Gulf Monitor

Hotel oversupply makes UAE great for visitors, tough for owners

A recent swathe of new hotel openings in Dubai and Abu Dhabi has ramped up the pressure on owners and investors. The negative effects of oversupply are also being exacerbated by events abroad. These include the entry of Saudi Arabia into the regional tourism market and expected impact of the Wuhan coronavirus on global travel. The latter half of this year will likely see an uptick in arrivals when World Expo 2020 comes to Dubai. But over the longer term, enabling hotels to offer a variety of experiences – and the authorities’ scaling back of new hotel building permits – will likely be two keys to the hotel sector’s future success.

 


Gulf Monitor | Jonathan Gorvett | UAE hotels industry


Travel booking sites can be particularly eye-opening when it comes to determining the fortunes of the UAE hotel sector. Among the dense clusters of hotel rooms now available sit luxurious, five-star hotels charging a mere $150 a night; a four-star room, meanwhile, might retail for under $100 – even at the height of the season in this winter holiday destination.

In Dubai, the hotel room average daily rate (ADR) – which shows the average revenue per paid and occupied hotel room – fell from $182 in February 2019 to $146 in November, according to international law firm JLL. Meanwhile, revenue per available room (RevPAR) – which shows the total guestroom revenue divided by the room count – declined from $155 to $109.[1] International analysts STR further stated that the second quarter of 2019 had seen the lowest ADR and RevPAR in the emirate since 2003.[2]

Abu Dhabi prices have also declined in recent years. JLL reported the ADR there had fallen from $138 in February 2019 to $117 in November, while RevPar had declined from $108 to $86. In both emirates, occupancy rates also fell over the year, from 85% to 74% in Dubai (with STR giving a second quarter rate of just 67.1% – the lowest since 2009) and from 79% to 73% in Abu Dhabi.[3]

Year-on-year, the figures were also in the red for Dubai. JLL reported that ADR in the emirate was 13% lower for the year to November 2019 than in the same period of 2018, while RevPar was down 14%.

While seasonal factors can explain some of the ups and downs, anecdotal evidence from hotel managers backs up a story of increasing concern over sector health. Indeed, one manager at a new, high-end hotel told Castlereagh in late 2019 that many of his guests were consultants hired to find ways of downsizing other hotel businesses.

This is hardly surprising when the supply-side numbers and overall economic environment are taken into account. In 2019 Dubai saw some 7,200 new room keys added, with 3,200 of these in the fourth quarter alone, according to JLL. This brought the sector total to around 126,800 keys.

In 2020 the pipeline is set to disgorge even more. The emirate is set to see around 23,000 more keys added this year, with Royal Atlantis in Palm Jumeirah and Artesia in Damac Hills among the largest.

In Abu Dhabi, there has been greater stability, at around 30,000 keys in both 2018 and 2019, yet, back in 2016, the total was around 27,000. In 2020 around 2,000 more keys are being added, with the 563-room Fairmont Marina Hotel and Serviced Apartments and Park View on Saadiyat Island among the largest due to open.

 

Pro forma blues

Many of these projects were given the go-ahead some time ago, on the basis of a pro forma that saw continuing high oil and gas prices and strong economic growth ahead. But recent realities have been more sobering.

In addition to economic headwinds and falling oil prices, external issues impacting the sector have included the recent Saudi liberalisation and tourism drive. This aims to both attract more foreign tourists, with an e-visa system operational since September 2019, and to encourage more Saudis to take vacations at home.[4]

Recent statements in the press from the Dubai Department of Tourism and Commerce Marketing (known as Visit Dubai) show the number of Saudi visitors – not including Saudi residents in Dubai – down by 20% year-on-year between 2018 and 2019.[5]

The changing origins and incomes of many of the visitors have further affected ADR and RevPAR in both emirates. Russia and China have been major growth markets for Dubai in particular. Visit Dubai statistics show upticks in visitors from these countries at 7% and 15%, respectively, between 2018 and 2019.[6]

This has been good for occupancy rates, but less useful for revenue ­– visitors from these countries tend to be less wealthy than tourists from Western countries and the GCC, who previously dominated the high end of the market. With the recent outbreak of the Wuhan coronavirus in China – and the UAE suspending nearly all flights to and from China in early February[7] – this market may also be severely tested in the year ahead.

 

Let us entertain you

The Dubai World Expo 2020 is seen by many Dubai hotel owners as a long-awaited lifeline. But in the meantime, the neighbouring emirate of Abu Dhabi may offer some valuable lessons.

JLL data shows that ADR and RevPAR in Abu Dhabi went up 5% and 8%, respectively, between 2018 and 2019 , while occupancy went from 71% to 73%. The stability in supply shown above was clearly a factor in this, with Abu Dhabi far more circumspect in allowing new hotels. At the same time, many hotel managers praise the emirate’s tourism authorities for thinking outside the box when it comes to attractions.

Indeed, the emirate has been strongly promoting itself not only as a sun and sand destination, but also as a global cultural hub, with the Abu Dhabi Department of Tourism and Culture able to capitalise on major global attractions like the Louvre Abu Dhabi, which opened in 2017. The collection for the forthcoming Guggenheim Abu Dhabi has largely been assembled now, too, and the Sheikh Zayed National Museum is currently under construction. At the same time, sports events such as Formula 1 and the UFC finals have also drawn visitors.

While Abu Dhabi will also feel the heat from external factors and an increase in supply through 2021, the emirate’s more varied offerings will likely keep it in better standing than its northern neighbour. The proof can often be seen at the weekends, too – many of the visitors among the exhibits at the Louvre haven’t travelled far. In fact, they’ve come from just up the road, with residents from Dubai and other emirates helping keep the occupancy rates and RevPARs up for their Abu Dhabi neighbours.

 

Jonathan Gorvett is a journalist and analyst with many years experience researching and writing about the Gulf and the wider Near and Middle Eastern region. His interests include political and economic risk, development and the evolving place of GCC countries in the international diplomatic, political and economic landscape.


Sources:
[1] https://www.jll-mena.com/content/dam/jll-com/documents/pdf/research/jll-2019-year-in-review-report-for-uae.pdf and https://www.jll-mena.com/content/dam/jll-com/documents/pdf/research/jll-real-estate-market-overview-dubai-q1-2019.pdf
[2] https://www.arabianbusiness.com/travel-hospitality/424630-dubai-hotels-suffer-worst-q2-occupancy-rates-for-decade
[3] https://www.jll-mena.com/content/dam/jll-com/documents/pdf/research/jll-2019-year-in-review-report-for-uae.pdf and https://www.jll-mena.com/content/dam/jll-com/documents/pdf/research/mena-jll-real-estate-market-overview-abu-dhabi-q1-2019.pdf
[4] E.g. https://hospitalityinsights.ehl.edu/saudi-arabia-tourism
[5] https://www.middleeastmonitor.com/20200124-uae-saudi-tourists-declined-by-20-in-2019/
[6] https://www.visitdubai.com/en/tourism-performance-report
[7] https://gulfnews.com/uae/coronavirus-uae-suspends-all-china-flights-except-beijing-from-february-5-1.1580740331001

[contact-form-7 id="345" title="Order Report"]