The good life

By SHILPA MATHAI MUSCAT

As of June, there were a record 978 hotels and 9,980 rooms in the Gulf with more in store - local chains and international operators are leaving no brick unturned in their quest to build the biggest, tallest and most fanciful property on earth.

"The regional hotel industry witnessed an unprecedented upswing last decade," says Paul Rouse, managing editor of Hotel Intelligence Middle East. "This trend looks set to continue - sunshine sells and the volume of international tourists is expected to increase from under 15 million a year to 69 million by 2020. Business travel is also driving the industry forward, particularly the lucrative conference and incentive market."
Diversity. Hoteliers across the region agree that the market is indeed growing and diversifying. Even in Dubai, known for its constantly burgeoning hotel supply, occupancy levels remain constant at 60 percent and the average room rate at 365 dirhams ($100), which means that most of the 250 percent increase in hotel supply over the last 10 years has been successfully absorbed. The fastest growing Gulf cities are Dubai and Mecca, where international chains are jostling to capture a slice of the highly lucrative but seasonal pilgrim market. Oman topped the league tables with a massive 59 percent growth in hotel supply.

The highest room tariffs in the Gulf are in Kuwait, a largely business-oriented static market. A fixed minimum rate is applicable for Kuwait's one four-star and four five-star hotels. "This arrangement has been working successfully and sustains hotel profits," says Guy Standish Wilkinson, a managing consultant with TRI Hospitality Consulting in Dubai. Local chain Safir International dominates Kuwait in terms of the number of properties. The other Arab operator, the Abu Dhabi-based Rotana hotel chain, says that it has its own designs on Kuwait.
Bahrain attracted 3.3 million tourists last year to its 73 hotels and 5,406 rooms and is working on increasing these figures. Analysts say it could do with more beach properties. Now that the Hawar Islands are back under Bahraini control, future developments are earmarked there.

Neighboring Qatar's gas boom energized its hospitality sector; occupancies averaged 60 to 70 percent last year - up from around 35 percent in 1990 - with current estimates running at 65 to 70 percent. Hotels have been making money despite a new Inter-Continental property coming on board in November 2000; the additional supply of 300 rooms led other players like Sofitel, Ramada, Marriott and Sheraton to upgrade their facilities.

"There is a squeeze on average room rates," says Gabriel Fernandes of Sofitel Doha. More hotels are in the pipeline - Ritz Carlton promises a spectacular show when it unveils its 374 rooms in September. A Four Seasons, Holiday Inn and a couple of independent properties are under construction. Various other chains have also been talking of opening up shop on the "Costa del Doha." The city is just waiting to take off and is touted to be another Dubai in the making - though, for now, that's a stretch.

"Qatar is rapidly emerging as the location for premium meetings and high-end conferences, which is why the Ritz Carlton is building its international, flagship hotel here," says the hotel chain's Doha general manager, Darrell Sheaffer. "The WTO summit is slotted for November this year, the Asian Games for 2006. The country offers huge potential for ecotourism - the flavor of the month - and there are some good sporting events as well. All this adds up to an attractive package for leisure and corporate travelers."

Muscat millions. Oman's rugged charms are unrivalled except by Yemen in the region, but authorities are opening doors only to well-heeled tourists. Upcoming attractions include the Shangri-La group's $200 million Barr Al Jissah Resort near Muscat - Oman's largest resort project - with 685 rooms of varying standards and the Al Sawadi tourist village. A Spanish group is said to be eyeing the Yitti Beach area.

Saudi Arabia has a thriving hotel sector, with 425 properties. "The opening of three new hotels in Riyadh between 2001 and 2002 will increase room supply by 40 percent in 16 months," says Christophe Pagni, the associate director of business development at the Hyatt Regency in Riyadh. "Demand is expected to rise by about five percent. As a result, profitability and occupancies are expected to drop in the city over the next few years. Competition is heating up and the government is taking steps to propose rack rates."

"The high profile and success of Dubai has done much to help the region," says Denis Johnson, vice president of sales and marketing for Bass Hotels & Resorts, Middle East and Africa. The spotlight is now shifting to the outlying areas of the UAE like Sharjah, Ras al-Khaimah, Fujairah and Al-Ain - these destinations offer quality hotels at economical rates. According to Wilkinson, "People chase the sun and the sand and beaches, not just the shopping malls and discotheques, and the entire Gulf region is perfect for that as long as the basic infrastructure is in place."

