Hotel pipeline poses challenges for UAE (page 1 of 2)

The UAE has seen rapid growth in terms of the number of hotel rooms that have been added to the market in recent years, and recent data shows that the pipeline of new hotels remains strong, especially in Dubai and Abu Dhabi.

According to a recent tally of hotel supply as of the end of February by STR Global, the UAE had the largest number of hotel rooms in the total active pipeline in the Middle East with 52,566, followed by Saudi Arabia with 14,178. Dubai leads the way in the UAE with 30,139 rooms on the way, followed by Abu Dhabi with 14,171.

Pipeline measurement difficulties

It will not be easy for the UAE to absorb the large number of rooms in the pipeline, following on the heels of a difficult year in 2009 when it suffered sharp declines in revenue per available room (revPAR).

'In Dubai, it could be argued that now is not the best of times to start delivering rooms, and you do see some projects, such as the Kempinski on the Palm Jumeirah, deliberately holding back on delivery until market conditions are more favourable,' says John Podaras, the associate director at Tri Hospitality Consulting. For the most part the hotel projects that are moving forward in the emirate are ones that have to progress as they have reached a tipping point in their development cycle, he said, noting that in any case measuring the hotel pipeline can be elusive.

'It's all very nebulous. It's not because the market is transparent or not transparent, it is simple uncertainty,' he told AMEinfo.com, noting that sometimes decisions made at the highest levels of an organization have not filtered down to the people who are commenting on the status of a project.

This uncertainty, along with the ebbs and flow of the market, can mean that the pipeline may not be as daunting as it may seem. 'When you are looking two or three years in the future it always seem like there are a lot of hotels about to be delivered, but then you find that for whatever reason the market has adjusted itself and projects have been a little bit delayed, and so the situation is never as bad as you would expect,' he said.

Oversupply is not the only factor that might cause a hotel project to be delayed or put on hold, notes Adrian Jonklaas, senior consultant at PKF The Consulting House. 'The real estate market in the UAE is still going through a period of adjustment,' he said. 'As such, the projected hotel pipeline will likely see some delays and cancellations occur for a variety of reasons which are not necessarily related to oversupply, such as developer liquidity issues and contractor insolvency.' He believes that Abu Dhabi, which has a smaller supply base than Dubai, is likely to face more challenges in the short term than Dubai, as the expected pipeline in the capital over the next two-to-three years will likely add another 50% more rooms to the existing supply.

Abu Dhabi rates

Noting that Abu Dhabi hotels were the most expensive in the world in the first half of 2009 due to undersupply, Jonklaas predicted that hotels in the capital, particularly in the luxury segment, will face much more competition, which will likely put some downward pressure on rates.

Podaras agrees that a 'quite large' number of rooms across all segments are scheduled to be delivered in the capital between 2012 and 2014, which will put downward pressure on occupancy in the middle of those years, especially as some of the drivers of demand such as Al Raha Beach have been delayed.