Abu Dhabi is being forged into a global destination for business, culture and leisure. Current global economic conditions seem to be striking just when the iron is hot.

As the world's sixth-largest exporter of oil, Abu Dhabi benefited from skyrocketing energy prices in 2008. Hotel rates skyrocketed too, making Abu Dhabi, the capital of the UAE, the city with the priciest hotels in the world.

Moreover, Abu Dhabi is one of only two out of ten selected global destinations to have witnessed a positive increase in average rate in the first two months of 2009.

Economic activity in any petrodollar city usually goes hand in hand with the price of oil. Excess reserves of oil from 2008 are expected to sustain economic activity until some recovery happens.

Table 1 Oil Price vs. Room Rate (US$)
 
We estimate that in 2008 marketwide average rate in Abu Dhabi increased by 30% year-on-year (YOY), with the compound annual growth rate (CAGR) being 17% from 2000 to 2008.

Although Abu Dhabi has always lagged behind Dubai in terms of tourism, with room rates stagnating in the first half of this decade, the aforementioned rates of growth in Abu Dhabi exceed those of its neighbouring emirate by about 35% on average, primarily because of the jump in 2008 (compared to stagnation that year in Dubai).

These results partly reflect the commitment of the government and, more recently, the success of initiatives such as Abu Dhabi 2030 and the Abu Dhabi Tourism Authority's (ADTA) Tourism Plan.

However, they were achieved under specific market characteristics that affected the hospitality market directly; these characteristics were the following.

• Significant corporate and commercial traffic, arising largely from the economy-driving hydrocarbons sector, and minimal leisure travel;
• Strong economic fundamentals and a federal government possessing the biggest sovereign wealth fund, which is active in the real estate, energy and financial services sectors;
• A marked undersupply of residential properties, an undersupply that will persist for a few years yet;
• ‘Domestic tourism' as a result of the undersupply of residential properties. One-third of hotel guests are UAE residents;
• A limited supply of hotels;
• A presently small market base that predisposes the city to double-digit growth rates.

Although it is hard to quantify the effect of such factors on the hospitality industry, there is no doubt that as these factors die away, their contribution will prove hard to make good.

In Retrospect

Demand in the past was driven primarily by government consumption, promotion of the emirate globally, improvements to the emirate's infrastructure and major construction projects. In addition, growth in the last couple of years has been fuelled by ‘overflow' demand from neighbouring Dubai.

• The number of tourist arrivals more than doubled between 2000 and 2008, with the increase from 2005 to 2008 alone being about 50%;
• The highest rate of growth in the number of tourist arrivals in a single year was 27.8%, in 2006. The CAGR in the number of tourist arrivals between 2000 and 2008 was 10.2%;
• The number of available hotel rooms almost doubled between 2000 and 2008, at a CAGR of 8.2%. The highest rate of growth in the number of available hotel rooms in a single year was 27.9%, in 2005;
• Between 2000 and 2008, marketwide occupancy was, on average, 76%. Marketwide occupancy peaked at 85% in 2005.

In general, tourism contributes 8.6% of non-oil GDP, 10% of non-oil employment and directly supports more than 47,000 jobs.

Foreign direct investment (FDI) in Abu Dhabi was approximately Dh31.5 billion in 2007. Real estate and rents took the largest share (Dh11.84 billion, or 38% of the total) whereas restaurants and hotels took 0.14% (Dh45 million). Investment from the UK was estimated to have been some Dh7.5 billion, or 23.7% of the total FDI, the highest percentage of all of those countries investing in the emirate of Abu Dhabi. Data for 2008 were unavailable at the time we wrote this article.

Table 2 FDI in Abu Dhabi by Country Group 2007 (Dh millions)
 
As investment opportunities worldwide become scarce, Abu Dhabi is offering the rewards of an emerging market and providing investors with some feeling of security as the government is still buffered.

This has entailed a surge in public-private partnerships (PPPs). PPPs could prove to be very viable in hedging risks on at least three levels.

First, developments complying with a country's tourism promotion strategy will find extensive support at the construction phase, hedging the risks of legal and political lags and project discontinuity.

