Dubai Hospitality Sector Update

Dubai’s hotel occupancy averaged 76.1% in Jan-Sep 2016, unchanged compared to the same period of 2015. According to the latest data from STR Global, the supply of hotel rooms in Dubai increased by 5.7% y/y in September 2016 while demand also increased by 11.4% y/y the same month. The supply of hotel rooms in Dubai increased by 5.8% y/y in Jan-Sep 2016 to 86,151 rooms with the Department of Tourism and Commerce Marketing (DTCM) targeting 140,000 to 160,000 hotel rooms by 2020. Data from STR Global also shows that a further 19,783 hotel rooms are currently under construction in Dubai, of which 6,851 are due to come online by year end. Another 23,825 hotel rooms are in planning stages.

Meanwhile, average revenue per available room (RevPAR) fell sharply y/y. In Jan-Sep 2016 RevPAR decreased by -10.7% compared to -9.5% the same period last year. RevPAR stood at an average of AED 524 (USD 143) in Jan-Sep compared to AED 587 (USD 160) in the same period last year. With substantial additional supply expected over the next few years, RevPAR is expected to remain under pressure in the near future.

Similarly, the average daily rate (ADR) charged by hotels has fallen in Jan-Sep 2016. Hotels in Dubai have lowered their ADR by -10.7% y/y in Jan-Sep compared to a decline of -7.4% y/y the same period of the previous year suggesting weaker pricing power with hotels further adjusting prices downwards to offset some of the impact of the stronger USD.

There is a high degree of concentration of hotel room supply (number of hotel rooms) within a few key segments. For instance, upscale, upper upscale and luxury hotel rooms (4* to 6* stars) accounted for roughly 50.0% of Dubai’s total existing supply and 58.4% of the additional projected supply. The midscale and upper midscale segment (2* to 3* stars) accounted for just 11.0% of Dubai’s total existing supply. In our view, Dubai’s tourism strategy to strengthen the midscale and upper midscale segment is moving in the right direction with 24.1% of the additional projected supply directed to that segment. This should perhaps shift the focus of the government to the economy range too as the market is top heavy on the luxury end. 

Similarly, Dubai’s hotel supply (number of hotels) is equally segmented with upscale, upper upscale and luxury hotels (4* to 6* stars) accounted for 37.7% of Dubai’s total existing hotels and 60% of the additional projected supply. Again, the focus should be on the midscale and upper midscale range (2* to 3* stars). Separately, the difference between hotel and hotel room supply for the independent segment highlights the fact that independent hotels are relatively smaller in size (fewer rooms) compared to luxury segments where 18.1% of the existing hotel room supply is absorbed by the 12.3% of the existing hotels.  

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