Imagine for a minute that you bought an investment property, and for ten years your rental income had been going down and down and down. Then after your revenue had dropped by around 60%, your agent suggests that, due to the number of new houses coming on-line around the new estate, that you need to completely overhaul all the equipment and finishes in the entire house. Not that it would allow you to increase your rent, just to prevent it from dropping further.
Well, that is the predicament facing many existing hotel owners in Dubai and other parts of the Middle East right now.
There are currently circa 110,000 hotel rooms available in Dubai, with an additional 50,000 in the pipeline to be delivered over the next few years, according to STR report for 2021. TopHotelProjects’ data confirmed recently that this year alone, a further 79 new hotels are slated to launch in Dubai, adding to the ever increasing competition for hotel rooms. So, what does this mean?
Well for starters, it means there are a lot of new hotels coming to an already saturated hotel market, which might provide more cost effective choices for the consumer, but it is not good for the hotel owners. Added to the new hotels are all the ‘old’ hotels built in Dubai in the late 1990’s and through the 2000s which are now approaching 10-15 years of age. There are about 50,000 of those just in Dubai, and they are facing some very stiff competition.
The question here is: why don’t hotel owners refurbish their ‘old’ hotels?
According to most hotel development industry pundits, NOW is the perfect time to refurbish a hotel. There is limited guest occupancy in rooms — leading to less disruption from noisy construction activity. While many restaurants are closed or on limited capacity — allowing them to be overhauled without impacting on guest ‘foodie’ experience. Additionally, the local economic cycle is depressed, leading to competitive consultant fees and construction costs.
So it makes sense to keep up with the competition and invest in a hotel refurbishment for some of the many aging hotels in the region.
However, we need to understand the intricacies around the timing of a hotel refurbishment, we need to think like an owner.
A hotel owner, after all, is simply a business owner looking to create a profit from their investment. The investment typology they chose to invest in, like many residential investors, is a property. As with any residential property owner, a hotel owner needs to consider the income that comes from the property compared to the capital that needs to be injected into it for operations and maintenance (O&M). It is a balance of cash flow.
Hotels, however, are different than houses. They have hundreds of guests who walk through their doors each day, leaving potentially damaging comments and photos on social media accounts and travel advisory sites. Not good for business. So really, the prospect of doing nothing is really not an option at all.
Whilst now might be a great time to refurbish a hotel due to increased competition and a lack of occupancy. Owners need to balance what has been reducing revenue, and not just since COVID-19 struck in early 2020.
The Revenue Per Available Room (RevPAR), a common metric to measure a hotel’s income, has dropped from its peak in 2007 of $353 by 61% down to $136 in 2019, well before the COVID-19 pandemic played havoc with their returns.
So, it begs the question: Would it make economic sense to pour money into an aging asset that had been losing money for several years with little prospect of re-cooping your return on investment in the near future? The answer is complicated.
The long term hotel owner might take the view that the asset will only further deteriorate if nothing is done. In addition, existing hotel owners know that the new hotels in the pipeline are not going to go away. So to avoid further erosion of the profit levels, and to remain relevant to their target market, some measured capital injection is required.
What we advocate is a considered analysis of the hotel and a carefully balanced capital development plan (CDP) or property improvement plan (PIP) to ensure that all of the guest & customer touch points are up-to-scratch, and that some of the back-of-house operating systems are audited and up-graded if required. There’s no point investing in soft room refurb if the air conditioning doesn’t work in summer.
A recent report by STR advised that based on current restrictions, hotel recovery will gradually re-commence from Q2, 2021. So now definitely is the time to be preparing, planning, and putting into action key improvements, so that when hotels are back to full operational functionality, they are well positioned to take advantage of the uptick in travel and occupancy rates.
After all, what is the alternative? A hotel investment is like a residential investment property, in that, it is bricks and mortar. It will stand the test of time and can ride out cyclical fluctuations in economic cycles. Owners just need to take a long-view, invest in the asset in a measured and consistent manner and remain relevant to the brand and guest.
And we, as customers and as guests, need to just put ourselves in their shoes, with the mindset of an investment owner and appreciate that refurbishments will happen, even if more measured.
Nathan Hones is a partner in Carter Associates, a boutique project consultancy and project management firm in Dubai, specialising in hotel refurbishment strategy, property improvement plans, and project management services.
