Finding the middle ground

A number of international hotel chains are starting to realise that the time is right to start diversifying the Middle East's hotel market with the addition of some low-cost, high-quality mid-tier brands

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By  Sarah Gain Published  June 6, 2006

|~|Mid-tierL.gif|~|Following the success of Accor’s Ibis hotel in Dubai, a number of other hotel chains are now jumping on the mid-tier bandwagon|~|In 2005, 38.5 million guests visited the Middle East and this figure is expected to grow a further 8% this year, according to forecasts from HVS International. These increasing tourist arrivals mean that demand for room nights shows no sign of slowing in the foreseeable future, and hotel development, therefore, continues to be at the heart of the vast majority of real estate projects currently underway in the region. “Take Dubai for example,” says Jean Marc Busato, vice president of Rezidor Hospitality in the Middle East. “Everywhere you look there are cranes and building works. There are developments and 'mega-developments' springing up all over the city and if you look at the plans for them you would see that almost without exception every one includes at least one hotel.” The preferred positioning for most of these upcoming hotel developments is high-end as attention-grabbing, luxury hotels offer higher average room rates, better bottom-line figures, and seem to promise better returns for investors than mid-range alternatives. “People tend to think that five-star hotels have better margins,” confirms Elie Younes, director at HVS International, “Investors also consider that the cost of land is very high so they believe they should build five-star hotels rather than a three-star. The operating expenses of a five-star hotel property in the Middle East are similar to those of a limited service hotel, so the investors will say, 'I'll have a five-star instead',” he explains. “They neglect the fact that the demand for such properties is saturated.” This attitude seems to be gradually changing, however, and economy lodging was a hot topic for debate at the Arabian Hotel Investment Conference (AHIC) held in Dubai in May. Several of the major international hotel brands have come to realise that hotel developments in the region have focused for too long on five-star properties and they are now planning to introduce mid-range brands into the region to inject some much-needed diversity into the hotel market. “There is a lot of demand for budget hotels with a mid-market orientation that offer value for money, especially in the high-rate environment that we have here in the GCC,” says Busato. “Let's face it; the three- and four-star properties in Dubai reached the prices of the five-star hotels two or three years ago. People would love to be able to pay a bit less for their rooms.” Indeed, as average room rates in the region shot up by approximately 17-20% last year according to HVS International's estimates, hotels in Dubai in particular came under fire for being overpriced. Among the critics is Stelios Haji-Ioannou, the self-designated “serial entrepreneur” who heads the easyGroup of businesses, which includes easyHotel and easyJet. “Hotels in Dubai are certainly overpriced. Having to pay US $150 (AED 550) per night for what passes as a budget room in Dubai is too much,” he states. “This is not an exclusive island of 2,000 people. This is a state that has to support about seven million residents in the next few years and you cannot build a sustainable economy like the one Dubai wants to have without all the different classes of hotels being available. There is a shortage of supply and you see it more acutely in the low-cost sector.” HVS International agrees with this assessment and in the 2006 edition of its Middle East Hotel Markets Index, the company recommends limited service hotels as one of its key investment targets for 2006 and 2007. The report also indicates that in order for these types of properties to be successful, they must first open in major cities in the region, such as Cairo, Manama or Dubai, where there is high growth forecast and where there is already a good level of demand from both regional and international corporate travellers. In markets such as Europe or the United States, where there is already a defined, mature hotel market, mid-tier brands have found their niche, and according to Chris Moloney, COO Middle East and Africa for InterContinental Hotels Group (IHG), Dubai and several other major cities in the Middle East are now mature enough to benefit from this type of segmentation. “Once an emerging market has begun to expand beyond the five-star products the time is right to start introducing the lower star ratings or the budget hotels as the market becomes more developed,” he explains. The market might be ready for this variety, but are the region's investors? While it is easy to see the benefits of being associated with a high-profile, high-end development, convincing Middle Eastern hotel investors that the middle lane may in fact be the fast lane when it comes to long term profitability still poses something of a challenge, according to Moloney. “There tends to be a stigma attached to the term 'budget', particularly in this part of the world, so it has been a challenge to