The continued rapid development of hotel projects in Dubai outshines those proposed in other leading centres of hotel development activity such as Shanghai, Beijing and Las Vegas.
A recent report from leading hospitality and leisure consultants Roya International confirmed that current hotel occupancy rates in Dubai are a world-high 83.1%.
Currently, demand for hotel rooms in Dubai far exceeds supply. It is believed that Dubai will need approximately 45,000 additional rooms over the next 5 years in order to boost Dubai’s hotel capacity, which, analysts say, is currently struggling to cope with demand levels.
The faster these projects are ready, the better the: i) returns, specifically for the local tourism and airline industries, and ii) likelihood of Dubai being able to consolidate its position as a leading global tourist destination.
Upcoming projects
The scope and magnitude of forthcoming hotel projects in Dubai range from the undreamt of (e.g. Hydropolis, which brands itself as the world’s first underwater hotel) to the epitome of elegance and luxury (e.g. The Palm Trump International Hotel and Tower).
What is most fascinating is the sheer number of exciting projects that are currently being developed in the Gulf Region. For example, the three immense palm shaped islands being formed by Nakheel off the coast of Dubai will add more than 200 hotels to Dubai’s expanding leisure and hospitality sector.
Moreover, the world’s largest planned hotel complex – the Bawadi project – aims to double tourism in the United Arab Emirates by creating a 10 km long Las Vegas style strip offering 51 hotels modelled on everything from London’s Houses of Parliament to Egyptian palaces. The project also includes the proposed “Asia Asia” hotel, which will, once completed, be the world’s largest hotel with 6,500 available rooms.
These examples are by no means exhaustive of the types of projects currently underway in Dubai and the Gulf Region as a whole.
Emerging trends in Dubai’s hotel market
While demand for 5 star luxury hotel accommodation continues to surge, it would appear that developers are beginning to take steps to attract an even greater and diverse number of tourists to Dubai.
Shariah friendly hotels
Given the religious inclinations of the region, several hotels have interpreted luxury to also include “family-friendly” accommodations. There are several projects underway by Le Meridien and Coral International, amongst others, which are operating as alcohol free boutique hotels.
The purpose of these types of “Muslim-friendly” projects is to try and lure the faithful who are living within the Middle East and North Africa to spend their holidays in Dubai.
Budget and mid-range hotels
With room prices averaging AED 1285 (approx US$350.00) per night, many developers and operators are also turning their attention to budget hotels to attract value-conscious visitors to the region.
For example, Istithmar Hotels recently announced that it plans to build more than 50 budget hotels in the region. In addition, Intercontinental Hotels (Express by Holiday Inn) and Accor Hotels (Ibis) have also recently announced their plans in the coming years to expand throughout the Gulf Region.
Time sharing
Finally, another key trend we have identified is time share projects.
Recent findings seem to suggest that Dubai’s vacation ownership potential can someday top that of Florida, currently the world’s leader in the time share industry.
The reason for this can be attributed to: i) Dubai’s status as the Middle East’s east/west hub with links to India, Europe, the Far East, and North Africa, and ii) the fact that the regional marketplace available to Dubai is greater than that of the North American region.
One just needs to look at the new time share projects (e.g. Royal Club at Palm Jumeriah and the Torch Project at Dubai Marina) currently being developed in Dubai as evidence of this position.
Issues to be mindful of
In the rush to accommodate huge demand comes the pressure to supply as soon as possible.
However, one should never overlook the fact that the hotel market is cyclical and it is likely that several issues will emerge which will need to be addressed by the parties involved.
The more care and attention that can be put up front in dealing with these matters, the less trouble there will be on the back end when a problem develops.
In subsequent paragraphs, we highlight some of the key commercial and legal issues that a hotel owner/developer should carefully consider and give thought to prior to commencing any work on a new development.
In the short term
Recently, a number of construction and work projects in Dubai have been delayed beyond their previously announced launch date, and hotels are no exception.
Typically, these delays are attributable to the scarcity of quality construction materials and their transport to the site on a timely basis. In addition, with all the construction projects currently underway in Dubai, often developers find themselves pressed to have appropriate staff with the necessary skills in place, particularly at managerial level.
Another circumstance which may delay progress occurs when a 3rd party contractor walks “off the job,” usually as a result of a disagreement over the commercial arrangement between the parties (i.e. the contractor was not paid for whatever reason).
Delays such as these can have serious ramifications to a project’s development, particularly where a developer has been relying on financing arrangements with banks to complete a project (who may delay further “stage” financing payments if concerns arise as a result of construction timelines not being achieved) or with home buyers (in the case of hotel projects that incorporate condominiums) who may decide to pull out of their purchase based on the terms of their sale and purchase agreement (e.g. rescission clauses).
In the medium to long term
Once construction is complete and the hotel has opened for business, a hotel operator will then be in charge of operating and managing the day-to-day operations of the hotel on behalf of the developer/owner. Typically, the terms of the operator’s contractual relationship with the hotel are outlined in a legal contract called a hotel management or operations agreement.
