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Mid-market is where Dubai’s hospitality action is

Dubai: As sites for prime hospitality assets become more scare, Dubai is seeing a shift towards the development of mid-market properties, underpinned by government incentives, a growing middle-class in key source markets and the rise of a younger, more cash-constrained guest profile.

The advantages of mid-market hotels generally revolve around the notions of price stability and less volatile demand trends, which have proven to hold true over the last 15 months at the local level. During this period, the segment has continued to perform well in an increasingly competitive environment.

In Q1-2015 the hospitality market exhibited a strong performance in relation to other major markets in the Middle East, despite a dip in key performance indicators, which were primarily attributable to global currency fluctuations and a declining Russian market. Average occupancy rates fell by 2.2 per cent to 86.1 per cent while average daily rates fell 5 per cent to Dh984 in annual terms.

Although this resulted in a year-on-year RevPAR decrease of 7 per cent, Dubai remains among the leading Middle East markets both in terms of average rate and occupancy.

The mid-market has proven to be resilient, with positive performance in Q1-2015 relative to the corresponding period the previous year. The segment saw a year-on-year RevPAR increase of 0.5 per cent during this period (which was driven by an increase in average rates) at a time of declining RevPAR performance in the luxury and upscale sectors.

Demand for mid-market hotels has been driven by two main factors — a growing middle-class in key source markets (e.g., GCC, China, India and Africa) and a younger guest profile with limited disposable income. As a result, strong demand for branded mid-market hotels has helped to support average occupancy levels at above market wide averages.

From an investment standpoint, mid-market hotels have significant advantages over luxury and upscale properties:

• Lower capital investment — Relatively smaller investment for mid-market hotels on a per key basis due to lower construction cost and higher design efficiency.

• Smaller construction period — Modular construction allows for the minimisation of time between capital outlay and revenue recognition.

• Lower land requirements — As a product of the comparatively high room to gross floor area ratio, mid-market hotels can be developed on smaller parcels of land.

From an operational perspective, mid-market hotels have these advantages:

• Lean cost structure — Lower staff to room ratio results in lower operating costs.

• Higher profitability ratios — Rooms driven business model, with fewer ancillary revenue generators, allowing for higher EBITDA margins.

• Less revenue volatility — Demand trends are less seasonal than in the luxury and upscale segments which result in more predictable revenue flows.

The advantages also extend from the development phase through to the operations and eventual disposal of the asset. Looking forward to the next five years, we can expect to see an influx of quality, internationally branded mid-market properties come to market, which will likely benefit from strong demand levels.

While the hotel industry in Dubai is far more developed than other Middle Eastern destinations, it still has some ground to cover before it can be considered a fully mature market. The current push towards mid-market development will reinforce Dubai’s standing as an emergent hotel market through the provision of a more diverse product offering.

As more internationally branded midscale hotels come in, the next asset class to see rapid growth in the medium term is likely to be the budget sector as the hotel market matures further.

The writer is the Development Consultancy Manager at Knight Frank.

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