Laurent A. Voivenel, CEO of HMH – Hospitality Management Holdings made a special presentation today on the changing face of luxury hotels at Dubai Hotels & Leisure Summit organised by CMS in association with Colliers International. In addition, he participated in a panel discussion sharing valuable insights on trends and development in the regional hospitality sector, owner and operator relations, emergence of mid-market sector, M&A activity and future outlook of the industry.
Talking about the biggest growth markets in the MENA region, Laurent stated, “All major Middle East regions have targeted hospitality as key sectors for growth and diversification of their respective economies. Among these Saudi Arabia currently offers huge opportunity for mid-range investment particularly in Jeddah, Riyadh and the Eastern Province. Similarly, Doha, Muscat, Abu Dhabi all look very promising with events such as Dubai Expo 2020, FIFA World Cup in Qatar in 2022, etc. With the lifting of EU and UN sanctions, Iran holds enormous potential both in terms of domestic and inbound as well as outbound tourism. Officials in Iran have announced plans to build 400 new 3- and 4-star hotels over the next 10 years. Egypt has massive opportunity in economy and midscale hotels segment as well as quality serviced apartments”.
Experts believe diversification of hotels is likely to result in reduction of average ADR, with ADR in the region already dropping slightly in 2015. The entrance of new hotel options will also likely result in the less desirable existing hotels having to cut their rates to maintain occupancy. It remains to be seen what the consequences of a reduction in ADR will be for both owners and operators.
Elaborating on the subject Laurent said, “Diversification is no doubt under way with increased interest in mid-market products. These are needed for growing domestic markets as well as to widen appeal for international travellers be it business or leisure. We are also witnessing an oversupply of rooms in certain markets which is naturally affecting the ADR adversely.
“Taking Dubai as an example, what we need is a CAGR (Compound Annual Growth Rate) of 9% until 2020, or near doubling the current CAGR of 4.9% to reach the target. This looks like a tall task but is achievable. However operators and owners would need to tune down expectations. There will be challenges in terms of profitability, potentially lower returns. This could mean getting used to lower occupancies of 70% as an average rather than 80% which was normal until recently. Plus let’s not forget the independent owners who see OTAs as their best sales persons. They have been surfing on wave of success but when the market slows down they are the most affected given the absence of adequate human resources, technology, and other support from a big operator.”
Changes in a market, including increased competition, can put a pressure on operator fees. For example, following the recession, there was a general trend towards a decrease in the percentage of fixed operating fees, with a corresponding increase in the percentage of incentive fee, making up the total operating fee.
According to Laurent, “The operating fee has been a subject of great contention between owners and operators. There are no doubt marked differences in fee structure throughout the region made worse by ‘fly by night’ operators. Things are changing and there is a need to rebalance. Many old hotels are still being operated under the old contracts that the owners are now looking to renegotiate. Moving forward operators would have to show some flexibility with a lot more transparency in fee structure.”