In-depth: Incentives for mid-range hotels
A look at Dubai's plans to help the development of 3-4 star hotels
Hotel developers must move quickly to capitalise on a new financial incentive from Dubai Municipality and Dubai’s DTCM to develop more mid-range hotels in Dubai.
In a move to swell the emirate’s supply of three- and four-star properties, eligible hotels will be granted a concession on the 10% municipality fee which is levied on the room rate for each night of occupancy.
According to DTCM director general, His Excellency Helal Saeed Al Marri, the initiative is designed to incentivise hotel owners to bring forward their construction timelines, creating more mid-range hotel rooms in Dubai more quickly.
It’s part of DTCM’s strategy to achieve Dubai’s Tourism Vision for 2020, which aims to attract 20 million annual visitors to Dubai by 2020.
Al Marri told Hotelier Middle East: “The hotel incentive has been brought in to increase the amount of three- and four-star hotels in Dubai and consequently broaden the range of hotel options available to visitors.
A number of hotel properties are either under construction or in the planning stages in Dubai and, under the directive of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, this incentive has been designed to bring those properties to market sooner. The sooner the developers bring these hotels to market, the sooner they will benefit from the incentive”.
He added: “Since the announcement there has been significant support from the industry and we’ve had several discussions with investors and developers who intend to capitalize on the incentive”.
A Question of Time
Hoteliers responded favourably to the announcement, but were concerned about the time scales involved.
Investors in new hotels will be granted a waiver on the fee for a period of four years from the date the permit to construct is granted and provided that this date is between October 1, 2013 and December 31, 2017.
Wyndham Hotel Group senior director of development, Middle East and Africa Panos Loupasis said the company welcomed the move from DTCM, but questioned the length of the validity period.
“We certainly agree that there is an opportunity to continue to add new midscale and economy hotels in the market and believe the proposed municipality fee waiver adds a further incentive above and beyond the existing supply and demand dynamics.
To capitalise on this opportunity, speed will be of the essence. As it can often take around two to three years to build a hotel and then a further period of time to achieve maximum occupancies, the full benefit of the fee waiver may only be realised over a period of a few months,” observed Loupasis.
“If the validity period were to be extended beyond the first four years, we believe this would further enhance the attractiveness of the midscale and economy sectors to prospective developers.”
The Rezidor Hotel Group director business development Middle East & Africa Elie Milky agreed that additional incentives were still needed.
“Such an incentive would drive owners to obtain their construction permits within the four-year window, thus bringing the construction period forward. Developers on the other hand should be working towards delivering the hotel project for the owner to benefit from the scheme,” he said.
“An incentive for developers would certainly add to the overall purpose and strategy.
Obtaining the construction permit before the end of 2017 may not guarantee the opening of the hotel in time for 2020, as any project carries several risks such as delays, lack of funding. Therefore, we would also strongly encourage an additional incentive for developers to help deliver the projects on time,” added Milky.
Looking at the bigger picture, however, he said the benefit to hotel operators would be the impact of increasing awareness of the mid-market hotel products they offered among investors.
“An increasing awareness among investors about the attractiveness of such a product, particularly in Dubai, along with maturing sub-markets in the emirate, will help produce opportunities for a stronger presence across the city. Additional incentives, perhaps for developers in delivering projects on time, would also help bring such projects to life,” suggested Milky.
Helping or Hindering?
The introduction of a financial incentive was well received, however, it raised other issues that could hamper the development of three- and four-star hotels in Dubai.
“From an owner’s perspective, the challenges are mainly expensive land plots that may not be supported by a mid-market operation in financial terms,” said Milky, echoing comments made to Hotelier earlier this year by Landmark Hospitality CEO Praveen Bhatnagar, who said the “cost of land is the biggest hurdle I would say in getting our feasibility and ROIs in place”.
For Darroch Crawford, managing director, Premier Inn ME&A, however, the main worry was a potential increase in minimum room size for three-star hotels.
“The DTCM does a great job in driving up standards and promoting Dubai and there is no doubt that there is a need for more high quality three-star hotel rooms so I welcome this initiative to encourage more to be built, however, the proposal to introduce minimum room sizes in the draft new hotel classification regulations could have quite the opposite effect,” he stated.
