Mid-Range Hotel Market

Donal O'Leary
Mid-market prospects have the potential to reshape the Middle East hotel sector. Together with director and head of hotels for the MENA region at Colliers International, Filippo Sona, we will discuss the opportunities and challenges faced by developers and operators.

Mid-range market opens up

The upmarket hotel segment has dominated the Middle East hotel landscape thus far, but diversification is under way with increased interest in new mid-range products. These new offerings are needed for growing domestic markets, as well as to widen the appeal for international tourists and business visitors. Medical and religious tourism are also creating a need for more price-conscious accommodation. The mid-range segment therefore looks set to provide profitable long-term investment.

Impact of mega-events

Hotel infrastructure is seeing expansion in most countries in the region, with some accelerated by major events. In Dubai, the Department of Tourism and Commerce Marketing (DTCM) estimates that a total hotel room supply of 140,000 to 160,000 rooms will be required by 2020, an increase from the current supply of approximately 90,000 rooms, with a further 10,000-plus rooms being reported as needing refurbishment prior to World Expo 2020. In Qatar, 45,000 further hotel rooms are reported to be required to meet FIFA 2022 World Cup capacity requirements, with 21 hotels planned for construction by 2017. (Source: Price Waterhouse).

Each city has its own supply and demand characteristics. Dubai is a mature tourism destination, whereas Doha is emerging and has the challenge of maintaining momentum until the World Cup Qatar 2022. However both markets have room for mid-range provision.

Post-event legacy

For cities anticipating mega-events, post event demand needs to be considered, to avoid the risk of overcapacity. The challenge here is to investigate alternative uses for accommodation post-event, for example turning athletes villages into affordable residential communities. This may be a challenge for Doha in particular, as it currently attracts less tourism than Dubai. All major Middle East regions have targeted hospitality as key sectors for growth and diversification of their respective economies.

Further afield

Saudi Arabia currently offers huge opportunity for mid-range investment. The Kingdom’s 2030 strategy includes a significant focus on tourism, as well as reinforcing provision for existing high numbers of religious tourists. Oman, Doha, Manama and Kuwait City all have a growing need for mid-market provision.

Locations that maximise the asset’s potential

Mid-range hotels may be a more lucrative investment if provided as part of a mixed use development, rather than as stand-alone assets. Considering versatile use of mid-market hotel accommodation can make better use of the building’s footprint. Mid-market hotels generally do not require lavish reception areas, and as a result, the hotel facility can be situated on the upper floors, releasing the ground floor to maximise retail footfall potential. In addition to new build opportunities, some areas have potential for converting old office buildings into mid-range hotels.

Funding models

There are different ownership/funding models, but a development owner and a branded operator is the most common. The operator may get involved at different stages of development/construction, but having the operator on board at design stage will usually maximise the efficiency of the space.

Incentives for developers

In October, Dubai’s DTCM launched incentives for developers of three and four-star hotels, including waiving Dubai Municipality’s one percent zoning fee and offering a two-year waiver on municipal fees if the hotel is open before 2017. These incentives are vital in promoting development particularly in specific areas where land prices continue to increase in the particularly margin conscious mid-market segment.

Defining the scope… and sticking with it

One of the key issues is accurately defining and staying true to the required scope. The tendency is for stakeholders to want to increase the standard of the facilities. This scope creep will increase development and operating costs and reduce return on investment. The parameters need to be very clear. This is not the market for upmarket spas or lavish reception areas. Food & beverage provision may be coffee shop style rather than restaurant, and bedrooms sizes should be carefully calibrated.

Efficiencies

Smaller simpler hotels are faster to build and lend themselves to modular methods of construction – bathroom pods, for instance, offer efficient and cost-effective quality control and sustainability benefits. Careful consideration of the design and layout of the typical floor-plate and building elevations are also helpful in targeting maximum efficiencies.

Mid-range facilities need to be designed with appropriate staffing levels in mind. Unlike the levels associated with upper market provision, mid-range should not be overly dependent on high numbers of staff. Policy makers are likely to come under increasing pressure to raise minimum wages. Hotels must therefore find ways of mitigating the impact of rising wages without compromising on competitiveness and service levels appropriate to the facility.

Sustainability is just as important in the mid-range market as at the upper end – and less complex hotel buildings are likely to find compliance is easier to achieve. This should also equate to long term benefits over the asset life cycle with lower running costs.

Benefits of mid-market hotels to the retail market

Urban planners are likely to encourage the inclusion of mid-range hotels in mixed use developments. Hospitality customers make significant economic contribution to the retail sector, and specifically to shopping malls. Typically, a tourist staying in mid-market hotels in close proximity to a retail complex will stay five days and will visit the complex twice during their stay. As this more basic hotel provision is primarily a place to sleep, eating, activities and entertainment are done elsewhere, again contributing to growth of retail revenue.

Getting it right

Accurate feasibility studies are essential, to quantify the opportunity, identify best use and release the maximum value from the proposed asset. Development budgets need to be tightly controlled in this price conscious market with realistic budgets established from the outset of the development life cycle. Coupled with the establishment of an accurate feasibility study, the appointment of an experienced project management company, with relevant hospitality sector knowledge, will help set the right conditions for the overall success of the development.

Faithful+Gould has completed projects in the mid-market hospitality sector including the Park Inn hotel in Abu Dhabi, the Ibis and Novotel hotel in Dubai and currently the Hilton Garden Inn hotel in Ras Al Khaimah. Our other hotel clients include Marriott, Wyndham, Crown Plaza, Disney®, Ritz-Carlton, Jumeirah Group, Shangri-La Group, Hilton Hotels, Hyatt, Intercontinental Hotel Group, Mandarin Oriental Hotel Group, Marina Bay Sands, Ascott, Carlson Hotels, FRHI Hotels & Resorts, and The Hong Kong and Shanghai Hotels Limited (The Peninsula Hotels).

Our integrated range of project and programme management services mean we can get involved from design phase right through to the opening and consequent refurbishment, to remain modern and competitive in this fast growing market.   

Written by