Dubai bubble: About to burst?

Industry experts underlined the strength of the regional market and called for an end to the speculation that the hotel boom in Dubai and its neighbors was part of a temporary “bubble.”

Dubai bubble:  About to burst?

Industry experts underlined the strength of the regional market and called for an end to the speculation that the hotel boom in Dubai and its neighbors was part of a temporary “bubble.”

Veteran hotelier Gerhard Hardick, chief operating officer of hospitality consultant Roya International, said he thought the bubble would not implode but explode, resulting in a much larger industry. “We are getting too small for our jacket when you consider all the major developments region-wide,” he said. “The best way to predict the future is to shape it ourselves. Dubai has done this and the vision of Dubai is now being realized.”

Pointing to the real challenges facing the hospitality industry in the region, he said service was one area where standards had actually declined over time. “This is something we have to look at now as it is core to the value proposition that we offer but in this respect, the influx of supply will resolve the issue in time,” he said.

Oqyana Limited chief executive Dr. Wadad al Suwayeh said the city of Dubai as a tourism destination fuels its $108 billion GDP, supported by various sectors from the current Dubai International airport serving 29 million passengers (including the upcoming new Jebel Ali Free Zone airport catering to only foreign carriers and is aiming to serve120 million passengers yearly), the Dubai Ports Authority and Jebel Ali Free Zone to various tourism entities.

Hotel occupancies in Dubai have reached 85 percent versus occupancies in Hong Kong (83.8 percent), Sydney (76.6 percent), Tokyo (73 percent) and London (71.9 percent). There’s also a 3 percent yearly growth in occupancy from 82.06 percent in 2006 to 84.04 percent in 2007, making Dubai a destination in its own right, while increasing exposure to a wider global tourism audience.

Suwayeh added that occupancy and the average daily rate in Dubai will probably move from a “not normal” situation to a normal situation. The result will be more positive and will be interesting to watch. “However, if there will be more than 600-700 hotels coming into Dubai, there will be a stagnant growth bringing about a reduced growth in the way that we have seen over the last 10 years. I don’t think there will be any severe effect on the bubble. It has been said since 1986 that the tipping point has been reached; they’ve hinted at it since the last 16 years (but no correction in the market has yet proven this stage). But in the future, these investors who have made investments in Dubai in the last 3 to 4 years would just have to accept terms widely accepted by the rest of the world,” said Suwayeh.

“Destination Dubai has shown that it can level and balance itself out. When all the new hotels come on-stream, prices will not collapse but rather will stop rising at such levels as we experience today,” said Hardick, who added there is a line of investment in the US for this part of the world, but minimal.

He added: “Most of the investments for this part of the world come from this part of the world. That’s why any slowdown in the US economy will not affect the investment climate here. Indicators don’t show that the bubble is about to burst. The inactivity in movement in real estate does not reflect a slowdown. This unique location of Dubai holds still a large untapped potential feeder market for Dubai, such as China, the subcontinent and the region itself fuelled by 400 million people in this part of the world (compared that to Dubai’s 200 million feeder market in Europe). Any slowdown in the West will surely not affect Dubai.”

Arif Mubarak, CEO of Bawadi, said the US market has never been a prime market for Dubai and anywhere in the region. “We’ve always looked at the 14 to 16 hours flight time to Dubai from the US, which does not give us a great advantage to capture. We are not going to be affected in Dubai by the slowdown.”

He said Bawadi is a destination by itself, with hotel investments by themselves. “We are doing projects with our local partners such as Emaar. Joint venture partners have already also invested in us. Profitability is our target, though construction costs have gone up. Construction will have no effect on our hotel returns while we sit on the high side of the return of investment. If there would be a drop, it won’t be long at least,” said Mubarak.

On hotel star classification, Daniel Hajjar, managing partner of newcomer Layia Hospitality, endorsed this view and stipulated that it was extremely important in the immediate future to focus on developing properties in the mid-scale and budget rankings up to US$150 a night range. “For the growth of Dubai, particularly in terms of attracting large conventions and events, it is imperative to start investing in this area,” he said.

Mubarak said the convention facilities and MICE support including the Bawadi hub will help capture the convention market, even if Dubai would have to take in more groups beyond the current inventory.

Experts concurred on the bullish outlook for hospitality sector in the Middle East, with Gerald Lawless, executive chairman of Jumeirah Group, referring to recent research from Mastercard that revealed that around $3.63 trillion was being invested in travel-related projects up to the year 2020.

“Around 170 million arrivals are expected by that year (2020), and some 830 new hotels are under development to give an additional 750,000 rooms across the region,” he said.

Addressing the issue of whether this growth was sustainable, Lawless said the answer lay in maintaining the level of investment across the board, and the expansion of airlines such as Emirates and complementary developments in the region, in Abu Dhabi, Oman and Qatar, for instance. “This is not a temporary phenomenon. We still have a long way to go,” he added

Statistics from US-based audit company HVS Research backed up this optimistic viewpoint, with research presented by managing director Russell Kett revealing new supply numbering upwards of 90,000 hotel rooms are under development in Dubai alone, excluding the massive Bawadi project that will include 60,000 rooms over three clusters. Kett said nearly 10,000 extra rooms were planned in Saudi Arabia and Oman; another 11,000 in Qatar, some 7,000 in Jordan and 13,000 in Egypt, while even smaller markets such as Bahrain had nearly 6,000 rooms under development and another 3,000 were planned for Kuwait.

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