2018 hospitality forecast: Closing In

The hospitality industry in the Middle East is dealing with similar concerns from last year, but is honing in on the finer details of macro trends to really capture the growing traveller base

Operators

During the year 2017, hoteliers were focused on the increase in supply of hotel rooms in the region and the Kingdom of Saudi Arabia being the biggest domestic tourism market. Additionally, the prediction was that the growth of the mid-scale sector will continue, along with an increased focus on experiential travel and further adoption of new technology. All of this came true, with added unexpected bumps on the way.

The Brexit saga continues, as does the uncertainty in global political relations due to American president Donald Trump, along with geo-political crises that have affected intra-regional tourism and travel. Even so, experts are sharing opinions that appear to belie all negative predictions. There’s certainly an increased level of hotel construction in the region, along with an interest to further invest in the Middle East’s hospitality industry.

Infrastructure on Point

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The Middle East/Africa pipeline data for October 2017 by STR, for example, showed that the Middle East region reported an 18.1% year-over-year increase in the number of rooms in construction in October. It shows that there are 166,774 rooms in 580 hotel projects under contract in the Middle East. Under contract data includes projects in the in construction, final planning and planning stages but does not include projects in the unconfirmed stage. Specifically in the ‘in construction’ phase, the Middle East reported 99,790 rooms in 314 projects.

At the time, Dubai reported 29,226 rooms in 95 projects in construction, Makkah was next with 23,791 rooms in 18 projects. Riyadh, Saudi Arabia had 6,349 rooms in 29 projects in construction, with Abu Dhabi showing 4,124 rooms in 12 projects in construction.

And this isn’t going to stop there. The Arabian Hotel Investment Conference 2018 (AHIC) is forecasting significant opportunities for hotel investors targeting the Middle East in light of new data from MEED Projects, which predicts that more than US$14bn worth of hotel construction contracts will be awarded in 2018.

MEED Projects director of content and analysis Ed James said in a statement: “After a relatively subdued 2017 up to end of November which has seen $5.45bn worth of new hotel construction contracts awarded, the value of hotels due to be awarded next year is more than $14bn. This total would comfortably exceed the $8.5bn awarded in 2016 and the previous record of $11.9bn awarded in 2015.”

James added: “On the back of its forecasted performance, investment in hotels will comprise about 7% of the total $200bn scheduled projects spending in the MENA region next year, making it one of the most important construction subsectors. On a country basis, the UAE will be by far the largest market, with an expected $8.4bn worth of contracts, followed by Saudi Arabia at $1.9bn.”

AHIC co-founder and Bench Events chairman Jonathan Worsley noted: “These new figures are exciting for the Middle East hospitality investment community, which gathers annually at AHIC. With oil prices now trading significantly higher than the January 2016 lows, we expect to see signs of recovery and stability in most regional economies.”

TRI Consulting associate director Chris Hewett, while at the Hotelier Middle East: Great GM Debate, commented that Dubai, specifically, is “well on its way to reaching the 20 million visitors by 2020”. And while, from September 2016 to August 2017, it had a 2% demand increase to 79%, the room rates have continued to drop. There are a significant number of rooms coming into Dubai over the next couple of years, reported Hewett, with predictions of about 40,000 rooms coming in from now until 2020. “What’s disconcerting is that about 40% of that is going to be in the upscale sector. This will put pressure on the existing five-star hotels on how to maintain market share and also how you’re going to try and combat the new supply and new products and new facilities. We think rates will continue to drop from this year and drop further in 2018 with the new supply that’s coming in,” Hewett noted.

And while the “tourism machine that is Dubai” will continue to bring visitors in, he said, RevPAR, unfortunately, is going to see more decline — about 6-7% — in the next 12 months. The mid-market sector will grow, he said, and while it’s about 10% of the new supply,  it will drive demand.

This was also seen through a market insight presentation by STR client relationships director Sarah Duignan at the Hotelier Express Summit 2017 held on November 22. According to Duignan’s presentation, STR analysis showed that Dubai budget and mid-scale roared ahead of the overall hotel sector, with high compression nights (occupancies over 90%) for the budget category showing a 203% YOY increase in September 2017 and a 186% YOY increase for the mid-scale category during the same period. Overall the Dubai hotel sector reported a 23% YOY in high compression nights.

