ABU DHABI: The Middle East’s tourism and hospitality sector remains upbeat despite a slew of issues affecting investments, particularly rising construction costs, funding delays and higher interest rates for development projects.
Speaking at the Future Hospitality Summit in Abu Dhabi, industry leaders shared their observations on the challenging environment for new hotels in Saudi Arabia, the UAE and elsewhere in the region, and how this affects tourism targets.
“The Middle East region, namely Saudi Arabia and UAE, is showing resilience in the face of rising construction costs for a combination of reasons, including investor profiles in the region, a robust economy and governmental policies and the rise of oil prices,” said Camil Yazbeck, global chief development officer for premium, midscale and economy segments at French multinational hospitality company Accor.
“Governments, especially in Saudi Arabia, have a target to achieve based on the country’s vision. We are seeing determination in meeting this target, with close collaboration between the public and private sectors to ensure project delivery on schedule. In addition, international consultants are being appointed to accomplish multiple projects across either one or numerous markets,” he said.
A study by hospitality consulting firm HVS, “Navigating the Investment Terrain: Trends in GCC Hotel Development Costs,” notes that Saudi Arabia has become the focus for investors as the Kingdom strives to turn itself into a travel destination to increase the tourism sector’s contribution to the local economy to over 10 percent.
The paper also said that hotel rooms in the pipeline in Saudi Arabia are primarily upscale, accounting for 36 percent of the total projects, with the concentration of the number of rooms operated by the top three operators for the existing supply decreasing as the positioning moves from luxury to midscale hotels.
Change in mindset
The Kingdom is also the leading country of hotels in the pipeline, focusing on luxury and upper-upscale hotels.
Industry data suggests that about 200,000 rooms are under development across the Gulf region.
Hala Matar Choufany, HVS’s president for Middle East, Africa and South Asia, said that Saudi Arabia and the UAE “have particularly demonstrated a strong commitment to tourism as a driver of economic growth, which may provide the incentive needed to overcome cost challenges.”
She added: “When considering the government role in hotel and destination development, many projects in the pipeline are less dependent on debt financing and arguably have lower return expectations when compared to the private sector and investment funds.”
But considering the historical development trend in the UAE and despite significant growth observed in the last 15 years, only 60 to 70 percent of planned projects materialize, with a typical delay of 18 to 24 months, Choufany commented.
Such delays, however, have a more significant impact on supply and demand dynamics in critical cities with strong seasonality, such as Riyadh and Makkah, she said, and it was also not uncommon for smaller and midscale hotels with limited investment budgets to be less impacted when compared to large and luxury assets, which typically experience longer financing and completion timeline.
The HVS executive nonetheless had a positive outlook: “The UAE has about 208,000 hotel rooms operating at an occupancy of around 70 percent. It is estimated that an additional 45,000 hotel rooms are planned to open, which at a similar occupancy rate suggests an increase of 10 million accommodated room nights.
“Factoring in project delays, limited financing as well as increasing travel costs, we are of the view that arrivals will continue to grow albeit at a slower pace when compared to 2022 and 2023, and the current inventory will absorb demand increases,” Choufany said.
As for Saudi Arabia, Choufany noted that considering the country’s considerable investment in tourism, strong growth was observed during the previous two years — although coming from a lower base.
“Undoubtedly, the Saudi Arabia hotel development pipeline, projected at around 275 hotels – 80,000 rooms – is likely to be more impacted by rising construction costs and increased lending rates, which may result in years of delays. Consequently, the number of visitors may be adjusted to 35 million by 2030, which remains a significant growth compared to 2022,” she added.
In Accor’s case, Yazbeck said the group is seeing greater demand for conversion opportunities in regions where they are experiencing funding challenges. He added that this strategy accounted for around half of Accor’s openings last year.
“Converting a hotel to one of our brands can be as simple as selecting ready-to-go design concepts or pursuing a completely bespoke design path … we have been on the owning side of the table, too, so we understand the mindset of an owner and are able to creatively find the solutions that work best for their specific property and investment objectives,” Yazbeck commented.
Constructive creativity
Looking forward, Filippo Sona, co-chairman of furniture suppliers Wood Couture, said companies can achieve their targets if they tackle hotel construction more creatively and strategically.
“By entertaining more lean processes and targets to shorten the overall time frame, there will be savings on bank finance charges. Also, projects need to compass smaller development phases as opposed to having huge construction sites on the first phase in order to spread the risk over time,” Sona said.
Michael McGovern, director of Dubai-based Compass Project Consulting, agreed: “In the face of rising construction costs, meeting tourism targets in the Middle East remains a practical aspiration, but it hinges on meticulous strategic planning, close collaboration among stakeholders, and the embrace of innovative construction techniques.”
He added: “Developers must have robust financial contingency plans and diversified funding sources to buffer against delays. Collaborating with experienced project management consultancies, like us, can provide proactive risk mitigation strategies and effective communication with financial partners is crucial.”
Meanwhile, industry leaders admit that while some costs may have to be passed on to customers, the overall approach has emphasized maintaining the service quality and guest experience.
“In reality, the approach taken to recover the higher costs will depend on a combination of factors and the specific circumstances of the hotel project,” Choufany said.
Sona added: “Engineering value, as opposed to value engineering, is the name of the game: anticipating versus curing. Rethinking and going back to the drawing board where possible is the solution. Where developments are advanced, there is the need to relook at costs or bring innovative solutions to recuperate equity invested.”