Crawford explained: “Under the proposed rules three-star hotel rooms must be a minimum of 28m² and such a size is simply unsustainable, as it increases construction costs by anything from 15 to 30% depending upon the brand.
This effectively prevents brands like Premier Inn, Centro and Citymax developing viable businesses in their current form and the 10% waiver of municipality fees will not be enough to combat this huge issue.
“At the time of writing the three Premier Inn hotels in Dubai hold first, second and fifth place among the three-star hotels on Tripadvisor in Dubai. This demonstrates that the consumer is more than delighted with the product at 24m² and will certainly not wish to pay more for a larger room.
“About four years ago Abu Dhabi Tourism started down a similar path, with an announcement that three-star hotel rooms needed to be 32m². They soon realized that this was unsustainable and after viewing a 24m² Premier Inn room and seeing that not only was it spacious enough for two adults it could even comfortably accommodate a family of up to four, they reduced their requirement to match.”
Citymax Hotels COO Russel Sharpe acknowledged that enforcing minimum room-size regulations would be costly.
“We have 20m² rooms – to do a 26-28m² room it would cost a lot more money.”
When Hotelier raised the issue with DTCM, it would not discuss the draft regulations but confirmed that room size would be more important in future.
Dr Ahmad Belhoul, CEO Strategy and Tourism Sector, DTCM, said: “Within the current imposed regulations, there are no minimum size requirements applied by star ratings – i.e. the size of room does not have an impact on the star rating. However, in the process of developing the new hotel classification framework it has been decided that the size of rooms should have an effect on the star rating.
“The development of the classification system has taken place over a couple of years, allowing for deep consultation with the industry both within Dubai and internationally, and at various times throughout this process different sizes of rooms per star rating have been suggested. We are currently finalising what those will be but the figures quoted are not accurate.”
Belhoul was keen to reassure developers and hoteliers alike: “One of our top priorities is the development of the midmarket segment and we will continue to work with the industry to ensure that the classification system helps, rather than hinders this.
“In our moves to increase the range of options within this segment, it is imperative that we work closely with developers and operators to create mutually beneficial results and we remain in constant dialogue to ensure that this happens,” said Dr. Belhoul.
Who's Expanding in the Mid-Market?
Rotana Hotels executive vice president & chief operating officer Omer Kaddouri acknowledged the lack of supply of mid-range hotels in Dubai and said Rotana was hoping to expand its own presence in this segment.
“In mature hotel markets, mid-scale and budget accommodation comprises more than half of the market’s rooms inventory, however, in Dubai, the five-star hotels dominate; they have a market share exceeding 60% and about a 50% of pipeline supply as mentioned in previous studies and reports,” said Kaddouri.
“Dubai as a destination needs now to focus more on mid-scale and budget accommodation in order to support the tourism vision. As an operator, we strongly believe that waiving the tax will make Dubai even more popular and will attract new markets. The budget conscious traveller is an increasingly important market in the Middle East but remains grossly under-serviced. Currently, Rotana operates one hotel under the Centro brand and has more in the pipeline, to be announced soon,” he revealed.
At Premier Inn ME&A, managing director Darroch Crawford revealed a potential six further sites in Dubai.
“Premier Inn has ambitious plans for further expansion in Dubai, with four new sites fairly advanced in our thinking and another two under consideration,” said Crawford.
“I therefore welcome the DTCM proposal to waive the 10% municipality fees on new properties as this will make projects more viable in the early years and help to combat the issue of high and rising land prices.”
Rezidor Hotel Group’s director of business development MEA Elie Milky said now was the time to take advantage of a “phenomenal opportunity” in an under-supplied segment, with a 300-room Park Inn by Radisson under development in Dubai already.
The Story in Short
To encourage the development of three- and four-star hotels in Dubai, DTCM has granted a concession on the standard 10% municipality fee which is levied on the room rate for each night of occupancy to eligible hotels.
The industry responded favourably, but said speed to market would be critical to the success of the scheme. The focus on the mid-market also raised concerns from operators over potential plans to introduce minimum room size regulations that could impact star ratings.
DTCM said the new hotel classifications system was still in draft form and that the industry would continue to be consulted.