middle East and Africa, at JLL. "However, the increased focus on mid-range development will open the emirate to new segments."

Government incentives
In January, His Highness Shaikh Mohammad Bin Rashid AI Maktoum, UAE Vice-President and Prime Minister and Ruler of Dubai, issued a series of directives designed to enhance and streamline hotel investment and development.

"There was an announcement of a five-year waiver of the 10 per cent service charge for three- and four-star hotels that start operating before June 2017," says John Podaras, Partner at Hotel Development Resources. “Additionally, we have been made aware of a supportive attitude towards developers in the mid-market in terms of electricity provision, change of use permissions and charges and other soft measures.”

Kazim points out such regulatory changes are indicative of the government's focus on encouraging growth by working with the private sector to ensure potential barriers are reduced.

Green says this has been aided by the government's move to shorten approval times and reduce red tape.

“The government has also promised to allocate new lands for development in a bid to encourage an expansion of the three- and four-star sector in time for the World Expo 2020," says Green.

The hotel industry has welcomed the government's move to promote the development of more affordable hospitality options. IHG, which has a large portfolio of mid-market hotels, believes the government's initiatives will benefit the industry.

"Announcements by Dubai Municipality and DCTCM on a series of initiatives and plans for new mid-market hotels to support the city's growth southwards will support the diversification of Dubai's market as it moves towards its target of 20 million visitors by 2020," says Pascal Gauvin, COO - India, Middle East and Africa at IHG.

Branded hotels
Hotels with a three-star rating or less collectively account for around 18,400 rooms in Dubai, mostly from unbranded properties.

“Although there is a perception that there are only five-star hotels in Dubai, in reality there is a relatively good balance between five-, four- and three-star hotels," says Hala Choufany, Regional Managing Director of HVS Dubai. "Since the majority of mid-range hotels are unbranded, more branded mid-range hotels are needed in the market.

"From an investment point of view, it's a lot more cheaper and quicker to build. Also, it's more attractive to secure financing for such an asset class, which does not necessarily carry the same risk that luxury hotels do.”

International hotel chains are grabbing the opportunity by launching more midrange properties in the city. Last month Hyatt Hotels brought its Hyatt Place brand to Dubai with the opening of a hotel in Deira. Hilton has opened a DoubleTree property in Dubai, while Starwood Hotels and Resorts has plans to bring its Aloft brand to the UAE.

With seven hotels already planned, IHG intends to add more than 1,800 rooms across Dubai, Abu Dhabi, Ras Al Khaimah and Fujairah in the next three to five years.

"In Dubai alone we have three hotels in the pipeline, including InterContinental Dubai Marina, which is due to open at the end of this year," says Gauvin. "Our three Holiday Inn and four Holiday Inn Express properties in the city together account for nearly 60 per cent of our portfolio and cover a broad geographic spread from Bur Dubai to Internet City.

"In the Middle East we currently have 27 hotels across both brands and we are looking to grow that by nearly 50 per cent [by number of rooms] in the next three to five years."

Business sense
Developers also think it makes business sense to build mid-range properties. Union Properties last month announced to build 1,000 hotel rooms in the next five years to help address the shortage in mid-range and low-end market.

"It will include a lower mid-market, mixed-use development with hotel rooms and serviced apartments. We will build 610 keys in two plots in Motor City. We have another plot in Dubai Investments Park where we will build 390 keys,” says Ahmad AI Marri, General Manager of Union Properties.

Dubai Holdings also recently launched 40 plots for the development of more than 8,000 mid-range hotel rooms in the emirate. Of these, 18 are located in Tecom. while the rest are situated across districts developed by Dubai Properties Group. Construction is expected to start within the next 18 months.

Beyond Expo 2020
Although there is growing demand for mid-range and budget property in Dubai, industry experts say this could not be entirely attributed to Dubai hosting the World Expo 2020. "It's not just because of the Expo 2020 that developers will build three-star hotels. There are multiple factors: government incentives, escaping heavy taxation. Access to finance and feasibility," says Choufany. "Sometimes the location also matters because secondary locations can't afford a five-star property."

Podaras agrees the current surge in new projects is not generally related to the Expo, but driven by requirements in other areas.

"We do not see Expo 2020 as an end point but rather a catalyst in a large picture," he says.




Source: Syed Ameen Kader, Special to Property Weekly


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