The GCC hotel market is traditionally dominated by luxury and up-market deluxe establishments. But now more than ever, the regional trends are turning towards the travelers seeking a comfortable accommodation for reasonable price. According to the study presented at the World Travel Market (WTM) in London in November, cost-conscious travel is the global trend, as tourists, even those who can afford luxury accommodation, want to stay in posh hostels or “poshtels” – affordably-priced hostels or hotels with the luxury uplift.
In the GCC, the mid-range (budget) hotels are the fastest growing sector in the region, thanks to the rise of the middle class (by 2030, globally the middle class will more than double in size, from two billion today to 4.9 billion), especially in Asia, and that has opened new opportunities for investors in the GCC hotel industry, who are now seriously investing in quality mid-market hotels. Recent Alpen Capital report reveals that the GCC hospitality market is set to grow from USD 22.8 billion in 2013 to USD 35.9 billion by 2018 with a predicted annual growth rate of 9.5 percent.
With such optimistic predictions, the region is preparing for a so called, “golden decade” of events – Expo2020 in Dubai and FIFA World Cup in Qatar, which is set to accommodate 3.7 million tourists in 2022. Qatar is planning to spend USD 200bn on tourism infrastructure ahead of 2022 World Cup, but the government objective is to increase the room number to 62,000 by 2030, and by that time to achieve seven million visitors to the country. Dubai is set to add 20,000-35,000 mid-market keys by 2020 to its hotel offering (nearly 30 per cent of hotels will be in the mid-market category), now dominated by five-star hotels, which have a market share exceeding 60 percent. Dubai currently has 634 hotels and hotel apartments with 88,680 keys, and just 10 percent of those are in the upper mid-scale and mid-scale segments. It is estimated that 25 million people will visit Expo 2020 in just six months, of which 70 per cent will come from outside the UAE.
Highly competitive segment
“Budget hotels have emerged as the greatest business opportunity across the Middle East and Africa owing to multiple reasons. There is a considerable shortage of affordable accommodation and not enough supply. And as the low cost airlines blossom, cost-conscious travelers are flooding the market pushing the demand for mid-market lodging. If cities like Dubai are to achieve their goal of 20 million annual visitors by 2020, they must widen their appeal amongst the fast growing middle class in emerging economies of Asia and Africa, particularly India and China. And in doing so, they need to build more budget hotels. Demand for the destination remains strong but the challenge is to have ample budget accommodations to meet that demand. The tourism authorities realize the destination’s shortcoming and are, therefore, pushing the development of mid-market hotels but the investors are dragging their feet. Given the staggering potential for growth investors must broaden their horizon and consider budget hotels like ECOS Hotels. It is a fast growing and highly competitive segment that will reap rich dividends. And we expect to see more announcements for mid-market hotels in 2015. ECOS Hotels is a ‘no frills’ B & B brand that ties together a unique economical and ecological concept. It is a smart choice for investors offering strong investment opportunity because of lower construction and operating costs and quick and high return on investment”, explains for bqdoha.com Laurent A. Voivenel, CEO of Dubai-based HMH – Hospitality Management Holdings, whose existing portfolio features 20 properties located across the MENA region, as well as a pipeline of hotels under development.
Stephane Laguette, Vice President Sales & Marketing at Premier Inn, UK mid-range hotel brand which expects to holg 30 properties in the GCC by 2020, agrees: “There is no doubt that developers are becoming aware of the returns generated by mid-scale hotels and we are witnessing a spur in our development activity. Brands like Premier Inn require smaller plots than luxury/up-scale hotels and are more affordable to build and operate, yet attract high occupancy and return on investment levels because of the consistency and value for money that they offer to the guest. There are slew reasons of this expansion in Dubai. In a nut shell – upswing in Dubai Real Estate, strong YoY performance, confidence in Dubai Tourism, robust performance through recessionary period, permanent increase of airlift including low cost carrier and Expo 2020 at the horizon.
The incentives from the Dubai Government are welcome, as are the initiatives to help fast track approvals, but the main challenge is securing affordable land. Prices are rising and there comes a point when the numbers just don’t work. Also the vision of Dubai is to increase its share of mid-scale travelers, with a world-calls destination combines with an excellent carrier and a destination offering a large tray of activities, shopping and restaurant – there are no any obstacle to bring in the country this new demand from all surrounding areas, at the end, the location of Dubai is simply strategic”, said Mr Laguette for bqdoha.com.
