Opportunities in Dubai budget hotels

Whether it is Dubai’s airports, malls, hotels or any major entertainment zone, a common sight is the growing number of tourists. The hospitality sector is surely booming in the emirate, as Dubai tries to strengthen its position as a leisure and entertainment hub. Investors are eyeing the sector to achieve higher returns. Many are now opting for hospitality as a development option to ride on the market opportunity created by the government’s thrust on tourism.

This sector has performed strongly over the past five years. The total number of tourists reached its highest ever at more than 11 million last year, driven by Dubai’s marketing efforts, tourist-friendly infrastructure and events taking place across the emirate during the year. Saudi Arabia retained its top spot as the source market for the emirate, followed by India, the UK, the US, Russia, China and Iran during the first 11 months of last year.

As a result hotel revenue has grown strongly reaching Dh23.9 billion last year, up 9.8 per cent from Dh21.8 billion in 2013. Room revenues increased by 12 per cent year-onyear and food and beverage and other revenues rose by 6.1 per cent year-on-year. Average daily rates have been relatively stable during the year, however, it recorded a slight drop of 0.4 per cent due to increased supply.

Investors are following the figures and hospitality-related projects have increased sharply over the past year. There were nearly 30 hospitality-related projects launched last year and eight more have been completed during the first three months of the year.

Most of the projects introduced last year were in the high-end luxury category, which is merely adding to the existing supply of posh developments in the emirate. There are 83 five-star hotels and 96 four-star hotels in Dubai compared to 69 three-star, 54 two-star and 124 one-star properties. There were 213 hotel apartments. This has created a market gap for budget hotels in the emirate. Three- to four-star hotels in Dubai have performed particularly well as they offer value options for families and group travellers. Due to lack of such properties in the emirate, many travellers choose to stay in more economical options in the northern emirates of Sharjah and Ajman. The Sharjah Commerce and Tourism Development Authority also confirmed that hotels in Sharjah are fully booked.

Local developers such as Emaar have also been attracted by the potential offered by the budget segment, with the company rebranding its mid-market hospitality brand Dubai Inn as Rove Hotels. The developer plans to open ten hotels by 2020 in the city and across the region, in collaboration with Meraas Holding. The first Rove property, with 420 rooms spread over 14 floors, is expected to be ready by the end of the year.

In addition to families, there is a new breed of backpack travellers that requires a place to stay, however, with a lower budget. This has resulted in a new segment of lodging options known as low-frills that offer highly competitive rates to suit students and low-income guests who like to travel on impulse. This trend has taken off globally and chains such as Travelodge in the UK and Motel 6 in North America have been on an expansion drive.

However, the segment has clearly not been touched in Dubai, as investors continue to focus on the high-end luxury segment. A clear advantage of this category of properties is high occupancy rates and low operating expenses. The properties typically have high revenue streams as all facilities are chargeable. For instance, the economy chain Motel 6 features coin-operated black-and-white televisions as a source of extra revenue.

Dubai’s hospitality industry is prepared for steady growth from 2015-2020 with close to 160,000 additional rooms entering the market. Many of these are in the three- and four-star category rather than the luxury segment. The supply is set to increase in the upscale segment with 16 new hotels offering 6,200 keys in the pipeline, while the luxury segment has 14 properties with 4,200 rooms waiting to come on stream.

Some analysts also believe the industry, particularly the luxury sector, could see overcapacity issues post 2020, which could impact occupancy rates and average daily rates. It could, however, be argued that once worldclass leisure destinations such as Dubai Parks and Resorts are fully operational, the emirate could very well sustain the level of tourist inflows in the future.

Source: Property Weekly.


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