Sporting events like the Olympics and the World Cup can result in massive revenue earnings for the countries that host them as such events are huge corporate brands in themselves. And nowhere will this potential for earning be more apparent than in the GCC, with Dubai Expo 2020 and the World Cup 2022 in Qatar to come, and the Grand Prix being regularly hosted by the UAE and Bahrain.
Even with the recent collapse in international oil prices, and the fact that GCC countries are vitally dependent on oil revenue, the hospitality sector in the region is forging ahead, witnessing extremely healthy growth at a time when finances in other sectors are seriously stretched and even compromised. The region is rapidly readying itself for a huge influx of tourists, made apparent in the huge expansion in hotel related infrastructure and capacity. Indeed, massive investment in infrastructure spending across all sectors is happening across the GCC. As a report by Alpen Capital states, the GCC hospitality industry should expand at an annual rate of 9.5 percent, from USD 22.8 bn in 2013 to USD 35.9 bn by 2018. Saudi Arabia will be the largest market in terms of revenue, followed by the UAE, and forthcoming events in both Qatar and the UAE will drive exponentially increased growth in the hospitality industry in these countries.
The gateway cities of Dubai, Abu Dhabi, Doha, Riyadh, Jeddah and Muscat are all expanding rapidly, attracting internationally renowned meetings, conferences and exhibitions (MICE). This, in turn, is fuelling record numbers of tourists and business visitors, with Doha and Dubai becoming vitally important international transport hubs. Over 124,000 hotel rooms are available in these six cities alone, with many more being constructed. In Qatar, 45,000 more hotel rooms are scheduled to be built and opened by 2017 to reach the requirement of 60,000 rooms expected by FIFA to accommodate fans attending the 2022 FIFA World Cup.
In Dubai, the Department of Tourism and Commerce Marketing estimates that between 140,000 to 160,000 new rooms will be required to match rising levels of tourism and that by 2020 a further 10,000 will be needing refurbishment before the upcoming Expo 2020.
This expansion is hardly surprising given the figures. Over 50 million people visited the Middle East in 2014, two million more than in 2013. More than 11 million hotel guests visited Dubai in 2014, up 5.6 percent from 2013. Abu Dhabi attracted around 3.5 million tourists, and domestic tourism in Saudi Arabia soared by 25 percent, with around 23.8 million travelling within the kingdom itself. In Oman, the number of four and five star hotels increased by an astonishing 24 percent in the first quarter of 2014.
Philip Wooler, area director of the Middle East and Africa for STR Global, notes: “The market in the Middle East is changing daily, but despite that, the hotel industry will have a fabulous period of occupancy, and a great opportunity for profitability.”
The impact of mega events
There is no doubt that the impact of mega events upon the host countries is huge. FIFA, the governing body of world soccer, has asked for at least 60,000 rooms to be built and ready to host visitors attending the football tournament. Accordingly, construction firms in the Qatari hospitality industry have gone into overdrive to meet the FIFA requirements. Wooler, who has been in the global hotel industry for the past 20 years, working for international hotel companies and consultancies in the UK, USA, Middle East and North Africa, says: “Qatar is going to host major events; everybody in the industry knows that. And three to four years before those major events, a lot of professional people appear – engineers, architects, politicians and soccer teams, to name but a few. They know this is a moment to jump on the bandwagon, and that this is the first Arab country ever to host World Cup. They are going to build the most state of the art football stadiums in the Middle East and North Africa, so the opportunity to host major events is there, and will bring more business opportunities, especially in the hotel industry, which will see strong growth.”
Wooler goes on to say that: “My personal view is that the Dubai Expo 2020 is going to be the best event there has ever been. I have no doubt that it will easily attract 25 million visitors. The city is gearing up for 2020, and it will be polished shiny and fabulous! I think it will be an incredible success.”
He further adds: “At the same time, I think the Qatar World Cup will also be a fabulous event. The way the city is gearing up for 2022 is remarkable, making Doha the most exciting place to be on the planet. I have no doubt that these two events will be absolutely fabulous and they will bring strong growth to the hospitality industry in the region.”