Second, the trend for Special Economic Zones (SEZ), or other forms of government zoning allotment, which typically involves mixed-use developments, reduces the costs of marketing and exposure, as hotels benefit from synergies with the different components of the zone.

Third, government partnerships could be stretched to include public funding of a privately managed, jointly owned development when such projects prove vital to social welfare and produce benefits to the wider community.

Current Landscape

In January 2009, ADTA completed its inspections as it looked at implementing a new hotel accommodation classification system, upon a recommendation made by the Arab Tourism Ministerial Council (ATCM), as a paradigm of regional best practice. Points collected by adherence to a very stringent list of requirements, consisting of both mandatory and scoring methodologies, will be the basis of the classification. As a result, many hotels are expected to renovate or rebrand.

In light of cautious tourism spending, properties have modestly budgeted actual 2008 average rates in 2009. Average rate in the first half of 2009 did not fall much below Dh1,016, compared to Dh1,134 in the same period in 2008.

Unchanged marketwide occupancy in the first half of 2009 resulted in RevPAR dropping to only Dh827 from the Dh925 recorded in 2008 (for the full year). Occupancy in 2009 was 86% in the corporate months of February and March.

We note the following parallel trends that have given rise to healthy growth in tourism to-date and the promise of further growth in the future.

• The World Airport Traffic Report 2008 showed that Abu Dhabi International Airport was the world's fastest-growing airport in 2008, handling as it did 30.2% more passengers than it had in 2007. Passenger traffic in 2008 increased to just over 9 million;
• In the first half of 2009 traffic increased by 8.1% YOY, to 4.6 million passengers. June and July saw YOY increases of 7.9% and 10.3%, respectively;
• Abu Dhabi is surging ahead as a leading destination for superyachts and ‘mega' yachts, and this confirms Abu Dhabi's developing leisure tourism;
• A light rail/tram system stretching for 340 km is expected to be introduced by 2014;
• The emirate is maintaining a bullish pace, with many developments continuing to progress. The emirate is set to award US$7 billion worth of construction contracts in 2009, attracting contractors desperate to secure tenders on financially viable projects;
• The selection of Abu Dhabi as the headquarters of the International Renewable Energy Agency (Irena) will translate into more aggressive demand growth rates in the corporate and MICE segments;
• The commercial segment accounts for about 83% of all guests (including MICE and resident employees) staying in hotels or hotel apartments in Abu Dhabi. Corporations on the outside are still eyeing the market;
• Five-star properties dominate the existing supply, leveraged by high occupancy, which has so far allowed them to increase their rates without pause. In the first half of 2009, occupancy among this asset class was 82%, average rate Dh1,178 and RevPAR Dh967;
• Four-star properties, which have room rates that are, on average, 43% lower than those of five-star hotels, are, in the main, locally branded, or locally operated, or both; these hotels are the greatest beneficiaries of the undersupply of residential properties. In the first half of 2009, occupancy among this asset class was 76%, average rate Dh670 and RevPAR Dh513;
• Serviced apartments fill the gap between four-star and five-star hotels in the market and have a higher occupancy (86%). Room rates are about 24% lower than those of five-star properties. RevPAR in the first half of 2009 for this asset class was Dh770.

On the one hand, managers admit to the challenge they will face in the third quarter of the year, given that Ramadan coincides with the end of the summer; this is expected to deepen the fall in occupancy in a season that already lacks in appeal.

On the other hand, there is a common consensus that economic activity will surge in the fourth quarter; this could in all likelihood narrow the gap between actual and budgeted performance in 2009.

Outlook

Few public announcements have been made about the delivery date of developments under way on and around the island. At the time we wrote this article, the hotel pipeline was, according to ADTA, as follows.

Table 3 Hotel Pipeline 2009-14

Room supply will have more than tripled by the end of 2009; Room supply will have almost doubled by the end of 2010 YOY; Hotel room count will have quadrupled by 2012 in comparison to the estimated count at year-end 2009.

