As Dubai copes with oversupply, developers plan for the long term

ME by Melia Dubai
Dubai-based developer Omniyat recently secured financing of AED150 million from Mashreq Bank for the to complete work on the ME Dubai hotel in The Opus by Zaha Hadid. Photo credit: Zaha Hadid Architects

Much of the buzz surrounding Dubai's hospitality sector has focused on the Emirate's rush to have 132,000 guestrooms open and operating by the end of 2019 and 164,000 by the time the Expo 2020 gets underway, and the resulting imbalance between supply and demand. Hotel supply is poised to increase by 13.3 percent in Dubai, with a compound annual growth rate of 10.2 percent in occupied room nights reaching 35.5 million annually in 2019, according to STR. 

But at least one executive is predicting the current oversupply will be "fully absorbed" after the Expo. Sébastien Bazin, CEO of French international hotel group Accor, told local news site Arabian Business the market would rebound over the next 18 months with the help of Expo 2020.

Bazin acknowledged Accor has faced "some difficulties" in the Emirate over the past few years. "It is a bit overcrowded in terms of supply inventory," he told the site, adding Accor has participated in oversupplying the market through new openings—"and rightly so, [but] 2020 will be enormous in terms of impact, in terms of tourism and people visiting Dubai. So oversupply will be swallowed over the next 18 months or two years. I’m not at all worried about the excess supply."

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Downturns

In January, Dubai reported drops in occupancy (down 5 percent to 82 percent), average daily rate (down 10.9 percent to AED716.78) and revenue per available room (down 15.3 percent to AED587.70.) According to STR analysts, occupancy and rate declines are to be expected for the market with a significant amount of new inventory in the pipeline ahead of the Expo. As of January, Dubai showed 170 projects in construction accounting for 48,759 rooms. At the same time, demand grew for the fourth consecutive month, and overall performance was solid during the first five days of the month thanks to New Year’s celebrations as well as  the Arabplast international trade exhibition.  

"The over-saturation of the Dubai hotel market is no more clearly illustrated than in months like this, when an additional 35,000 people in the city fail to spur an increase in top- and bottom-line performance,” said Michael Grove, HotStats' director of hotel intelligence and customer solutions, EMEA, last week. “Against a backdrop of challenging economic conditions, profit decline is likely to continue at hotels in Dubai for some months to come."

Reasons for Hope

Bazin has good reason to be optimistic, noting London's enduring strength seven years after the 2012 Olympics. "As long as Emirates and Etihad have so much more traffic, [we’re] fine," he said.

In a vote of confidence for the Emirate's hotel sector, Dubai-based developer Omniyat recently secured financing of AED150 million from Mashreq Bank for the work needed to complete the internal layout and servicing of the building shell of the ME Dubai hotel in The Opus by Zaha Hadid. The property is slated to open in Downtown Dubai by year's end, with 93 guestrooms and suites across 19 floors, as well as 98 serviced apartments. In January, Abu Dhabi National Hotels and First Abu Dhabi Bank signed an AED1.6-billion loan facility agreement to provide ADNH with the funds to acquire several Dubai hotels owned by Emaar Properties.

Dubai's revised "Tourism Strategy" reportedly is looking to bring in 21 million to 23 million visitors by 2022, and 23 million to 25 million visitors by 2025 so demand for hotel rooms can be expected to rise.

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