Once a hotel has been up and running for some time, it can be the case that the hotel may not be operating financially as well as the developer/owner had envisaged.
Sometimes the reasons for this are based on factors outside either party’s control which may be affecting tourism on a global scale (e.g. unfavourable weather conditions, global terrorist threats, or the economic environment (recessions)).
However, sometimes poor financial results may be caused (directly or indirectly) by the hotel operator itself. If there are any issues or concerns of the owner/developer as to financial performance of the hotel or how the operator is conducting business on a day-to-day basis, then the owner will find itself reviewing the contractual terms of its hotel management agreement to find out of it is contractually protected.
The hotel management agreement
To consummate any substantial business transaction, there are inevitably “challenges” to overcome.
Hotel management agreements are no exception; in part because they typically transfer effective control over valuable assets for several years (15 year terms are not uncommon), and their terms can substantially enhance or diminish the value of the hotel.
What is most important is advance preparation. This is especially true for those developers and owners operating in Dubai and the Gulf Region who may be relatively new to the hospitality industry.
Recently, many sophisticated regional developers and investors have identified the rich potential that hotels offer – particularly in hotel mixed-use projects – and they are bringing new vitality to the marketplace. While not new to real estate development, these players may be new to the customs, practices and business considerations of hotels. The intertwining of single purpose real estate with an operational component presents distinctive issues and prospects – prospects which the inexperienced may leave on the table, simply because they were either unprepared or did not have appropriate advisors on board who could identify and maximise these economic opportunities.
Some helpful suggestions to keep in mind
Here are some helpful ideas for owners and developers to keep in mind so that they can strike a fair deal on a hotel management agreement prior to engaging an operator of their choice:
Get the right brand for your project
Every hotel plan is distinctive, and all appropriate brands, identities and market strategies should be considered – along with suitable operators who will enhance project value.
Selecting the finest or appropriate brand name and operator requires a careful business and legal investigation if the owner’s goals are to be achieved – particularly for a hotel mixed-use project.
Establish the parties’ respective situations at an early stage
The developer/owner comes to the negotiating table with one set of economic projections and program fundamentals, while the operator has its own.
If the developer/owner believes the project will be highly profitable and the operator does not, the natural and reasonable result will be for the operator to try and protect itself by demanding higher fees and incentives, which may create a schism between the developer/owner and the operator.
If the operator believes that the hotel requires extensive facilities and the owner does not, or if they cannot agree on how the mixed-use project elements should be incorporated – more likely than not the developer/owner and the operator will be unable to agree on key issues, such as the total cost of the project and the owner’s required initial investment.
Tackle “challenges” between the parties at an early stage
During negotiations, it may be easier to defer certain difficult issues for later resolution so that all the areas where agreement can be reached are understood, and the importance of the areas that require compromise is clear.
However, failing to address known issues at an early stage can be an expensive way to reach agreement at a later date if the parties haven’t established appropriate dispute “mechanisms”, because it leaves potentially messy disagreements for the future.
Establish what the “market rate” is and how it fits your goals
While both owner/developers and operators usually seek to negotiate agreements with “market” terms, every hotel property is unique.
There is no simple checklist of market terms, particularly in a market which has grown as rapidly as the hotel market in Dubai. There are ranges of what are considered “market” terms for particular types of properties or projects and specific brands or operators. However, the terms for branding or operating a 2,000 room convention hotel are quite different from those that would apply to a 150 room full service urban hotel or a 50 room extended stay establishment.
And “market” is also defined by the competition for a particular set of brands or operators, which will vary depending on how desirable a specific hotel project is, and how important that location or property may be for the strategic and business needs of a brand or operator (e.g. to fill in a critical “gap” in its distribution system or to maintain a key presence in a key market, etc.)
These factors make it very valuable for a developer/owner to have an experienced team who are able to may know better what “market” than the operator – and will at least know what the operator has done in recent deals and what their closest competitors are likely to offer on a sticky economic or business point.
Bring the right team to the table
Dialogue and business negotiations do not occur between faceless companies; they transpire between the people representing those companies – and it is essential to have a team with the all-inclusive set of experience and skills to negotiate and document a successful hotel management agreement.
Hotel management companies or operators usually have a solid team of experienced lawyers, advisors, financial experts and others who understand fully their goals and needs, because it is their business to source and negotiate hotel management agreements and franchise contracts.
Developers/owners typically have not experienced the regularity nor volume of hotel management agreement negotiations that operators have. As such, developers/owners should retain experienced legal and financial advisors in order to increase their chances of achieving important concessions under the hotel management agreement while reflecting the economic priorities of both sides, not just those of the operator/manager.
Finally, it is important that owners understand the critical consequence of their own involvement in the negotiation process.
For more information please contact Paul Greven at paul.greven@simmons-simmons.com
