How can hotels survive the current supply glut

How can hotels survive the current supply glut
Published: 3 February 2019 - 10 a.m.
By: Namitha Madhu

According to Simon Allison, the CEO of HOFTEL, the long-term outlook for the GCC hotel market is very positive.

With the upcoming Expo event in Dubai and the opening up of the Saudi tourism market, 2019 is expected to be a largely positive period for the hospitality sector.

However, the increase in room supply over demand will continue to be a pressing problem.

“Expo 2020 is on the horizon; there are a surge of tourism projects planned in Saudi Arabia; and we’re seeing strong ambition and innovative ideas in a number of areas, such as Ras Al Khaimah’s experiential tourism agenda. However, there are a number of hurdles to overcome in 2019, the most fundamental of which is the balance between supply and demand,” remarks Allison.

New supply growth in the region is very strong and the revenues of many individual hotels and serviced apartments are falling.

The recent STR report showed that occupancy rates in the Middle East fell by 0.5%, to 64.6%, compared with the figure for 2017. Average daily rate fell by 5.2% to US$155, while revenue per available room (RevPAR) fell by 5.7% to US$100.45.

It’s practically impossible for hoteliers not to see occupancy fall, or prices slashed in order to maintain some kind of balance, says Allison.

“Figures from STR show that Jeddah’s pipeline is well over 100% of existing supply; for Muscat, Doha and Dubai it’s at 75% or more. In Dubai’s case that means around 45,000 rooms in the pipeline and more than 20,000 in planning - though many of the latter many not be built. This new supply is coming into markets which are already suffering.”

“Revenue per room in Dubai was down 7% in the year to August, on top of a 4% fall in 2017. Abu Dhabi’s figures were 3% and 5%; Muscat’s 5% and 7%; Al Khobar/Dammam’s 16% and 3%,” he added.

Simon Allison

How can hoteliers survive the current glut?

Allison says that hoteliers should focus on options other than price reductions.

“A multi-faceted approach is more likely to help them emerge in a much stronger position when conditions improve,” he says.

According to him, the key areas to focus on include:

1. New markets

Hoteliers should seek out new market segments, especially from India, China and Africa as well as South East Asia, Alison says.
Chinese arrivals to the GCC are predicted to go up by 21% to 2.5mn by 2021, according to research published by Colliers International. The company also predicts that around 9mn Indians will travel to the GCC by 2022 – 37% of India’s total outbound market.

2. Review cost structures

Hotels should review their cost structures to see where fundamental changes can be made. “That may include looking closely at their management agreements with operators to ensure the brand is fulfilling all of its obligations,” says Allison.

3. Best use of space

It is important to ensure that hotels are able to get the maximum benefit from their available spaces and assets. “Would it be better to convert a restaurants into a meeting room or visa-versa? Is there space to rent out some of the ground floor or even the parking? Can the GM’s office make way for a saleable suite,” these are some of questions Allison says hoteliers should ask.

4. Renovation

If hotels can afford it, the slow market is a great time to undertake renovations. “They will be displacing less paying business and contractors’ prices will have fallen if the glut of property really bites.”

5. Changing ownership structure or rebranding

“Considering a move from a management agreement to a franchise (especially if they have three or more properties and can benefit from internal economies of scale). Similarly, independent hoteliers may find it worth considering a move to a well-known brand,” says Allison.

6. Timeshare

The use of timeshare is another option for hotels to increase revenues.

“Timeshare is a system where a hotel room or serviced apartment unit is chopped into 52 weeks and these are mostly sold to buyers on a week-by-week basis. The buyer can use their weeks or swap them or leave them to be rented out. There are variations – clubs where buyers get a “right to use” but not legal ownership of the unit; and fractional ownership where they do get ownership but the blocks are months not weeks (so more expensive and often more prestigious),” Allison explains.

He says that the rules on letting out private residences to short-term guests have recently been softened in the UAE and it timeshare might soon become a popular option for hoteliers

“It may provide more competition for hotels; on the other hand, it may allow hotel owners to sell off some inventory and raise funds in the tough times.”

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