GCC hotels seek return to growth after a tough 2016

In days gone by the Gulf Cooperation Council was the darling of the global hotel industry.

Record revenue per available room, some of the world’s highest occupancy rates, government investments in tourism infrastructure and mega events on the horizon attracted hoteliers from every corner of the globe keen to gain their slice of the action.

“Seven to eight years ago there was so much demand into the destination and much less supply. Hotels were used to very good occupancies, sky rocketing rates, very good profits and that was the way it was,” says Christian Pertl, regional vice president of sales operations for the Middle East and Africa at Hyatt.

“You didn’t necessarily need to think a lot about strategies, and where is the business coming from and what you needed to do. Business was there. That has obviously changed. “

First quarter data from market research firm STR serves as an indicator of this changing climate faced by regional hoteliers as the lower oil price, reduced economic sentiment and government austerity measures continue to impact the industry.

Reductions in revenue per available room (RevPAR) – a key metric of hotel performance – ranged from 30 per cent in Jeddah, to 22 per cent in Riyadh, 17 per cent in Manama, 16 per cent in Doha, 15 per cent in Muscat and 8 per cent in Abu Dhabi.

Dubai, hailed as one of the few Gulf bright spots, saw a more moderate decrease of just under 4 per cent.

“2016 was a very tough year across pretty much all markets and 2017 started in a similar fashion,” says Robin Rossmann, managing director of STR.

“Saudi has had the toughest of it, Qatar is also struggling to cope with all the increased supply that’s going in there, and likewise Bahrain which is heavily dependent on outward bound Saudi demand has had a tough time.”

Are things as bad as they seem?

Amid these gloomy conditions, some hoteliers stress that conditions are not as bad as some would have you believe; particularly given rates are declining from high levels in a global context.

“For me the big thing about the Middle East is that it might be coming down but down off a high base and so the market is still in general profitable,” notes Rossmann.

This is supported by the company’s data. An analysis of gross operating profit per available room (GOPPAR) for 2016 reveals margins are above 45 per cent in Kuwait City, above 40 per cent in Dubai and Riyadh and around 35 per cent in Doha. While even in worse performing markets like Abu Dhabi and Manama they stand at around 30 per cent.

In light of this, some hotel groups stress that it is not all doom and gloom in the regional hospitality industry, even if conditions are not as favourable as they once were.

“It’s true that for two to three years rates have come down in Dubai,” says Guy Hutchinson, COO of Abu Dhabi-based Rotana. “However, the underlying base of how the market actually performs is in the top five destinations globally.”

“There are probably 300 destinations around the world that would give their right arm for Dubai’s numbers so we’re actually blessed with how the market has developed in the space.”

Others too suggest that despite the blip in performance in recent years, the fundamentals of the Gulf region remain attractive for hoteliers.

“We are really very confident for the market, and there will always be ups and downs, that’s the cycle of the business especially in the Middle East where the volatility can be quite omnipresent,” says IHG COO for India, Middle East and Africa, Pascal Gauvin.

“Operators that have been here a long time understand the market well and how to manage it and making sure that for our investors it is still profitable even when times are a bit more difficult.”

But there is also a sense that the “good times” – as Gauvin describes the period of record high rates in Dubai over the last decade – may be over, as governments seek to boost tourist arrivals.

“It was not sustainable, we knew that,” he says. “We had many leads for large conferences we could not take. Honestly it was quite tight. So we knew at some point we needed to build more and the government realises that.”

Supply and demand

On top of challenging economic conditions in some markets, one of the key factors suppressing hotel rates is new supply.

Middle East data for March from STR shows 153,298 rooms in 546 hotels under contract, including the construction, final planning and planning stages – a 1.1 per cent rise on the previous year. Of this, more than 42,000 rooms are under contract in Dubai alone, giving the city the largest hotel pipeline in the world.

The challenge for many regional markets will be absorbing this capacity without impacting hotel performance.

As Yousef Wahbah, MENA head of transaction real estate at EY, notes, some 2,000–2,500 hotel keys have entered the internationally branded four and five star category in Riyadh and Jeddah alone in the first quarter, partly explaining why rates in those markets have been hit particularly hard.

“Supply is coming into the market and that’s obviously not helping when the market is soft,” he says.
“I do see a risk [of oversupply] in a city like Jeddah, and to a lesser extent Riyadh and Doha.”

Despite these concerns, regional operators show no sign of slowing down.

Mark Willis, area vice president for the Middle East and Turkey at Rezidor Group, says the brand could even exceed its 17 confirmed openings across the region this year, including 11 in Saudi Arabia.

“We look at things in a positive manner. Q1 has been relatively good across the entire GCC. Saudi remains a location where supply has increased dramatically. Things are flat – we haven’t seen any year on year growth – but I still think we’re looking at positive trends.”

But the fact that five of Rezidor’s properties in Saudi Arabia will be under its midscale Park Inn by Radisson brand is also a clear sign of changing strategies in a region traditionally dominated by luxury hotels.

Of the Middle East March pipeline, some 20,983 rooms are under contract in the luxury segment, compared to 43,619 in the upper upscale, 32,213 in the upscale, 16,415 in the upper midscale and 10,813 in the midscale. STR predicts that this increasingly diverse roster will mean midmarket supply will match luxury in the region by 2021.

Brands including Emaar’s Rove and Rotana’s Centro reflect a different mind-set from operators in the region – seeking to diversify their portfolio and cater to a wider audience inline with government efforts to boost tourism.

