While some argue markets such as Dubai are becoming overbuilt, the Middle East continues to offer opportunities for developers and brand managers. Opportunities have spread across the Arabian Peninsula to markets such as the Kingdom of Saudi Arabia, and now more development is starting to move more down market as deals are being struck for midscale and budget properties.
HOTELS recently interviewed Alain Debare, CEO of Dubai-based Action Hotels, to get his take on the marketplace and learn more about his company’s strategy.
Action Hotels, listed on the AIM market of the London Stock Exchange, is the owner, developer and asset manager of branded 3- and 4-star hotels in the Middle East. Established in 2005, it operates six hotels with a further three due to open by the end of 2014. Debare said Action Hotels will see its portfolio increase to 14 hotels with 2,500 rooms by the end of 2016.
HOTELS: What are the hottest markets in the region right now? How real is the threat of overbuilding in markets like Dubai or Doha?
Alain Debare: The region’s markets are very dynamic. Business opportunities in the Middle East are underpinned by a strong, growing population and strong economic growth with a GDP expected to grow 45% by 2020. Overall, the markets are very favourable with the strongest markets being UAE’s Dubai and Saudi’s Riyadh and Jeddah.
Currently, 22% of hotels are in the economy and midscale segments, and they are predominantly unbranded and privately owned. The announced construction pipeline is focused on upscale and luxury hotels with the risk of oversupply. While everyone is focused on upscale and luxury, Action Hotels is focused on delivering value in the economy and midscale segments, working with the global hotel brands that have understood the opportunity and are actively targeting growth in the region.
HOTELS: Do you see the upscale and upper-upscale segments becoming more popular?
Debare: The rationale for economy and mid-market hotels is based on very favourable markets and the growth of intra-regional travel, which is further illustrated by an increase in airport capacity and in the number of budget airlines in the Middle East. We have a very contrarian investment style as we focus on economy and midscale hotels, which is a market that is much undersupplied throughout the region.
We would expect increased competition in certain markets pushing rates down and eroding profitability, but ultimately we believe that rates will stabilize under the pressure of a higher cost base.
Our hotels break even at 33% across the portfolio due to their strong performance and tight cost base, which is driven by the efficiency and the limited-service nature of the business. That gives us a very strong competitive advantage.
HOTELS: What are the hottest cities in the region?
Debare: Dubai and Jeddah have a variety of business drivers which drive substantial demand and allow to tap in various markets.
HOTELS: What’s the investment climate like? How much has the unrest in the region dampened foreign investment?
Debare: Most of the hotel investment in the Middle East is regional with foreign direct investment mostly directed toward oil and gas, or related projects.
The very favourable markets drive huge demand but clearly investors and global hotel brands also recognize that there are high barriers to entry with restrictions on local ownership and access to local markets, which is a very powerful combination and was key to our recent investment proposal for our investors.
We mainly focus on the key markets of the GCC, which are the stable and resource-based countries of the Middle East. Unlike Egypt or Syria, the area has not been impacted by the unrest and there are very different dynamics in the markets here with strong economic and demographic growth. WTTC forecasts tourism-spend growth in the GCC of 6% from 2013-2017 with an increase in demand for affordable quality accommodation.
HOTELS: How are deal terms for management contracts changing?
Debare: We work very closely with Accor’s Ibis brand, IHG’s Holiday Inn brand and Whitbread’s Premier Inn brand. We enjoy a great relationship with those leading brands, which bring operational expertise and immediate international brand recognition with a very powerful access to marketing and sales and distribution systems driving up to 40% of the occupancy of a hotel.
Because of our very strong relationship, we are able to enter into long-term management agreements with those brands in the best possible way, which include exclusivities and guarantees. Beyond the fees, we remain very involved and have a very proactive asset management style working closely with the hotel operators making sure that key decisions are made jointly.
HOTELS: What segments are key among travellers?
Debare: Most of our customers are intra-regional travellers – both business and leisure (noting the region’s increased business travel and that 50% of airport arrivals are intra-regional travellers). Economy and midscale hotels in the Middle East offer larger rooms and are of a higher specification than their European or U.S. equivalents.
HOTELS: What are the biggest pipeline trends you’re seeing? Will the projects that are currently on hold get back to active development?
Debare: The largest trend at the moment is Dubai Expo 2020, which is seeing many of the projects previously on hold being re-activated. Dubai is seeing high growth and the recent announcement to incentivize and prioritize the development of midscale hotels in Dubai is very timely.
HOTELS: Where do you see the Mideast pipeline in five years?
Debare: We expect the announced development to be phased over a longer period with initial openings mostly in the higher upscale and luxury end of the market.
As economies grow, we also expect increased demand from the burgeoning middle class for affordable quality accommodation.