Jalil Mekouar, chief executive officer — hotels, Majid Al Futtaim — Properties, comments: “Given how saturated the Middle East markets are with luxury developments, there is great potential for mid-tier hotels to grow and thrive, especially as they tend to be more resilient to economic ups and downs.”

Source Markets

Colliers International director, head of hotels (MENA) Filippo Sona reveals that from a total number viewpoint, India remains one of the strongest inbound source market for the GCC with overall tourist numbers forecasted to reach levels above the six million by year end 2017. He comments: “With the pace of the growth of the inbound Indian market, these numbers are likely to be above nine million by the end of 2021.”

China, he adds, is not yet a major source market for the inbound GCC tourist market but is fast catching up and in cases such as Dubai, Sona reveals, the growth is double digit year on year. “From a spending point of view however, the domestic market, Europe and North America remain the source markets which spend more in hotels with total revenues per available room 35-37% higher than the volume markets. For the years to come, this trend will continue to characterise the tourism numbers and dynamics of the GCC market and therefore establishments need to prepare to cater for this tourism diversity,” Sona notes.

Speaking about the properties in his portfolio, The Rezidor Hotel Group area senior vice president, Middle East, Turkey and Africa Tim Cordon reveals that overall, the operator’s top source markets for the GCC continued to be the United Kingdom, United States, Saudi Arabia, India and Russia/CIS.

Echoing Sona’s predictions for the region, Cordon adds: “For 2018, we see the traditional markets of the UK and US continue to play a dominant role; however, India, China and Russia/CIS will definitely play a bigger role in tourist inflows to our hotels as a result of the regional tourism authorities’ efforts in promoting regional destinations and as a result of the streamlined visa processes in some markets.”

The UK was Jumeirah Group’s top source market in 2017, followed by guests from within the GCC. Jumeirah Group chief commercial officer Alison Broadhead comments that the locally founded operator maintained its UK visitor numbers despite an industry prediction that travel from the UK to Dubai would be significantly down due to Brexit and economic uncertainty. “We anticipate that the UK will remain our number one source market in 2018,” she adds.

From a revenue perspective, Broadhead comments, the group’s top market is still Russia and saw substantial growth in 2017. Broadhead continues: “The visa free initiative is definitely helping Chinese business and visitors from German speaking markets also showed double-digit growth.”

Looking at a regional market which has seen impressive growth in the last year, Hilton vice president of operations, Saudi Arabia and Levant Kamel Ajami says domestic travel within Saudi Arabia was its biggest source market, with this set to continue through in 2018 — with both the GCC and Asian markets important for the country as well. “Domestic travel within Saudi Arabia is bolstered by government initiatives such as ‘Live Saudi Arabia’, a marketing campaign run by the Saudi Commission for Tourism and National Heritage (SCTH) that encourages citizens to explore their country and discover its archaeological sites, beaches, monuments and other fascinating attractions,” Ajami reveals. These seem to be working, says Ajami, with the 2017 Euromonitor International Tourism Forecast report showing record levels of domestic travel within the Kingdom, with predictions that 40% more domestic vacations will be taken in 2020 than just five years earlier.

Most hoteliers are in agreement that China, India, Russia/CIS, and GCC tourists will continue to lead the charge well in to 2018. Jumeirah Group’s Broadhead comments: “Opportunities will continue a rise from increased numbers of visitors from Russia and China, improving economies in key source markets.”

Challenges in the year ahead

Supply growth and drop in average room rates — and RevPAR — seem to be concerns that are not going away.

Colliers’ Sona asserts that hoteliers will need to prepare for a “total shift from a revenue driven economy to a cost driven economy”. He predicts that average room rates will be static for hotels in better locations and challenging for those in secondary locations. “Volume, translated in occupancy will remain strong with Q4 2018 showing a higher growth in occupancy percentage when compared with the same period this year. This will be particularly the case for UAE hotels,” he adds.

Mekouar adds: “At an industry level, the risk is to develop and build new hotels based on the historical RevPAR performances. Given the strong supply story this market is witnessing, and which is likely to continue in the lead up to 2020, RevPAR may face downward pressure.”

Cordon says: “The incoming hotel supply across the region will intensify competition in some markets resulting in more pressure on average room rates. The challenges for hoteliers will be in revenue management and keeping rates in line with the market and also with the brand positioning.”