High land prices
Mr. Voivenel and Mr. Laguette are emphasizing that the rise of the cheaper means of transportation, especially low cost carriers, changed their industry sector. “Democratization of travel has been the main change of our industry in the last 20 years, therefore mid-class segment is becoming the most popular hotel segment. On top of it, democratization of airlines with low cost carriers in emerging countries in Asia and South America is supporting our growth”, said Mr Laguette.
“Shortage of budget hotels, growing airline network including massive rise of low-cost carriers, expansion of airport facilities, and expanding middle class in key source markets like India and China are some of the factors contributing to demand of budget and mid-scale hotels”, added Mr. Voivenel.
According to the November 2014 STR Global Construction Pipeline Report, the Middle East/Africa hotel region reported 644 hotels under contract totaling 151,680 rooms. The under contract data includes projects under construction, in the final planning and planning stages, and among the countries in the region, the UAE reported the most rooms under contract – 40,102. Saudi Arabia reported 37,362 rooms under contract; Qatar reported 12,073 rooms; and Oman 5,836 rooms. But high land prices (cost of land forms about 50 percent of the construction total), especially in Dubai and Doha, are an emerging problem for the investors in mid-scale accommodation facilities. According to industry experts, building a mid-scale hotel in Dubai would cost approximately USD 166,000 per key. “Location is always the dominant factor in any real estate investment and this is no different in the hospitality sector. The cost of land in prime locations is definitely very high and is an important factor from an investor’s perspective. There is a lot of interest in the mid-market sector. However, returns in the current ‘landscape’ are under pressure due to high land prices and rising construction costs that are in a way dictating the investors’ decision. Having said so, mid-market hotels tend to be more resilient to market fluctuations in the long term. Alternative construction methods such as modular construction can make projects more viable for investors making it easier and more affordable for them to build projects as well as come on line quicker”, said Mr. Voivenel, asked about the possible solutions to the problem.
An opportunity for mid-size companies
Despite the high land prices and construction costs, budget hotel market in the GCC is a lucrative one, not just for international hotel chains, but also for SME’s, who are more than interested to invest in budget hotels, shown to be recession-resilient and yielding exceptional returns on investment even at modest occupancy levels. Laurent A. Voivenel, argues that the SMEs are the backbone of any economy and their numbers are increasing quite rapidly in this part of the world. “They are no doubt driving demand for budget hotels that in turn will push and accelerate the development of mid-market products. Let’s put it this way, as far as development of budget hotels is concerned, it is these mid-size companies who are the true investors and entrepreneurs. Big brands and operators are often locked into relationships with the large developers and are therefore not the real architects of budget segment”, he said.
There is also another factor that distinguishes mid-scale hotel market in the GCC from the rest of the world – the standard of the facility. For example, a four-star hotel anywhere in Europe can have much smaller rooms than any mid-range facility Doha, Dubai or Abu Dhabi. Long-term domination of luxury accommodation in the GCC market has also set the higher standards for budget hotels.
“The standards are no doubt very high in the GCC and at the end all have to adhere to the hotel classification defined by the authorities. If you are building a 3-star hotel you need to build it to 3-star level. The tourist is now much better informed than ever before and this has impacted the way the market has to approach its customer. Guests are increasingly looking for value for money. They seek experiences at affordable rates. Hoteliers must offer products that offer ‘non-typical’ or unusual design and experiences at a mid-market price point to capture this market”, said Mr. Voivenel.
Stephane Laguette said that the higher standards for the mid-market hotels in the GCC are the story of this region, including Asia. “All hotels are new with a high quality of service and an appetite for attractive renovation and innovation.” He explains that they are following brand direction from the UK with their ‘Hypnos’ bed, complimentary Wi-Fi, revamping their brand web-site, creating mobile app and making every stage of our reservation more friendly.
“Our room features en-suite bathroom with walking shower concept and we are always adapting our product to the domestic demand with room service, well equipped gym while respecting our brand standards. In conclusion, we are not ‘forced’ to offer something we are only adapting to create unique stays and experience within all our Premier Inn hotels”.