Special Market Reports Issue 54: DUBAI

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Joan Payne
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1 Issue 54: DUBAI December 2015

Dubai tourism: From emerging to established Tourism in Dubai is on the rise as the city prepares to host the World Expo in 2020 and it s no longer fair to say the market is still emerging, according

2 Dubai tourism: From emerging to established Tourism in Dubai is on the rise as the city prepares to host the World Expo in 2020 and it s no longer fair to say the market is still emerging, according to an analysis from Horwath. While various rating agencies classify Dubai as an emerging market, its tourism and hospitality industry can hardly be considered emerging any longer. Over the last 10 years, Dubai has established itself as one of the world s fastestgrowing tourism and hotel markets. In the first quarter of 2015 the hospitality sector accounted for 5.6% of total gross domestic product. However, the GDP breakdown for the hospitality sector measures only restaurants and hotels. Tourism in the broader sense is a much bigger driver of economic growth in Dubai, and some officials have indicated between 20% and 30% of Dubai s GDP is tourism-related. Dubai International Airport welcomed 70.4 million passengers during 2014 making it The World s Busiest Airport for International Passenger Traffic, according to Airports Council International. By the end of 2015, Dubai is projected to welcome 79 million airline passengers. Hotel room supply has more than tripled over the last 10 years to nearly 70,000 keys in 2015, which doesn t include 30,000 hotel apartments keys and an additional 20,000 in the pipeline, according to Horwath research. By comparison, Paris boasted approximately 82,000 keys in 2014, according to the Paris Convention and Visitors Bureau. Source: 1- Tourism in Paris - Key figures 2014, Paris Convention and Visitors Bureau. In millions 2- Department of Tourism and Commerce Marketing (DTCM), Dubai. In millions While Dubai s impressive tourism statistics might rival those of Paris, its development on the ground and the challenges it faces ahead more closely mimic those of other establishing cities such as Shanghai (which hosted the 2010 World Expo) and Moscow. Dubai s diversification As a market that has traditionally been dominated by 5-star products and experiences, Dubai s hospitality and tourism offerings are diversifying with goals of attracting 20 million tourists by 2020, when Dubai will host the World Expo. To meet this goal, the city is changing its identity to become a more competitive destination: the continued growth of Emirates Airlines and the addition of low cost carriers to the region; the development of the leisure market with the addition of several large-scale theme parks; government incentives offered for the development of budget hotels; a supply pipeline dominated by mid-market and budget products; and the emergence of alternative booking and lodging options such as Airbnb and last-minute booking applications. Having a more segmented market will not only make Dubai more competitive, but it also will help insulate against specific source-market demand shocks. Product differentiation and market diversification do have implications with regard to the local industry s status quo and standard business practices moving forward. Owners and operators in Dubai have traditionally had it fairly easy compared to some more mature markets. Limited to no revenue management was a normal practice; average daily rates were among the world s highest; and aside from the typical slow summer period, occupancy levels between 75% and 80% were all but guaranteed. However, recent rate declines and a slight decrease in demand are noticeable mainly due to the fall in oil prices and currency fluctuations. These decreases have sparked concern in the market and have fueled speculation of possible oversupply and reductions in ADR, threatening the overall sustainability and profitability of hotel development in Dubai.

3 While significant in size, the supply pipeline is likely to be absorbed without too much disruption to the market. Growth in tourist arrivals has averaged 7.5% annually for the last 10 years. For the last three years, the combined growth in tourist arrivals exceeded 9% annually. If Dubai can maintain these levels of growth it will likely exceed its target of 20 million visitors by 2020 and as such the supply pipeline is warranted. A decrease in ADR is expected for several reasons, however. First, the market-wide ADR is a reflection of the level of diversification in a market as much as it is a reflection of performance. As more budget and mid-market properties enter the market, the market-wide average will come down. Secondly, as more hotel options become available, older properties in less desirable locations will suffer and are likely to cut rates to maintain occupancy. Overall, we consider this a healthy development as Dubai moves from an emerging hotel market to an establishing one. Furthermore, we anticipate seeing more alternative funding and operating models. While the standard developer owner and branded operator model is prevalent, we are already starting to see more variation. A number of properties are on the market as sell and lease back propositions, and the emergence of regional developerowned brands is making the owner operator model more common. Finally, with the emergence of regional brands alongside established brands, we foresee an increased focus on brand equity in a bid to win the loyalty of customers and sustain profitability. Brand loyalty, brand awareness, perceived quality and brand image will, even more so, become the driving forces behind the ability to charge a price premium in an establishing market. This increased competition will force developers and operators to refocus their attention on two basic core drivers moving forward: cost and value. To compete in this new establishing market, developers and owners will need to more carefully consider their standard of facilities, funding/operating models and value drivers. Traditionally the standard of facilities in Dubai has been comparatively high. Gross area per key and standard room sizes are well above global averages. By maintaining a healthy bottom line in an increasingly competitive market, development costs and operating expenses will be scrutinized. As such we predict a rationalization of the standard of facilities and increased building efficiencies in new developments. With that rationalization, a reduction in operating expenses is possible, but we expect further emphasis on training and staff efficiency in the form of, for instance, cross-departmental functions, part-time and potentially temporary or flexible working solutions in an effort to curb increasing labor costs and enhance retention in a market were the talent pool is dwindling. While current alternative employment arrangements such as flex working and temporary contracts are not at the operators disposal due to prevailing labor laws, we expect to see some changes to the local labor legislation in the years leading up to Dubai Expo 2020 to allow for more flexibility.

4 WRITTEN BY: KIM DRUBBEL Senior Director Horwath HTL UK Kim joined Horwath HTL in 2015 to oversee operations and expansion to the Middle East. Kim has more than ten years of experience in the mixed-use real estate, hospitality and retail development sectors in the Middle East. She is adept at evaluating complex real estate developments and undertaking detailed sector and financial analysis for Re-Development, Green- and Brownfield projects. Kim has worked on multiple large and high-profile developments in the MENA region representing a combined investment value in excess of USD 50 billion. She has advised and represented a significant number of Regional clients including Investment Corporation Dubai, Meydan, Sobha, Aldar, Manazel, AE7, Burt Hill, Waha Capital, Emirates Palace, Al Fattan, Bloom Properties, Mubadala and Union Properties. HORWATH HTL UK 15 Old Bailey EC4M 7EF London United Kingdom

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