Since mid-2014, hoteliers in Dubai have been going through tough times. The completion of substantial new hotel room stock came in baleful synchrony with the oil price crash, the Rubel depreciation and Dollar appreciation. All this weighed heavily on the tourism demand from Dubai`s most significant source markets, thereby substantially decimating the hotelier`s revenue figures.
As the saying goes, there`s no shadow without light and it has to be pointed out that Dubai`s hotel industry has been one of the best-performing worldwide for the greater part of the past decade. Occupancy and Revenue per available room (RevPAR) had been phenomenal, above all conditioned by tremendous growth rates in tourism with which the construction of hotel rooms could barely keep track. Furthermore, one should not forget that the increase in overnight visitors in Dubai amounted to a healthy 5% even in 2016, however marking a substantially slower than the long-term sector growth (8% CAGR since 2012).
Mass Markets as Growth Drivers
Still today, Dubai attracts by far the most free-spending tourists worldwide, with the spending per visitor clocking more than double the amount of runner-up London (Mastercard Global Destination Cities Index). However, the recent market evolution seems to support the assumption that the skimming strategy has reached its limitations and that even the wealthy are susceptible to price hikes (currency fluctuations) and declines in income (oil price).
It appears that Dubai`s tourism strategists would have seen this coming, as in my opinion it is not by coincidence that the advent of a host of theme parks – Legoland, Bollywood Parks Dubai – to name but a few, are to lure new tourist segments to the dynamic Emirate. And yet, the latter attraction gives a clear indication that the targeted audience are mid-income family travelers from the gigantic source markets India and China.
Diversification as Growth Driver
But it doesn`t stop here: Dubai is actively promoting development of inbound medical tourism and the goal is to welcome 500,000 medical tourists per annum by 2020. Furthermore, since mid-2016, Dubai is home to the only opera house within the Middle East. While it is too early to assess this venture`s success for now, it becomes apparent that Dubai is constantly diversifying its offerings, thereby addressing new segments of tourists.
While it is obvious that Expo 2020 will be an outstanding, non-recurring event, there is little doubt that Dubai`s local tourism industry will return to its long-term growth rates, also due to the development initiatives outlined above.
Affordable = In Demand
Consistent with a visitor`s clientele that has traditionally been highly solvent, Dubai`s hotel market has been and remains top-heavy to date: At present a total of 54% of the hotel room stock in the emirate is categorized as 5-star and 4-star. Analyst Deloitte estimates that an additional 23,000 hotel rooms will become available between 2016 and 2020, roughly 30% of the inventory as per 2016. Considering the growth prospects in visitors and with Expo 2020 on the horizon, this seems all but unsustainable.
In line with the initiatives to tap into the mass markets and thereby creating tourist inflow from lower income segments, there will be substantial shifts in demand towards the lower-grade, primarily branded hotel offerings – opportunities abound.
Conclusion
Due to the economic pressure in the present hotel environment, there are occasionally some highly attractive offerings to be reaped (off-market), which have substantial upside potential considering the prospects of the industry towards and beyond 2020. What`s more, with the oil price showing some upward tendency, the UAE`s anchor markets in the region (i.e. Saudi Arabia, Iran) are likely to regain traction within this time frame.
While we see that somewhat reduced occupancy and room rates will represent a „new normal“, Dubai`s tourism sector as a whole and over the long term exhibits an extremely healthy growth trajectory. With the lion`s share of tourism growth inevitably to be seen in the budget segment, hotel investors on the hunt for attractive ROIs are well-advised to shift their focus towards assets settled in the lower-grade hotel segment. We have become aware that the present trough-situation imposes pressure on some market players to divest their hotel assets, creating an entry occasion for opportunistic institutional investors.
The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on
author@property-blog-dubai.com.