educate investors,” he admits. “We've had to define 'budget' as not being low quality but rather as being good value. It's just a different offering that fits the needs of a certain budget. It is absolutely not low quality. That's a distinction we've had to be very clear about with Express by Holiday Inn.” IHG will open the first Express by Holiday Inn at Dubai's Knowledge Village next year. The 240-room property features a no-frills design concept that has been adapted especially for the Middle East market. Express in the Middle East will have slightly larger rooms than its European counterparts, as well as more cupboard space and slightly bigger bathrooms. The principle behind the brand is very much the same, however, according to Moloney, who says the facilities will meet the needs of businesspeople who come to Dubai for short periods, and are out at meetings all day. IHG says this type of economy product follows on well from the expansion of budget airlines in the region, which will drive up regional and international travel for both business and leisure markets, and the group has plans to build around 20 properties in the Gulf, as well as a further 20 in the Levant, in Lebanon and Syria. “Dubai is busy positioning itself as an exclusive destination, focusing on high-end luxury resorts, but there is a great deal of industry, manufacturing and service industries that exist here, and these markets aren't served most successfully by the high-end resorts or even the high-end corporate market. There is definitely a need for a well-priced, quality, branded product in the mid-tier segment and I think that is what the nuance is with the Express product,” Moloney says. “The three-star market in the Middle East is not being served in a consistent manner at present and a recognised budget brand is needed to improve the standard and variety of accommodation available,” he adds. Rotana's chief operating officer, Imad Elias, is of the same opinion. The group is aiming to open 25 of its mid-tier Centro brand properties across the region within five years, starting with two hotels in Dubai and one in Abu Dhabi opening in 2007. With an average cost of $70-$80 per room, Centro is expecting a return on investment between 15-20% on its turnkey cost of $60,000-$70,000 for each room. Rotana is looking to eventually extend the presence of the Centro brand beyond the UAE, with further properties in Egypt, Lebanon and Kuwait in the future, but Centro will only open where Rotana already has a presence with its four- and five-star hotels, in order to offer the complete range to guests. As with Express by Holiday Inn, Centro will adhere to different standards to those found in economy hotels elsewhere in the world. The Centro formula features rooms of 22m², all-day restaurants, bars, delicatessen-style take-away shops, gyms and pools, plus business and meeting facilities including wireless internet connectivity. This full service, low cost model will provide accommodation across the region for budget-conscious travellers, without compromising on comfort and accessibility to business facilities. At the other end of the scale, easyHotel's Haji-Ioannou is looking to completely revolutionise the low-cost hotel sector with a radically different product. He is launching a chain of easyHotels across the Middle East, North Africa and the Subcontinent in partnership with Dubai-based private equity group Istithmar, whose subsidiary, Istithmar Hotels, will own and operate the properties. Each of the 38 easyHotels will have 100 rooms and will follow a pure room-only model, with no food and beverage facilities onsite. Haji-Ioannou also plans to keep costs down by offering guest rooms measuring just 12m². “We don't need to standardise the room size — we are talking about a real economy product. Room rates will be around 15% lower than similar international budget hotels across the world,” he explains. “With this type of product, it is extremely important that you know and understand your target audience. There are all sorts of markets for the easyHotel product. The number of expats living in Dubai generates a lot of trips from VFR (visiting friends and relatives), for instance. Half of the tourists to Dubai come from Europe, and the majority of them are already familiar with the easy- brand, so they are able understand the concept and the value of the easyHotel.” With a total investment of $400 million (AED 1.46 billion), the plan is to set up 38 easyHotels, eight of which are expected to be operational by the end of 2007. Another 18 will be up and running by the end of 2008, and the remaining 12 will be open over the following three years. The strategy includes six properties in Dubai. “The sites under consideration here include International City, Jebel Ali Village and Jumeirah,” says Haji-Ioannou. “They will be located as centrally as we can find. It is important to be right in the middle of things.” Opening a lower-end hotel in an area where there is an abundance of high-end properties can often be a sound business strategy, according to a study carried out last year by the Centre for Hospitality Research, a unit of the Cornell School of Hotel Administration. The study found that economy and budget hotels had higher RevPARs when they were located in markets where there was a high proportion of