Investors aim to fill Dubai’s mid-market void
28 JULY 2014 6:12 AM
Maturing Dubai is in need of branded economy and midscale product to appeal to the emirate’s expanding base of demand.
DUBAI—While the pipeline for midrange hotels is significantly less than that of other segments in Dubai, the maturing market is likely to tip in their favor to meet a need for more affordable accommodations.
“More branded midrange would appeal to a wider market,” said Hala Matar Choufany, regional managing director of HVS Dubai. “Not everyone targeted by (airline) Emirates’ ever-expanding network, flying to China and India for example, will be able to stay in luxury hotels when coming to Dubai.”
Of the 21,856 rooms scheduled to open in the United Arab Emirates between 2014 and 2018, the midscale segment accounts for 10% (2,157 rooms) and the budget segment accounts for 9% (1,871 rooms), according to the HVS “Middle East hotel development cost trends” survey, published in March this year.
“Those numbers are low and don’t reflect the demand potential that is ever increasing. There is still a tendency by investors in the region to develop luxury hotels, oblivious to the returns available from the economy sector in particular,” said Darroch Crawford, managing director of Premier Inn MEA.
“There is no doubt that Dubai could sustain many more value-for-money hotels,” he added. “The more high-quality, affordable rooms that are available, the more attractive Dubai will become to a wider guest base and able to achieve its ambitious growth targets.”
Dubai’s Vision 2020 growth plans calls for 20 million annual visitors by the year 2020. The emirate welcomed 13 million during 2013.
The emirate’s hospitality market is already very developed, Choufany said, making midrange a natural progression in the development cycle. She cites multiple reasons giving rise to development opportunities in the midrange segment, including international operators’ need to push their midrange brands due to territorial expansion restrictions.
“Many operators already have enough of their luxury brands represented, and yes, there is the (World Expo 2020), but even despite that the market needs midrange to be sustainable and the government is incentivizing them,” Choufany said. “You will definitely see more and more announcements in regards of midrange hotels to add to the pipeline.”
A sampling of Dubai’s existing, branded budget and midscale supply includes offerings from Premier Inn (three hotels), Ibis (five) and Holiday Inn Express (four).
“These three brands are the leaders in the economy sector,” said Alain Debare, CEO of Action Hotels, an owner and developer of six economy and midscale hotels in the Middle East and Australia. Though long a player in the Middle East, Action is just now entering Dubai with the 215-key Premier Inn Dubai Healthcare City (DHC).
“The supply of hotels in this sector is undersupplied,” he said. “Even with the proposed pipeline of an increasing number of economy and midscale hotels, the demand will outweigh the supply for many years to come.”
That’s good news for global chains such as InterContinental Hotels Group, which aims to double its footprint of 27 Holiday Inn and Holiday Inn Express hotels (5,700 rooms) in the region within the next three to five years.
“In the (United Arab Emirates) we were considered one of the pioneers in the midscale market when we opened our first Holiday Inn in Dubai 15 years ago and introduced Holiday Inn Express to the city in 2007,” said Pascal Gauvin, IHG’S COO of India, Middle East and Africa. “We have grown since and today have eight properties across both brands in the UAE, seven of those in Dubai spanning a broad geographic footprint, from (Dubai International Airport) to Internet City.”
Incentives and costs
To assist achieving the emirate’s 20 million visitors target by 2020, Dubai’s Department of Tourism and Commerce Marketing announced in September 2013 it would grant all investors into new 3-star and 4-star hotels a waiver on the 10% municipality fee, usually levied on each room night. The waiver lasts for four years from the date the construction permit has been obtained, which must be any time before end of December 2017.
“The Dubai government has economy and midscale hotels very much on its radar and is aware of the gap in the market with the increasing demand for quality affordable hotel rooms into the emirate. The municipality fee waiver partially mitigates other things, such as escalating construction costs,” Debare said.
Increases in construction likely will correspond with increases in construction costs, sources said.
Building a midscale hotel in Dubai would cost approximately $166,000 per key, according to the HVS Middle East cost trends report.
Action Hotels’ development costs average between $131,000 per key for a 3-star hotel and $249,000 per key for a 4-star hotel, according to Debare.
“We are not overly concerned by construction costs at this time, but there is no doubt that the cost of raw materials is likely to become a concern as the construction industry goes into overdrive. In common with most of our internationally branded competitors, the cost of building a Premier Inn without land is around $100,000 per key,” said Crawford.
Premier Inn expects to reach 30 properties in the GCC by 2020. Future openings include:
- the 372-key Premier Inn Ibn Battuta Mall;
- the 200-key Premier Inn Al Maktoum International Airport;
- the 215-key Premier Inn Dubai Healthcare City (DHC); and
- the 300-key Premier Inn Al Jadaf.
“We are also working on several other projects in Dubai that are yet to be confirmed,” Crawford said.
The Premier Inn brand in the region is developed via a strategic partnership between the Emirates Group and the U.K.’s Whitbread.
Action Hotels, which also brands its properties with Accor’s Ibis Styles, as well as IHG’s Staybridge Suites, is looking for further opportunities in Dubai via new-builds, conversion or lease opportunities. “We are actively looking at developing another one or two properties in Dubai as we target our growth to around 5,000 rooms by 2020,” Debare said.
Which brands he can’t say yet. But IHG’s development plans may offer a clue. The group has seven hotels in the development pipeline, including a Staybridge with Action Hotels in Abu Dhabi and another Staybridge in Dubai.
Finding a footprint
Location is key in selecting new projects. Economy hotels typically fetch around 400 UAE dirham ($109) in terms of ADR, but prime locations can double that figure during peak demand.
But land in prime areas is scarce and expensive, leaving smaller players and high-net-worth individuals to look in secondary locations, according to Choufany.
“We’re working on quite a few feasibility studies for midrange hotels in areas such as (Dubai Investments Park), Motorcity and DuBiotech. Today these areas aren’t entirely developed, but by the time the hotel completes within three years they will be,” she said.
Premier Inn’s first properties, built when their surrounding areas were still under development, prove the point.
“All our locations are now either established or growth areas. It took time for DIP and (Dubai Silicon Oasis) to reach the high levels they are at now, but they are now delivering excellent returns on what were low cost investments,” Crawford said.