Are markets such as Dubai and Middle East worst hit when compared on a global scale, especially with regards to room rates? What are the rate projections for 2010?
One of the typical characteristics of downturns in the hotel sector is that occupancy tends to decline first with a subsequent negative impact on average room rate as hoteliers yield manage or discount to shore up the occupancy decline. Upper market hotels are affected first, especially where the downturn is driven by economic factors as opposed to ‘events’.
Based upon STR global results of a selection of key global cities all hotel markets have experienced a decline in occupancy levels in 2009 compared to 2008. Some have been affected more than others with a number of markets experiencing a single digit percentage drop and others a double digit percentage drop. Dubai experienced a drop of 10.2% in occupancy levels from 77.2% in 2008 to 69.4% in 2009. Compared to other global cities the percentage drop is higher than experienced by most European, North American and Asia Pacific destinations.
However, we would comment that some of this decline is due to the continuing development and opening of new rooms through the year within the Emirate.
The Dubai market is largely dominated by the luxury sector of the hotel market and thus levies rates that are commensurate with the product offering. In 2007 the Dubai Emirate achieved an average room rate (ARR) of US$308.51 (source: STR Global) which compared to other global cities was the highest. New York was the next highest performer with an ARR of US$275.04. However, hotels within the deluxe market have in the current economic environment tended to suffer the most with hotels having to offer significant discount to either generate or maintain demand levels. The current economic environment is global and as such this has had an impact on hotel performances virtually across the world. Most cities experienced a decline in ARR during 2009 compared to 2008. In Dubai, ARR decreased by 23.7% to US$235.48, on a global scale Hong Kong experienced a decrease of 37.8% in ARR which was the highest across a selection of key global cities. Dubai’s decrease is compounded by the continuing increase in supply of five star rooms within the Emirate. Together with declining occupancy levels due to the economic crisis there is a requirement by hoteliers to discount rates to secure demand.
In respect of 2010, the general consensus amongst the industry is that trading will be tough. Economies are showing growth albeit minimal in some areas and as such corporate travel is still likely to be restricted and leisure travel may decrease as disposable income is reduced. UK is one of the prime sources of demand for Dubai and with a high degree of uncertainty in respect of the economy for this year, travel for both leisure and business is likely to remain depressed. As such, the immediate impact to hotels will be a loss in occupancy levels which in turn leads to a drop in room rates. As a result, in our opinion ARR is likely to decrease further or at best remain in line with results achieved in 2009. The concern that remains is the continuing development of hotels within the Emirate. Whilst a number of hotel developments have been put on hold the ones that are due to open in 2010 are aimed at the 5-star and above markets. This places further pressure on hotels to achieve reasonable occupancy levels and thus a stronger argument for ARR to drop further this year.
Cities within the wider Middle East region, based on STR Global data have had a mixed reaction to the current global economic environment. Not all cities have a global profile and a considerable amount of demand is generated amongst the GCC countries. Dubai, amongst its peers, has been affected the most, year to date October 2009 ARR was down 26%. Abu Dhabi as a comparison increased rate by 4.7% over the period. UAE as a whole saw ARR decreased by 10.4% year to date October 2009 versus the same period in 2008. Compared to the global market some cities in the Middle East have out performed other key global cities, but as a region UAE (skewed by Dubai) has probably faired the worst.
When do we see a recovery in room rates globally? How long do you think markets like Dubai / UAE will take to actually recover their average room rates? What per cent do you see Dubai hotels' rates declining in 2010?
The general consensus is that room rates will not start to improve until 2011. It is fair to say that some markets will improve before this time but as a global perspective recovery will not be seen until 2011. Rate improvement generally follows a recovery in demand levels. With positive outlooks in respect of economic performance, it is expected that corporate demand will improve towards the latter part of 2010. As demand increases it allows hotels to start increasing negotiated rates. Leisure travel may take longer to improve and therefore leisure sector rates may remain depressed.
Dubai and UAE hotels are likely to follow a similar trend and as such hotels may experience an improvement in rate in 2011. However, with a large proportion of demand for Dubai hotel rooms generated from the leisure sector, rate improvement may take longer toward the end of 2011 and beginning of 2012.
A correction was required in the Dubai hotels' room rates, which were astronomically high before the downturn. So would the hotels be actually able to return to their peak rate levels?
Dubai room rates were high before the downturn, but with a high proportion of five star deluxe rooms the achieved rates were not surprising, due to the fact that there are little mid-market or budget properties to dilute the ARR compared to other global cities.
In respect of whether or not Dubai hotels will be able to achieve the rates of 2008 in the future, the following points should be considered:
• The continuing development of five star deluxe hotels within the Emirate will place pressure on occupancy levels and thus the ability for hotels to charge high rates with many offering significant discounts. Hotels that occupy a prime location, i.e. on the beach or attached to a significant tourist attraction or mall should be able to improve rate better than those properties that are considered to have a secondary location.
• The London market has been affected by the current economic climate, especially in ARR with rate decreasing from £117.92 to £110.82 a drop of 6.0%. Before the current downturn, performance indicators on a real growth basis (i.e. with inflation stripped out) RevPAR has not recovered to the highs experienced in 1998/99. Since this period a number of global events have occurred and whilst both occupancy and ARR improved after each event rate has yet to get back to levels achieved pre 2000. This is due to greater levels of room stock available and the difficulty hotels have had in increasing rates over the period.
In downturn periods hotels tend to discount heavily in order to maintain occupancy, however recovery takes several years and may not get back to rates achieved previously. In our opinion it is unlikely that Dubai hotels’ will be able to achieve rates experienced pre the current downturn. This will be compounded by the future pipeline in Dubai and the ability of people to negotiate better rates on both a corporate and leisure basis.