Another hotelier embracing the mid-scale segment is France’s Louvre Hotels, which was bought by China’s Jin Jiang International Holdings Co in 2015.

The group’s regional plans include 5,000 rooms across 40 properties in the budget friendly segment by 2020.

“What we have realised today, with the pressure on the GCC economies and on the demographic of travel, the great motivator is definitely the budget hotel sector and the midscale,” says Amine Moukarzel, president Louvre Hotels Group MENA.

“The old good days that we have witnessed in the last three to five years, I’m not going to say they have gone by, but there is a pressure because of two major factors. Number one is supply and demand and number two consumer spending.”

While these factors continue to have an impact, Gulf hoteliers are hoping for an improvement in conditions by the end of 2017 as factors including the UAE’s granting of visas on arrival to Chinese and Russian travellers, and Saudi Arabia’s decision to restore financial allowances to government workers, bear fruit.

“There are positive signs in the market – whether in UAE or Saudi – that would support a growth in RevPAR towards I would say the last quarter of 2017. But we will still see an overall drop in RevPAR in 2017 and then in 2018 we’ll start to see a positive increase in RevPAR,” says Wahbah.

STR’s Rossmann shares a similar forecast, citing signs of recovery in Dubai in particular as an indication conditions may be improving faster than initially expected. During the first quarter occupancy rose by 2.7 per cent to 86.3 per cent, and overnight visitors increased 11 per cent to 4.57 million.

As a result of these improvements, he says the firm will likely improve its forecast made at the start of the year of an average 8 per cent decline in RevPAR across the Middle East.

“It’s probably still going to be down this year but hopefully this will put us in a good place and next year we can start seeing growth,” he adds.

But, while the actions of regional governments are fuelling optimism there are also concerns that they have just as much potential to dampen future growth.

As a recent panel session at the Arabian Hotel Investment Conference in Dubai emphasised, the 2018 introduction of a 5 per cent value added tax rate in the Gulf region is making many operators nervous, particularly given the uncertainty surrounding how it will be applied to hospitality.

“VAT is a grey area,” said Ignace Bauwens, regional VP for Middle East and Africa at Wyndham Hotel Group, citing a lack of clarity surrounding the tax’s introduction alongside existing municipality, service charge and tourism dirham fees.

“We will potentially be adding 25-30 per cent on a guest’s tax bill,” he suggested, adding there was a risk of making an already expensive destination like Dubai more expensive.

While a second potential pitfall could come from the introduction of additional hotel levies as lower oil prices lead governments to seek additional revenue sources.

“There is nothing yet announced but I did hear certain countries are considering as an alternative source of income to go and levy certain taxation or fees on hotels,” says Wahbah.

“If this is something insignificant, it can be absorbed and passed on to the end user. But if it is something really significant then that will negatively impact the hospitality market.”

These and other challenges will need to be navigated as operators eye a potential return to form later this year.

Box out: Is bigger better?

Outside of Middle East specific issues, another factor market players will have to navigate in the coming years is the formation of ever larger hotel groups through mergers and acquisitions as shown by two major deals in 2016.

Marriott International Middle East and Africa has revealed plans to increase its combined regional portfolio from 52 hotels to 80 within the next four years after its $13bn acquisition of Starwood Hotels and Resorts.

French rival AccorHotels has plans to more than double its regional footprint to over 150 hotels by 2020 after completing its $2.9bn acquisition of Fairmont, Raffles and Swissôtel brands owner FRHI Hotels and Resorts in July.

For the likes of Marriott, whose president and CEO Arne Sorenson was in Dubai in April, the emphasis has been on the synergies and scale the merger has offered the firm, including a combined member base of 85 million customers. Sorenson has also emphasised the increased clout the combined group now has when negotiating deals amid expectations it will receive better commission terms with online travel agents.

Among large operators there appears to be some agreement with this argument.

“Scale matters, and scale combined with broad geographic diversity, with good product service is really powerful,” noted Hilton president and CEO Christopher Nassetta at the Arabian Hotel Investment Conference in April, while insisting the firm was not “bounty hunting” for deals itself.

However, others argue bigger is not necessarily better when it comes to brand portfolio, customer experience and owner satisfaction.

“I question whether you can sustain 30 brands in the long run and how many people recognise those brands,” said Jumeirah Group CEO Stefan Leser in a panel featuring representatives from both Marriott and Accor at the conference.

“If you look at other big companies and how many brands they sustain, it’s not 30 it’s five – they go down and consolidate.”

Some also suggested that larger groups risk prioritising shareholder interests over those of their property owners.

“Size will matter, it does matter, but do not forget that when you talk to an owner he wants that small size mind-set also,” said Ani Bhardwaj, director of A.A. Al Moosa Enterprises and a hotel owner.

Rotana’s Hutchinson echoed similar sentiment. “We think there is opportunity in that because the larger the multinational become the more the value system around those companies shifts and performance values shift,” he said.

“A lot of investors are wanting to know they’ve got a partner who is going to be at the end of the phone when you talk to them about business.

“If you’re operating 1,000 hotels it’s not manageable anymore and the value of the company is not necessarily measured by performance, it’s measured by share price performance which is a different thing, We make our money from the hotel.”

Despite this argument, almost every hotel operator we spoke to forecast that the consolidation trend was likely to continue in the coming years, meaning bigger may become the new norm.