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Dubai Tourism has just announced that hotel inventory is set to increase by 11% in the next two years, with nearly 25,000 hotel rooms being added. By the end of 2019, there will be 132,000 rooms in operation in the emirate.
Much of this supply is being built to prepare for the World Expo 2020, which will open on 20 October, 2020, and will run for a period of six months. More than 120 countries and 200 organisations will participate in the Expo, which is expected to attract more than 25 million visitors from 180 different countries.
But what does this mean for the market?
“Back in 2009/2010 we had a demand issue and no new supply coming into market. When the announcement came out for Expo 2020, businesses got very excited. The challenge now is that we have a massive amount of new supply coming in. To put that into perspective, by the time 2020 arrives, Dubai will be the fifth largest inventory supply in the world,” explains Robert Jeans, Regional Director of the MEA region for Duetto.
Many in the hospitality field are now getting nervous about the impact this increased inventory will have on market conditions both before and after the World Expo. Can the Dubai market really absorb such exponential growth in hotel supply?
Dubai Tourism is confident that the emirate’s “Build it and they will come” mantra will continue to ring true. The government tourism agency has forecast 20 million annual visitors to the emirate by 2020.
In 2017, occupancy stayed stable at a relatively healthy 78%, showing that demand for Dubai continues. Overnight stays in the emirate increased by 6.2% last year to almost 15.8 million. However, despite this high demand, hotels saw a drop in revenue per available room and average daily rate.
RevPAR figures in Dubai fell to their lowest levels in a decade at the end of 2017. JLL’s Q3 2017 Dubai Real Estate Market Overview reported that RevPAR for the first eight months of 2017 had fallen to AED503. It was reported that hotel average daily rates declined 4% in 2017.
According to Jeans, the secret to success lies in RevPAR Index. Those hotels that are not benchmarking effectively could lose out.
“For a country that's less than 50 years old, to have that much supply in the market and for this supply to be exponentially growing in such a short period of time, is creating a huge drop in RevPAR. Now the focus is not so much on RevPAR, but RevPAR index. How's your hotel going to compete in a market that has so much new supply coming in so quickly?” he asks.
A drop in RevPAR and ADR, despite running high occupancies, is bad news. You have the cost of operating at 75%+ occupancy but are not driving the right level of revenue to your property.
For owners, especially in Dubai where hotel stock is among the most expensive ever built, this means an even longer wait for return on investment – not good news.
“A lot of the hotels will find it challenging to meet owner expectations if they're simply comparing themselves to their performance last year, when there were fewer hotels to fill,” Jeans explains.
Even small gains in RevPAR Index mean that your hotel is performing ahead of the market – and in a challenging market this is the very best you can hope to achieve.
Hotels need to benchmark against the market, and not against their previous performances, if they are to get ahead, and RGI enables them to do this.
See our recent blog— 3 Ways Middle East Hotels Can Prepare For a Downturn—for more on RGI in Dubai.
According to Jeans, most of Dubai’s new hotel supply will come in the midscale segment, which could lead the market to discount too heavily.
Statistics from Dubai Tourism show that the three- and four-star categories are expected to grow at 10% and 13% respectively through to the end of 2019.
Midscale rooms have been much needed in the emirate, and the growth of this sector is seen as a move to attract a wider audience. Although it may come at a cost.
“New hotels come into market at a low price, and they offer advance purchase prices, packages, promotions, etc. … The existing properties then start competing, and this is where the challenge comes in,” Jeans says.
The World Expo starts in October 2020. This means that hotels have another 18-24 months of challenges ahead of them, before the party truly gets started.
Once in full swing, it is expected as many as 25 million visitors will descend upon Dubai to attending the Expo during its six-month run.
Beyond that, when the exposition moves on, Dubai will be left with an incredibly high number of hotel rooms, albeit some of the best in the world. The challenge then will be in setting realistic goals for the future and working towards them.
Discover more about the Dubai hotel market. Watch Robert Jeans talk Hotel Trends in Dubai in our latest Trend Spotting video.
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