Most of the hotels in the pipeline are five-star and this would lead us to expect upward pressure on rate as a result of the high-end positioning of the forthcoming luxury brands.

This, however, can be subject to much debate, as the present market sentiment is for a broader product offering to cater to the needs of various segments. The opportunity to invest in four-star and three-star hotels still exists, especially since these hotel asset classes are proving to be more robust in times of economic downturn.

Further intervention will be needed, since the anticipated effects of economic recession will not suffice to synchronise supply and demand. Excessive supply in 2009 and 2010 should be spread out over a longer period for smoother and more realistic demand growth rates in line with initial considerations of sustainability. From the pipeline, we can infer that although the tourism industry as a whole will witness significant growth over the next few years, hotels are prone to lower levels of profitability.

Corporate demand has dominated the market. However, the recent initiatives taken by government explore new types of demand, most notably MICE and leisure. Guests in these segments tend to stay longer than their corporate counterparts, requiring a property to take on different attributes. In addition, the emirate's commitment to developing the city as a leisure destination will put further downward pressure on marketwide occupancy going forward, owing to the seasonality of this segment.

Moreover, as promised ‘mega' developments are delivered in the market, the undersupply of residential properties will be significantly less pronounced, relieving hotels of resident guests. This change will further be exacerbated by the clearer distinction that should develop between hotels and serviced apartments. Guests staying for three to six months, in particular, will be drawn from hotels by the more adequate extended acco

mmodation product on offer. ADTA's strict regulations on rate competition and hotel classification ought to restore conventional hotel apartment operations. This will further reduce the attractiveness of the pricy hotels in Abu Dhabi in the eyes of unaccommodated residents and business tourists.

Hard economic times, a strict classification system, delays in some projects and the resizing of others could all be of positive consequence in the near future, as they might give birth to a mature hotel industry by 2014. However, these contributing factors might not be all that it takes to control the correction that will happen along the way.

Third party consultants should be contacted before any investment decision is taken. For any advice on the market please contact the authors.

About the Team
HVS has a team of experts that conducts our operations in the Middle East and North Africa. The team benefits from international and local backgrounds, diverse academic and hotel-related experience, in-depth expertise in the hotel markets in the Middle East and a broad exposure to international hotel markets. Over the last three years, the team has advised on more than 150 projects in the region for hotel owners, developers, lenders, investors and operators. HVS has advised on more than US$25 billion worth of hotel real estate in the region.

About the Authors
Nehme Ayoub joined the Dubai office's Consulting & Valuation practice in May 2008. Before joining HVS, Nehme led the investment team at Noor International Holding. While in Boston, he honed his skills at Mercer and Bank of America's Investment Services in the areas of finance and portfolio analysis.

During his years in college, Nehme worked as an intern with Banque Du Liban, Deloitte, and Société Générale pour les Études et l'Entreprise. Nehme holds a masters degree in Economic Policy from Boston University and a bachelor in Economics from the American University of Beirut.

Hala Matar Choufany is the Managing Director of HVS Dubai and is responsible for the firm's valuation and consulting work in the Middle East and North Africa. She initially joined HVS London in 2005, and moved to HVS Shanghai in September 2006 where she helped grow the HVS Shanghai office and its business in the Asia region. She relocated to Dubai in September 2007 and looks after HVS's interests in the Middle East. Before joining HVS, Hala had four years' operational and managerial hotel industry experience. She lectured at Notre Dame University in Lebanon on International Travel and Tourism. Hala holds an MPhil from Leeds University, UK, an MBA from IMHI (Essec- Cornell) University, Paris, France, and a BA in Hospitality Management from Notre Dame University, Lebanon. Hala has worked on several midscale and large-scale mixed-use developments and has conducted numerous valuations, feasibility studies, operator searches, return on investment analyses and market studies in Europe, Middle East and Asia.

For further information, please contact one of the authors.
Nehme Ayoub – Consultant & Valuation Analyst
Email: nayoub@hvs.com; Mobile: +971 50 9024912
Hala Matar Choufany – Managing Director
Email: hchoufany@hvs.com; Mobile: +971 50 4597930

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