Dr. Martin Berlin, Middle East Partner and Global Deals Real Estate Leader at PwC shares his insight on two key markets

There has been considerable chatter in the market regarding the hospitality cycle in the UAE (Dubai) and Saudi Arabia. While the general sentiment about the Dubai hotel market is that it is currently struggling, the story in Saudi Arabia is one of accelerated but ‘unsustainable’ growth. This article attempts to put into perspective the hospitality investment landscape in both markets by shifting the lens through which each opportunity is viewed.

The hotel market in Dubai
The hospitality market in Dubai has traversed from being a tiny speck on the hospitality investment horizon, moving through a period of unprecedented growth recording some of the highest Average Daily Rates (ADR) and overall room occupancies in the world, to holding its own during a global recession, to arriving at the current situation where past performance is no longer a reliable indicator of the future. Understanding this aspect of where we are in the cycle is important to put the market’s current performance in the right perspective. It is true that ADRs in Dubai are no longer what they used to be pre-2008 or even pre-2016. But neither is the composition of supply, the type, size and sources of demand, or the reasons why visitors come into the city. We clearly see a maturing tourism and hospitality market. Hotel owners and operators had a relatively smooth sailing in the past when properties in the city commanded average rates above AED 1,100 with occupancy levels above 75 percent (2008 figures, STR report). It also used to be the norm that F&B departmental revenues were at par with revenues generated by rooms, making up almost 50 percent of the total revenues achieved by a property. In 2018, the ADRs for properties in Dubai dipped to approximately AED 810 with an occupancy of 79 percent (Hotstats). Now, a comparison of the performance between these years would suggest that the market has turned quite drastically with a drop in RevPAR of approximately 23 percent. And a 50 percent contribution to revenues from F&B is no longer the norm, with the department now accounting for 30 to 38 percent of the total revenues. Does this mean that the hospitality market in Dubai is on a downward spiral? Not necessarily; it is taking a correction.

When compared to international, mature markets, the ADRs and occupancy levels in Dubai are still very healthy. Compare Dubai’s performance to London with a similar number of room (approximately 155,000 – PwC UK report). Hotels in London achieved an average rate of AED 700 with an occupancy of 82 percent in 2018. Also, average GOP margins achieved by London hotels are around 35 percent (KF report) while hotels in Dubai achieve margins higher than 40 percent on average (based on market intelligence). While this is not to argue that investing in hotels in Dubai is a better option than London, it does put into perspective the returns from investing in each market. An individual investor/developer’s interest in the market would ultimately be dependent on their personal view of the inherent market risks. It is worth pointing out that when the market is in a state such as the current situation in Dubai, where past performance is no longer an indicator of future performance (albeit still healthy), is typically when more hotel deals come to market and to fruition. Hotel owners who may have valued and received financing for their properties based on the earlier performance of their assets may feel pressured as their cash flows may not meet the debt service coverage ratio thresholds implemented by their banks, or even be insufficient to meet debt obligations, thus incentivising a sale of the asset to prudent investors.

The hotel market in Saudi Arabia (KSA)
A lot has been said recently about the number of hotels planned in the country through the six GIGA projects. Is the addition of an estimated 12,000 to 15,000 keys over the next 10 years going to adversely impact the market?

To put this into perspective, let’s consider the total number of keys available across KSA currently. There were about 78,000 hotel keys across the major cities in KSA as of 2018. Across the majority of these cities, demand stems from business, corporate, religious and government segments rather than from leisure travelers. Currently, Saudis wishing to travel for leisure and entertainment reasons typically travel outside the country. Of the 21 million outbound trips made by Saudis in 2015, approximately 59 percent, i.e. 12.3 million outbound trips were leisure trips.

With the opening up of the country toward the leisure and entertainment sector and the advent of domestic leisure options, KSA should be able to capture a share of these travelers as domestic tourism. Even if KSA managed to capture only a 10 percent share of these leisure travelers, it would still generate sufficient demand for approximately 13,000 hotel keys in KSA. It is to be noted that this demand only takes into consideration indigenous travelers opting to travel within the country for leisure purposes. If all conditions are created to successfully attract foreign tourists to the country, the supportable keys would have to be revised up. However, the point is that the country has sufficient inherent demand in domestic tourism that can be capitalized by the proposed leisure and entertainment facilities planned under the Vision 2030 initiative.

Another question that frequently pops up while discussing the potential for success of the GIGA projects is their attractiveness for private investment. This is a question that does not have a simple answer. While investing in these projects may face some push-back from international institutional investors given the amount of uncertainty and number of unknown factors at play here, private investors that are attracted by the underlying positive demographic factors may be interested if the right incentives to compensate for the risks are factored into the investment package.

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