Rates soften amid supply creep in Dubai
13 OCTOBER 2015 6:35 AM
With supply outpacing demand, hoteliers in the emirate are beginning to sacrifice rate in hopes of inducing more demand.
DUBAI, United Arab Emirates—Dubai’s hoteliers are resetting their revenue expectations and adjusting to a “new normal” as supply begins to outpace demand, according to hospitality experts at the Hotel Show’s Vision Conference.
Recent performance figures are far from alarming, but the strong supply pipeline over the next three years has led to a consensus that performance will continue to soften over the coming years.
“If all the supply comes in, Dubai could be the fifth or sixth largest hotel market in the world,” said Philip Wooller, area director of the Middle East & Africa at STR Global, which is sister company of Hotel News Now.
STR Global forecasts 107,905 rooms in the market by 2020.
Information provider TophotelProjects recorded 63,970 rooms (luxury, upscale and upper scale) in the planning and construction stages in the United Arab Emirates, led by Dubai with 47,269 rooms.
“Around 60% of 546 projects in the Middle East are due to be complete in 2016 and 2017, then the numbers tail off; 18.8% are forecast to open in 2018 and later,” said Caroline List, international sales manager at TophotelProjects. “The top five brands are Radisson Blu, Hilton, Marriott, Hilton Garden Inn and Sheraton.”
Dubai’s supply increased 6.3% as of 12 September year to date, while demand grew 5.4%, according to STR Global. Occupancy and average daily rate dropped 0.9% and 8.1%, respectively, resulting in a revenue-per-available-room decrease of 8.9%, in U.S. dollar terms.
In absolute terms, Dubai still ranks at or near the top of all global hotel markets in the key performance metrics. Its ADR of $223 through August, for instance, was fourth behind Paris, New York City and Hong Kong, Wooller said.
“Comparing Dubai to powerhouses like Paris or New York, these are absolutely staggering results. The question at this point is if Dubai can keep up this kind of growth. Conventional wisdom would suggest something needs to change, but historically demand kept up with supply,” he said.
Deloitte, using STR Global figures, compared January through May 2014 with the same period in 2015, which leaves out the slower summer season. Supply was up by 6.7% during that time and demand by 5.1%. Occupancy was down 1.3%; ADR decreased 7.3%; and RevPAR suffered an 8.7% loss.
“Hotel operators have taken a defensive strategy, maintaining occupancies broadly at current levels at the cost of ADRs,” said Martin Cooper, director of real estate advisory for the Middle East region at Deloitte.
“Dubai is moving towards a ‘new normal.’ We see supply slightly outstripping demand until 2019 and occupancies at 73% to 76%, should the forecast we mapped actually play out,” he said, adding attractive rates could entice more visitations.
Wooller, citing demand is still in a positive territory and forecasted to increase year on year, cautioned hoteliers against sacrificing rates to the point of a price war. The strategy only worked in a few areas, such as beach locations during the summer.
“Average room rates may have to drop a little bit due to increased competition. However, one of the unfortunate trends at the moment is that hotels have become a little more competitive than they need to,” he said.
“If you drive rates down, it takes forever to bring them back up again and your RevPAR drops. You can’t just scrap rates because a new hotel has an introductory rate,” Wooller said.
Instead, hoteliers should trust bookings will come while holding their rates in strong sub-markets such as Downtown Burj Khalifa or The Palm, just as hoteliers would do in New York City or London, he said.
Cooper called for a coordinated strategy among hoteliers in Dubai and other emirates, where rates are cheaper.
“The challenge for operators is that margins will be slightly lower, but Dubai can absorb a slight supply and demand imbalance. Getting complete parity is difficult,” he said.
“The country is pretty well insulated against economic slowdowns. In terms of source markets, oil prices are predicted to stay low over the next couple of years, increasing disposable incomes,” Cooper added.
The emirate’s view
The Department of Tourism & Commerce Marketing projects 140,000 to 160,000 rooms by 2020. Eleven properties, which added more than 2,600 rooms and increased the emirate’s total inventory to 95,000, opened by mid-year alone.
“This increase has inevitably triggered talks of oversupply, and while we at Dubai Tourism do not share this view, it does highlight the very important need to strike a balance between supply and demand, ensuring that Dubai retains its high occupancy rate and avoids room rates that are either too high or too low,” said the DTCM’s CEO, Issam Abdul Rahim Kazim.
“We will continue to work with the public and private sector to make sure Dubai’s inventory increases are well-aligned to our tourism needs,” he added.
Dubai ranks fourth on the MasterCard’s Global Destination Cities Index and is poised to attract 14.2 million visitors by year-end, placing it ahead of the likes of New York City, Istanbul and Singapore. The emirate already had welcomed 8.2 million visitors by August this year.
“We’re aiming to become the world’s most visited city for global travel and events, as well as the most recommended destination with the highest number of repeat visitors. This is not a small task, obviously, but we already made great strides forward,” Kazim said.
To counter global economic instability and currency fluctuations, Dubai is working on diversifying its leisure offerings and source markets, according to the official.
Cooper cited the Kingdom of Saudi Arabia as the strongest growing source market followed by India; the United Kingdom; the United States; Russia; Iran; China; Kuwait; Oman; and Germany.
“Source markets matter. Do they want malls, beaches, theme parks, cultural events? Complicating things slightly is that they shift quite substantially over time and thus drive demand for new products,” he explained, adding that “dry” hotels that don’t serve alcohol could represent one growth vehicle.