We spend a lot of time speaking to hospitality investors about Dubai. For many, the Emirate is still seen through the lens of 2008. It is now more than three years since Dubai made international headlines for all the wrong reasons – a residential market collapse and sovereign debt issues. For those who have not been following the market closely, a review of current conditions is timely. Not only has the situation evolved significantly in three years – the hotel sector and in particular the luxury beach segment – has continued to thrive.
Certainly the residential market remains challenging. Supply from the construction boom continues to be an issue with Jones Lang Lasalle estimating another 18,000 residential units came on-line in the second half of 2011. Positively, constrained consumer lending conditions began to loosen in 2011 with financing surfacing for quality villa products in sought after communities.
Another promising sign is anecdotal evidence suggesting multi-unit (bulk) residential transactions are being completed, as investors begin positioning themselves for a recovery. For those looking for signs that stability has returned, Nakheel, a Member of Dubai World, has reached agreement with 98% of its creditors and has announced the continuation of a couple of significant projects that were put on hold in 2008.
It is in travel and hospitality sectors where we see the most strength and continued strong underlying fundamentals. Despite the negative headlines that dominated 2008 and 2009, traffic through the Dubai International Airport experienced a compound annual growth rate (CAGR) of 13.3% from 2006 through 2010. Tourist arrivals increased by 10% in 2010 and likely advanced a further 17% in 2011 to exceed 8 million, according to Jones Lang Lasalle.
Not surprisingly, these trends are reflected in the recent performance of Dubai luxury beach hotels. Occupancy in the segment grew from 71.8% in 2010 to 76.2% in 2011, according to STR Global. Average rate in 2011 increased to $403.92 USD in 2011 and REVPAR reached $307.71 USD.
There are a couple of important points to make here. Obviously, beachfront hotel performance is robust and and growth story remains intact. While the segment has certainly benefitted from the safe haven status that Dubai has enjoyed as a result of the Arab Spring, strong underlying fundamentals continue to be an important part of the story. Beachfront hotel supply is surprisingly constrained in Dubai and a number of leading global luxury brands remain relegated to in-land locations. It is not surprising then that remaining “tier 1” hotel development locations on the Crescent of Palm Jumeirah are once again attracting attention.
We see opportunities for investors on the Crescent where several mixed-use developments have been slowed down or stalled by the residential market correction. By injecting much needed capital into projects, investors can secure equity positions in very attractive hotel assets. The key is to find a project that is not saddled with excessive debt. While debt is an issue for many projects, there are some interesting exceptions.