upscale and luxury hotels. “It turns out that co-location is a key contributor to RevPAR premiums for low-end hotels that operate near those in higher market segments,” explains Cathy Enz, one of the professors responsible for the study. “Looking at a particular hotel's pricing strategy; we found that the more different a property is from the average property in a particular cluster, the greater the RevPAR benefit for a low-end hotel.” French hotel giant, Accor, has certainly found that it has benefited from being different to its neighbours since it opened the Middle East's first business economy hotel in 2003. The success of the 210-room Ibis on Sheikh Zayed Road in the heart of Dubai, has been a major factor in prompting the company to draw up its aggressive regional expansion plans, according to Anthony Peter Slewka Armfelt, director of business development for Accor Hotels. “The branded business economy model did not exist in the Middle East at the time, so we took the challenge to introduce it into the region. Now everyone's jumping on the bandwagon,” Armfelt says. “Similarly, the Novotel brand, which is an upper mid-scale product, was a risk at first. We didn't know if the region wanted this type of product. The proof is in the pudding, though — the group is now gearing up to increase the capacity of its Middle East portfolio by 360% by 2009.” The regional strategy incorporates 16 new property contracts currently under negotiation and 24 hotels under construction. Together with the 18 existing properties, this will bring the company's product portfolio to 58. The 16 new properties in the final stages of negotiation will be spread across the region with eight in the UAE, two in Oman, and one each in Jordan, Lebanon, Kuwait, Qatar and Saudi Arabia. Meanwhile, the 24 under construction are set to open by late 2008 and over half will be in the mid-scale and economy segments, with six Novotel and eight Ibis properties. “Ultimately, we would like to have one Novotel in most major cities in the region…and we will be growing the Ibis brand in the long term,” says Armfelt. “We try to position them very intelligently, placing the product near to a specific requirement such as a factory, hospital or a business district, to serve people in a certain hub.” In fact, this is a typical strategy among those looking to introduce mid-range products into the market. In April, for instance, when the Emirates Group announced its plans to bring the Premier Travel Inn brand to Dubai, it also selected locations close to major business centres. Working in partnership with British hospitality group Whitbread, the group will open the first of its AED 260 million ($70.8 million) Premier Travel Inns in 2007 at Dubai Investment Park. In 2008, a 220-room hotel in the Dubai Silicon Oasis will follow, as will another hotel at Dubai airport. However, Rezidor Hospitality's Busato believes that top locations in top destinations are not always necessary for a mid-market brand. “The development strategy for the Park Inn focuses on top locations in secondary destinations, or secondary locations in top destinations. We would locate the properties in big cities such as Dubai, Kuwait City or Doha, but not necessarily in the city centre,” he explains. “When it comes to secondary destinations, then we want to have the top location. If you build a Park Inn on costly land it will increase your development costs. We want to be able to sell the rooms for a reasonable mid-market price, but if the initial investment was too high this wouldn’t make sense.” Rezidor SAS is set for extensive growth in the Middle East, where it will have at least ten Park Inns in the next ten years. The brand will make its Middle East debut in 2007 in Saudi Arabia, with properties in Al Khobar and Riyadh, and now the company is turning its attention to the emerging market of Oman. Due for completion by 2008, the Park Inn Muscat will have 200 rooms, a restaurant and bar, meeting facilities, a business centre and health club. The new property will be situated in the heart of the capital. “Oman is still a developing market, and this is what we mean by a 'secondary destination'. The tourism industry in the Sultanate is on the rise, however, and Park Inn is ideal for this market,” says Bustato. “I wouldn’t really call Park Inn a 'budget' brand, but it is for people who are more price-conscious, with rates between $50 and $100. The budget market is definitely a step lower than the Park Inn.” As the region's luxury hotel segment becomes increasingly overcrowded, Busato is convinced that the safest investment prospects and the best opportunities for future growth exist in the region’s three-star arena. “Even though the five-star and the 'seven-star' markets are exciting propositions, the mid-market and the budget market are a practical requirement for the hotel industry as a whole. They might not be the most glamorous products, but a good return on investment is more or less guaranteed with a mid-tier hotel,” he says. “Branded three-star hotels offer high quality, standardised accommodation whereas the typical three-star properties in the region are often nothing more than four-star hotels that have become shabby. Being a three-star should be a deliberate, strategic choice.”||**||

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