HOTEL INVESTMENT IN THE GLOBAL ECONOMIC CLIMATE

 

Globally, the hospitality industry has kicked off 2017 with largely positive performance results. RevPAR growth was seen in North America, Central/South America, Europe, Asia Pacific and Africa in the first five months of the year (in US dollars), and Robin Rossmann, managing director of STR, sees continued performance increases in many key regional markets as the year progresses

 

As of May, the Middle East has recorded a five percent year-over-year drop in RevPAR. The region is impacted by a wide range of factors that can be narrowed down to two main buckets: hotel supply growth and greater economic issues.

Tied to the barrel
This year-to-date as of May, the Middle East’s occupancy is down one percent, while ADR has dropped 4.5 percent*. The region’s gross operating profit per available room (GOPPAR) declined six percent in 2016, compared with the previous year. STR has identified a strong correlation between the decline in the price of oil and an overall downturn in hotel performance and profitability for the GCC nations. Significant declines started in mid-2014, when the crude oil price started dropping. For markets that rely heavily on oil production, this has had a massive impact on corporate travel, which is a very important business segment for this region.
As of July 2017, the crude oil price is hovering around USD 51-52 per barrel (according to Statista), which is nearly double the 2016 low point, but still far below year-end averages seen earlier this decade.








From the ground up
Anyone following the Middle East’s hotel development is aware that several markets currently have extensive pipelines. As of May, the region has nearly 160,000 rooms under contract across 581 hotel projects, representing a 3.8 percent increase compared with the same month last year. Dubai leads the way, with 46,000 rooms in the pipeline, followed by Makkah with 28,500. Focusing on the former, the market has managed to continue growing demand, despite its rapid supply growth, which has offset much of the potential performance declines that typically come with a build-up of this magnitude.

The Ramadan effect
Taking a look at recent performance trends, most key markets in the GCC recorded performance declines when comparing Ramadan 2017 with Ramadan 2016, with the exception of Muscat (RevPAR +9 percent) and Dubai (RevPAR +0 percent). While early close to the school term impacted performance in Saudi Arabia, again these results are heavily influenced by growing hotel


supply and geopolitical issues. Also, currency devaluations in Egypt and Indonesia, two key religious tourism source markets, likely played a role in hotel business declines, as pilgrimages to Saudi Arabia were less affordable for potential visitors from those countries this year.

Looking ahead
Keeping focus on Dubai, STR forecasts year-end performance to be in the red, brought down by drops in ADR. So far this year, however, Dubai’s demand levels have exceeded our previous expectations, so we have raised our forecast year-end occupancy level for the market. After much consideration, we have updated our long-term outlook for 2020 based on an analysis of mega events. We now expect Dubai’s performance growth to be stronger than we had previously envisaged, driven by ADR growth and strong demand.
For the region as a whole, it is clear that corporate travel will be heavily swayed by oil prices, but attracting leisure demand will be very important for markets to counterbalance supply growth.
strglobal.com
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