Dubai hotel investors: Think local and act global

Hospitality will remain a strategic jewel in the crown of the UAE's long-term growth, writes Matein Khalid

The Austro-Hungarian empire of the Habsburgs did not survive the end of the World War One in 1918 but its ancient imperial cities Vienna and Budapest are still magical jewels from a lost time that have haunted me since boyhood, the lost world of Strauss, Mozart, Sisi, Freud, Klimt and Mayerling. So I was thrilled to learn that Dubai's Al Habtoor Group has acquired Vienna's Hotel Imperial on the Ringstrasse from Starwood Hotel, which is selling $800 million in assets to switch to a new "asset light" operating model. The Imperial Hotel embodies Vienna of the Belle Époque to me. Hitler took the salute from the Imperial's balcony the night of his Austrian Anschluss in March 1938. My advice? Buy a five-star hotel in exquisite Prague, the third urban jewel of the Habsburgs. Then offer UAE residents a three city, short break luxury package with Emirates or Etihad. Even a long "Schönes-Wochenende" in Vienna is an aesthetic treat!
The crash in oil prices, the spike in new hotel room supply, the 30 per cent rise in the US Dollar Index, slump in world trade and collapse of the Russian rouble will impinge on the performance of the UAE hospitality sector in 2016. Yet even a jaded veteran of the world's hotel scene like I was stunned by the sheer magnificence of the Al Habtoor's St Regis Hotel on Sheikh Zayed Road that opened in December. Tourism and hospitality, will remain a strategic jewel in the crown of the UAE's long-term economic growth and non-oil diversification strategy. 2016 will be a mediocre financial year for the sector, as room rates and occupancy rates are under pressure, as King Dollar (notably against the euro, sterling, rouble and Asian currencies) takes its toll on tourist traffic. Any investor in UAE property must, be forced to become a foreign exchange strategist in order to survive this asset class rollercoaster.
How long will the UAE hotel scene remain under financial pressure? The CEO of Rotana Hotels has forecast a tour year bear market scenario. Economists and banks in London and New York warn me of global recession risk, a higher US dollar against the euro/rouble and an oil glut that will only worsen as Iran, Iraq and Russia compete with Saudi Arabia, Kuwait and the UAE for Asian market share. It does not help that the UAE is nowhere near a budget destination. Yet Dubai is unquestionably the financial and entertainment hub of the Middle East. Not even Beirut in its prewar golden age can match the sheer scale and extravagance of the luxury hotel offering in the UAE. The Syrian civil war has flooded Beirut with refugees but also reduced its appeal as the "reve du Orient" or Paris of the Levant for the world's tourist cognoscenti. Cairo has also not recovered from the tragic bomb blasts and downing of a Russian jet by terrorists in the skies above Sinai.
Revenue per available room (Rev Par), a metric of hotel performance, declined six per cent in Dubai and 4.4 per cent in Abu Dhabi in 2015. However, the decline in this metric of hotel performance does not mean that ownership of luxury hotels was not hugely profitable in 2015. The Habtoor Group's growth plans for new hotels in Dubai alone are a testament to the emirate's bull market in hospitality offerings. It also did not surprise me that Abu Dhabi National Hotels Co net profits rose 18 per cent in 2015. Dubai Parks and Resorts, with 13,500 workers and 41 contractors, is a Dh10 billion project.
The brutal realities of 2016 will force hotel operators in Dubai and Abu Dhabi to reduce their dependence on tourists from Russia and Europe. For instance, India, Saudi Arabia and Pakistan are obvious growth markets. There are just too many five-star hotel properties in the offering mix, with more economic offerings needed. Even BMW does not manufacture only 7 series sedans for its clientele. There is an oversupply in luxury hotel rooms. Family tourism from the GCC will be a growth area, four-star family hotels will be a sweet spot. Abu Dhabi needs to attract meetings incentives, conventions and exhibition clients to boost its 75 per cent occupancy rate, as expansion of Etihad's global route networks will attract more tourists from the US and Australia. Dubai must reduce its cost curve as the hotel room premium to Abu Dhabi is far too high. It makes no sense to be complacent on Expo 2020 alone. Dubai hotel investors will "think local and act global"!
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae