Hospitality developers seeking reassurance post credit-crunch

Hotels in the Middle East are doing record business, but delays and shaky confidence mean the industry is eying alternative development structures. Chris Jackson reports.

Hotel development is tightening up in international markets, but there are still signs of optimism in the Middle East market.
Hotel development is tightening up in international markets, but there are still signs of optimism in the Middle East market.

Hotels in the Middle East are doing record business, but delays and shaky confidence mean the industry is eying alternative development structures. Chris Jackson reports.

For several years the Middle East hotel industry has been plagued by doomsayers predicting that successful performance would not last once massive room supply flooded the market.

However, as recent figures from Hotelier Middle East reveal, this flood has not eventuated, with large hotel chains revealing that one in five rooms slated to open this year have been pushed back to 2009.

 

Loans are getting harder to achieve - banks are definitely thinking twice before financing a hotel property.

And the picture further ahead looks even less rosy, with one in four hotel rooms slated to open in 2009 being pushed back as well.

In reality, the situation is perhaps even more dramatic than it appears, with the study only taking into account those projects for which a hotel operator has been signed and announced. It did not include developments that are part of large master-planned projects and do not yet have a management deal signed.

Hotel industry expert and Viability general manager Guy Wilkinson said the market place for new hotel openings and planned hotel openings was changing as developer and investor confidence started to weaken.

"What we have seen is that they are being pushed back at least a year, in some cases two," he said.

"There are several reasons for that - the difficulty in obtaining materials, and people getting a bit frightened about construction costs. Some of [the developers] will have to abandon [the projects]."

Wilkinson added that some delay issues were caused by over-optimistic public relations campaigns stating hotels would open well before they were actually ready.

"Some have been much too optimistic about what it actually takes to build and open a hotel," he explained.

"Also, with occupancy not as healthy over summer as it has been in the past, people are waiting a few moments [before deciding to continue with hotel projects].

"Loans are getting harder to achieve - banks are definitely thinking twice before financing a hotel property."

While the majority of delayed projects are in the UAE, Qatar and Bahrain also show large numbers being held up. Indeed it appears existing hoteliers in the Gulf will be able to capitalise on the under supply for some time to come, through higher rates and inflated occupancy results.

Despite the rosy outlook for existing hoteliers, however, many are nervously watching the international market conditions to assist with long-term projections.

Following the US

Despite a record number of hotel rooms under construction, US developer confidence is falling in the face of unfavourable economic and lending conditions.

Lodging Econometrics' US Construction Pipeline Report for Q2 2008 shows 5883 rojects under development, totalling 785547 rooms.

The company's president Patrick Ford said the results were only a moderate quarter over quarter increase.

"Project and guest room counts in the total pipeline are at peak levels, but appear to be cresting," he said.

The migration of projects up the pipeline stalled significantly in Q2, with projects at the "scheduled start in next 12 months" stage not flowing forward into the "under construction" category.

"For some time there hasn't been financing available at either the Wall Street or National Bank level," Ford said.

Another sign of the shift in developer sentiment is the hike in project cancellations in Q2. The 327 projects canned last quarter represented the highest number of cancellations since Q4 2001 in the immediate wake of the 9/11 terrorist attacks.

Where to next?

Looking at longer-term market predictions, the trend in new project announcements is the key indicator.

After exceeding 100000 rooms for three consecutive quarters in the US, new project announcements dropped 28% in Q2 2008, down from 125442 rooms announced in the first quarter.

"Lodging Econometrics expects quarterly new project announcements to continue to fade until capital markets are restored," the report notes.

However as the average 150-room project is in the pipeline for around 30 months, these declines will not impact new openings until mid-2010 or early 2011.

In short, "with both the housing and lending bubbles bursting simultaneously, the downturn is likely to be prolonged" in the US.

However the Middle East is a different market, where consumer confidence remains relatively high and access to capital is easier. According to Lodging Econometrics' Construction Pipeline Report for the region, developers are eying global conditions before making a local decision.

"Rapidly spiralling construction costs, a shortage of construction materials and skilled labour, along with a softening in the global economy with its potential impact on inbound tourism, appear to be raising concerns in the development community," the report notes.

"Developers may well be watching how this current [planned] development wave will be absorbed before entering into another period of rapid growth. It could prove advantageous to have such a period of assessment to see how well tourist and business demand growth keeps pace with what will be a significant supply increase across the region during the next three years."

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