A smarter pricing policy
Room rates are an important way to stimulate demand, and offering discounts on room rates is an obvious easy way to boost occupancy. Filippo Sona, head of Hotels MENA Region at Colliers International, states that how room rates are discounted, plays a vital role to increasing profits and benefits within the hotel business. He says: “The hotel has many individual business units, for example, the room department, the food and beverage department, and the leisure and spa department. It’s like a business with multiple companies that work together to maximize the overall business. So now hotels are concentrating on grabbing more and more people, and offering them a better price. If somebody attracts a lower room price, they may spend more on meals, or spa treatments. So the more people you have, the more opportunity to sell your various services.”
Wooler also believes that room rates should be made more affordable to attract more travellers:
“I think hotel management can charge whatever they like, but they need to manage that process effectively, mainly by fixing correct room rates. Sometimes, the room rate is initially far too high, and this must be reduced to make travellers return again and again.”
He adds that Dubai has become largely unaffordable for huge leisure segments, and that consequently, proper strategies have to be developed to make it more affordable: “One way to control this situation is to introduce more supply. When more supply is introduced to the market, more pressure on room rates and occupancy will make room rates more affordable. If Dubai increases supply by 40 percent to 50 percent in the run up to Expo 2020, it is going to be an affordable city. Then the room rate can be offered at an attractive price to more easily attract 25 million-plus visitors.”
He adds: “The World Cup is different, because it is only held over a four week period. However, I would imagine there will be some degree of rate capping for hotel rooms in Doha to make it more affordable for fans and visitors.”
Oversupply poses challenges
Hotel occupancy rates in the GCC easily command a greater ADR (Average Daily Rate) than others globally. In 2015, the highest occupancies are expected in Dubai, Abu Dhabi and Doha, with these cities together commanding over 80 percent of overnight stays. Industry experts forecast this trend to continue throughout 2016, including in Muscat and Abu Dhabi, where ADR and occupancy will also be solid. This will be driven by increased levels of supply and infrastructure spending, and more tourists visiting as a result of governments’ advertising initiatives.
Sona says this high occupancy rate is the reason Qatar has developed such a profitable hotel sector: “The hotel industry is still doing well in Qatar, even in the economic slowdown. The occupancy is above 70 percent, meaning that out of 100 rooms, 70 are occupied – a positive sign for the Qatari market, and a sign of a highly profitable industry.”
The highly increased hotel room capacity in the GCC, however, means that the sector could face serious sustainability challenges once the mega events are over. Oversupply is a major concern, and Sona says that the hotel industry is actually facing challenges across all levels: “The supply of new hotels is expanding at a time when, because of lower oil prices, people have less money, and domestic ‘feeders’ of traveller numbers, such as Saudi Arabia, Bahrain, and the UAE are slowing. People are spending less money for ‘domestic’ vacations, so those numbers are falling. They holiday at home rather than travelling to the state next door.” However, he further notes that Qatar is in a different position, since it is a very wealthy nation with huge cash reserves.
Wooler says this is a challenge for individual owners, but it is not a challenge for Doha, since the city is growing so rapidly to face the future: “Supply is going to be a challenge but at the same time, it is also necessary.” So a dramatic fall in the oil price and over supply of hotels could become an issue, but only in certain parts of the region.
The bigger the problem the bigger the opportunity
Sona believes that falling oil prices, far from being disastrous, actually present a great opportunity for investors in this burgeoning hospitality industry. “Everybody knows oil price is down, and that falling oil prices lead to a lower price for land. This may come as a blessing for investors since there is an opportunity to buy land at a far better price. Presently, a lot of investors have cash, and want to buy land – and these people are concentrating on reducing costs. So they consider that if they buy now, when the oil price goes up, as it inevitably will, business goes up correspondingly, and the value of land also increases. There can be no question that they will make a fortune,” says Sona.
Sona adds on a positive note: “The bigger the problem the bigger the opportunity and this opportunity is being able to do business in a more effective way. They need to develop new strategies to attract more people and extract added value from them. Hotel management is trying to grab customer attention by offering attractive prices, and once guests are at a hotel, the job of management is to try to make them spend more money on ancillary products and services.”
He is realistic about what will happen after the major events have taken pace. He states that by 2022, there will be increased levels of both Qataris and expats: “So more demographics means more business. Now, simply talking about 60,000 rooms panics everybody – however, in 2022, it is a number that everybody will be comfortable with. The main aim is to plan correctly, without haste.”
One thing is clear. The expansion of the hotel sector is attracting investment to the economy as well as showcasing the GCC’s organisational strength and ability, particularly in developing better infrastructure. This in turn boosts economic self-confidence at a national level, bringing optimism across all sectors.