But as an estimated 140 new luxury hotels and resorts currently under development come onto the market, internal competition is a significant threat and the region could eventually end up competing against itself. So just how real is the demand for more beds? "The steady growth of business, leisure and conference tourism is responsible for the building boom.

Although people have been predicting the market downfall for a while now, it remains fairly resilient with market conditions varying from city to city," explains Rouse. "The new supply so far has been balanced by strong demand increases."

"Oversupply is when there is insufficient guest demand to support the new hotels that are built," adds Wilkinson. "I anticipate cities like Doha and Abu Dhabi to face a problem if they don't work on increasing demand. Dubai created a supply-induced demand to weather threats of excess supply - this region is relatively unknown as a tourist destination, so the magnificent Gulf properties are excellent advertising vehicles to catch the world's eye."

Like everything else, the hotel industry, Wilkinson argues, moves in cycles. A few years ago, Dubai was at a low, but has now moved to a high with room rents and occupancies increasing over the last two years. "Dubai is one of the most expensive winter sun destinations, competing with Orlando and the Caribbean," he points out. "If rates increase further, then the demand may dry up."

Demand is clearly on its way up in Bahrain and Saudi Arabia. Things are moving more slowly, however, in Kuwait. The delicate balance of supply and demand was put to the test in Muscat when the Grand Hyatt and the Radisson SAS opened their doors in 1999-2000, stretching occupancies and room rates. However, a TRI report estimates that, with the continuation of the present status quo in Muscat, there is no danger of any significant oversupply until at least 2008. Qatar, though, is at a peak: there will be a period of readjustment when the Ritz Carlton opens in September. "Its premium tariffs will pull the whole market up," says Wilkinson.

Competition is intense and the discounting of rates common in most free-market Gulf economies. Hospitality is a lucrative business with estimated break-even levels of 30 percent or below; labor costs are minimal and land prices are often not included in the payback. Arthur Andersen's Hotel Industry Benchmark Survey reports that room yields in Manama, Kuwait, Doha, Jeddah and Dubai's Jumeirah Beach are higher than five percent.

But the halcyon days of hefty management fees for international operators look to be over. Local owners are becoming more aware of the industry and, predictably, reducing operator fees. While hotels are making money, international chains or operators are taking back proportionately less revenue than before.

The emergence of local Gulf brands is also crowding the market. Regional chain Rotana Hotels, Suites and Resorts currently manages 17 hotels throughout the Middle East, and according to Imad Elias, the group's vice president, "Being the first regional Arab hotel chain, we face stiff competition, but we have managed to prove ourselves."

Due to the drop in management fees, some of the international chains are considering minority equity participation in some of their projects. Hilton picked up a stake in its property in Salalah to increase its bargaining power. The investment risk is perceived to be high in the Middle East, which makes investment seem unattractive; with the proposed revision of foreign ownership laws in some of the Gulf states, however, sentiments may improve.

The biggest investors in operations, according to Wilkinson, are the Bass chain, which includes the Inter-Continental, Crowne Plaza and Holiday Inn brands; followed by Hilton; then Starwood with the Sheraton, Westin and Four Points brands - the only chain that has a property in every major business city in the Middle East; Accor with its Novotel and Sofitel brands, which is contemplating building the first e-biz hotel in the region at the Convention Center in Dubai; and finally Ramada, Ritz-Carlton, Meridien and Hyatt.

Industry watchers say the Gulf markets are still limited in their product type and that there is a need across the region for hotels to suit a wide range of tastes and budgets. Two- and three-star chain hotels and relaxed family-oriented resorts are largely unrepresented. Club Med has been considering the region for a while, and Wilkinson thinks it is only a matter of time before they move in.

Standards. "Hotels in the region also have to concentrate on improving their customer service standards," says Rouse, "in order to match the excellent facilities they offer." That's a view shared by Sammy Zoghbi, Starwood's head of sales for Africa, India and the Middle East. "There could be a danger of the hotel industry in this part of the world slipping from the standards it once set," he says. "Even if costs rise and profit margins diminish, any temptation to cut corners in service, staff, training and refurbishment must be resisted."

"Overall the industry is healthy, though in the medium term I know some countries will have to tackle a few glitches," sums up Wilkinson. "Graphs don't always go straight up and every industry readjusts from time to time. But any long-term pessimism is unfounded. At the end of the day, the political will behind tourism across the Gulf, balanced by commercial reality, is a good formula for success."