He also takes a slightly different viewpoint of the same concern — that it isn’t altogether about revenue, but brand identity. He says: “With an increasing number of new hotel brands coming into the market, both regionally and globally, the challenge for hotel groups is to clearly define what each brand stands for and to deliver the brand consistency that every strong brand is recognised for. Furthermore, the cultural diversity of the global consumer adds another dimension of complexity in delivering the brand experience to consumers with varying needs and expectations.”

Broadhead notes that one of the challenges that stands out is the sheer volume of new inventory in Dubai.

Millennials in Focus

The changing nature of travellers is no secret, but it’s certainly one that hoteliers are going to be increasingly focused on in the coming year. The millennial demographic is travelling more and more and its purchasing power is increasing as they become older. Research from FutureCast revealed that this demographic spends approximately $200bn every year on travel.

Ajami believes that demographics and social change is a key issue that will impact the tourism and hospitality industry in 2018. He shares data from a PwC report that revealed that in the Middle East, 40% of its people are under the age of 45. Ajami adds: “While historically the hospitality industry in the region was designed to cater to middle-aged business and leisure tourists, it must today transform itself to cater to a wider variety of visitors, age groups and backgrounds. The challenge, albeit an exciting one, is for hotel brands to bring forth a new age of innovation to attract new types of travellers.”

Rezidor’s Cordon adds: “As the purchasing power of the millennial generation increases we will see more hotel groups trying to tap into this market and reach and an increasingly important market.”

Millennials, or rather those who identify as millennials, are driving the trend behind experiential travel and authentic, personalised experiences. Majid Al Futtaim’s Mekouar adds: “Demographics of the millennials and generation Z travellers are increasingly shifting into the spotlight and they expect bespoke services.”

Trends and Directions Ahead

Other than agreeing on issues surrounding supply and rates, millennial travellers, technology, and airlines, there’s a number of opportunities and trends the hotelier experts are predicting in the years ahead.

One trend Cordon is convinced is set to boom is around MICE, and adds: “The increasing number of international conventions and conferences, especially in Dubai, which has successfully positioned itself as a global MICE destination with an increased number calendar of major international conventions year on year.” He also believes that the leisure attractions being developed and launched in the region are cause for celebration — referencing the opening of the Louvre Abu Dhabi as an example of how the UAE can further market itself to a global audience.

Saudi Arabia, a booming regional hospitality market, has its own set of changes to contend with. From sweeping changes in laws surrounding women driving and cinemas coming back to the Kingdom, hospitality is set to undergo a refurb of sorts. Ajami says that as part of the Kingdom’s economic diversification strategy, tourism is becoming a central pillar of the Kingdom’s Vision 2030.  “The country is aiming to welcome 1.5 million tourists in the next three years — clearly this new legislation and government reform is making the Kingdom more accessible than ever which is great news for our industry. As such, Saudi Arabia is now our largest market in the Middle East region in terms of the number of hotels we have open or in development,” he notes. Religious tourism, he adds, continues to be a major component of the hospitality sector in Saudi Arabia, creating a need for a range of accommodation options in the area.

Colliers’ Sona adds that in Saudi Arabia, a new trend will be branding of residential compounds with hotel brands. “This will enable residential developers to lease the unit as traditionally done on a yearly basis as well as taking some stock and rent it according to seasonality.  With an international brand the developer will provide consumer with a recognisable service level and potentially being able to attract slightly higher rents,” he adds.

For UAE, Sona believes the opportunity is to develop Ajman and Umm Al Quwain as new destinations. He also thinks, echoing the report in Hotelier’s December 2017 issue, that manchising (a combination of management agreements and franchising) will be a trend in the GCC, particularly in the UAE and Saudi Arabia.

Mekouar concluded: “Overall, we share a positive outlook for the Middle East’s hospitality industry in 2018, with strong market fundamentals in place and attractive investment opportunities on the horizon, especially with regards to the mid-segment hotels. In a marketplace where tourists are increasingly seeking more meaningful travel experiences, there is scope to create additional demand by offering innovative services. We also expect to see countries such as Saudi Arabia, Bahrain, and Oman, benefit from national infrastructure programmes and specialised hospitality offerings.”

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