DUBAI—As Dubai grows and becomes more affordable and as domestic travelers emerge in neighboring countries, a new market for budget and midscale hotels is sprouting in the Middle East. Some international brands have recognized that opportunity and have begun targeting growth by way of conversion—a tactic new to the region altogether.
“Over the last couple of years, we’ve been debating whether to do budget hotels (in the Middle East),” said Fadi Michel Mazkour, founder of MENA Hotels & Resorts Management. “If we talk in general about the regional needs, opportunities and niches of the budget hotels, indeed from an investment standpoint it makes more sense on the (return on investment) to owners than the traditional 5-star hotels.”
In the United States, 33% of the hotel market is in the budget sector, compared to 17% in the United Arab Emirates and 2% in Saudi Arabia, said Costas Verginis, director of consulting for Deloitte.
Mazkour said a potential budget market in the Middle East might be different from a budget sector in another region of the world. Therefore, it’s imperative to know what is important to travelers. A food-and-beverage option could be necessary in some countries while meeting space may be important in others. In Cairo, for instance, Mazkour said hotels must have a bar to survive.
Christian Karaoglanian, chief development officer for Accor Hospitality Worldwide, has experience building the Ibis economy brand to 900 global properties. Accor began pushing Ibis in the Middle East three years ago and now has six properties open in the United Arab Emirates running at approximately 80% occupancy, according to Karaoglanian. Fifteen Ibis hotels are under development in Morocco.
“The danger might be to make a budget hotel by the name,” he said. “Regional standardization is most important.”
For instance, certain countries have restrictions on the dimension of a hotel room and others won’t permit a liquor license in a hotel. Still, there are benefits to building smaller-scale hotels.
“The beauty of Ibis is the cost (to build) is around one-fourth or one-fifth of a luxury hotel, but the difference in (revenue per available room) isn’t so high,” he said. “So the profitability remains good.”
Bassam Boodai, managing director of Jenan Real Estate Company, said the budget sector has the opportunity to present itself as part of mixed-use developments in Saudi Arabia. The country was identified by many participants at the Arabian Hotel Investment Conference as an opportunistic market because of the size of the middle class that has started traveling domestically.
Boodai said oftentimes there is a challenge in deciding whether to build a 2-, 3- or 4-star hotel. Sometimes an additional 10% investment will take the property from one star to the next and command a much higher rate, he said.
Effects of a budget market
Elizabeth Randall, managing director at STR Global, said a shift in the type of hotels that are opening in the Middle East will create a “new normal” for performance measures. Lower-tier hotels that charge lower rates naturally will bring the region’s overall average daily rate down.
“When the first markets emerged, they were predominantly upper-upscale and luxury hotels,” she said. “As new hotels have opened—and given what’s happening in the pipeline—most of the hotels coming on board are mid-market or economy brands, which mean we’ll have a new base, we’ll have a new normal in the region. When you look at the year-over-year comparisons, we’ll see a slight decline.
“That’s not necessarily reflective of performance,” she continued, “it’s just reflective of the new sample and the new distribution within the marketplace.”
Adding a lower-tier hotel market in the Middle East also might open up the opportunity for brands to target growth by conversion, something the region has experienced very little. Because most cities in the Middle East recently have emerged as hotel hotspots, most of the growth thus far has been by way of new hotels. But regions like Dubai are coming of age, and some of the properties off the beach are ripe for repositioning.
“That’s something we weren’t doing two years ago, and now we are looking more and more into it,” Karaoglanian said. “Generally speaking, it might be time in this area to look at conversions now that the amount of new product might be lower. Since the speed of new product coming to the market has slowed down, it might be time, as we do elsewhere in the world, to look for and try to convert existing properties.”
Karaoglanian said Accor will target either hotels with struggling brands or independents. Although the region is recovering, the market remains “less easy” than it was three years ago, he said.
“You might see the situation where some owners would be happy to have the help from the brand and all the systems which are behind it,” he said. “You can always fill your hotel with Travelocity or Expedia, but the cost will be higher.”
Three of five Hilton branded hotels that opened this year in the Middle East were conversions. Rudi Jagersbacher, area president of the Middle East and Africa regions for Hilton Worldwide, said certain brands are ripe for conversion and others, particularly Hilton Garden Inn, should grow by way of new construction.
“Our conversion brand is DoubleTree because it’s much more flexible,” he said.