In an effort to diversify its economy and with Expo 2020 approaching, The United Arab Emirates' (UAE) hospitality market – with Dubai at the forefront – is taking different measures to both strengthen the market as well as preparing to make the most out of the generated revenues.
Having said this, we aim to take a look at the market, its significance for the UAE's overall economy, where it is heading, and who the major players are.
The impact of the sector
Regarding the importance of the hospitality sector for the UAE, we have several indicators. According to officials, the sector accounted for 9% of the country's GDP in 2015 while expectations see the figure go up to 11.2% by 2026. This makes the sector one of the most important non-oil sources of revenue for the UAE.
Furthermore, the emirates have in recent years exerted great effort – and continue to do so – to diversify the economy, slowly reducing dependance on oil revenues. Reasons for that include the fact that those revenues are subject to market volatility, the diminishing role of the OPEC, and of course the fact that oil is a limited ressource. Drops in oil prices have in the past years more and more demonstrated to the UAE's leadership that diversification is a pressing issue with the oil prices at the beginning of 2017 standing at slightly above $50 per barrel – until late 2014 it had steadily recorded between $90 and $100, sometimes even more.
This diversification effort, combined with the still somewhat steady inflow of money through the oil sector, have over the last decade allowed the UAE to achieve a significant buildup in its real estate and hospitality sector. This led to some Emirati developers making the list of the biggest players in their respective sectors.
Market overview
According to several reports by consultancy and research company Colliers International, the UAE sported an overall of 161,000 units throughout all emirates in February. Dubai took the lead with over 106,000, followed by Abu Dhabi that accounted for nearly 30,000, making the two emirates the by far most important players on the UAE's hospitality market.
The largest part of these available rooms fell into the luxury segment: 5- and 4-star hotels made up slightly above 50% in both Dubai and Abu Dhabi, while it stood at well above 80% for Ras Al Khaimah. If deluxe serviced apartments are also taken into account, the luxury segment accounts for even more, well above 60%, for both Dubai and Abu Dhabi.
However, especially Dubai has in recent years undertaken significant effort to dive deeper into the middle-class segment, opening a number of 3-star hotels, even in prime locations, and strengthening the regular serviced apartments segment, according to Colliers.
This becomes all the more significant as, according to consultancy JLL, Dubai recently witnessed a decline in corporate visitors but saw an increase in families and couples visiting the country, traditionally a segment that is more price sensitive than business travellers. With this development, combined with increasing tourism figures from GCC countries, the serviced apartments sector, offering more privacy to families than classic hotels, is also becoming increasingly important and continues to outperform the hotel sector. It accounts for nearly 30% and 25% of the market in Dubai and Abu Dhabi respectively as recorded by Colliers – including both the standard and the luxury segments.
Despite an only slowly growing global economy, the UAE's hospitality sector has furthermore shown resilience: Occupancy rates stood solidly at around 80% for most emirates, especially the key markets of Dubai and Abu Dhabi. It is however, worth noting that occupancy percentage for both cities is expected to slip during the remaining of 2017 to hit around 76% and 73% respectively.
Bird’s eye view: The trend
In line with the aforementioned diversification efforts, the hospitality sector is expected to witness further growth across all emirates. According to Colliers, there are already 76,000 additional keys – announced and confirmed – in the pipeline and are to be delivered within an unspecified timeframe, likely within the next five years. However, Dubai alone plans to boost its number of keys by 2020 by over 50,000, eventually reaching 160,000 in time for Expo 2020.
The trend also points towards more leisure-oriented tourism. While Dubai and Abu Dhabi have for a long time been typical destinations for business travellers – with the other emirates more catering to leisure and culture tourism – the two main markets for tourism in the UAE have started to diversify and to pay more attention to hosting an increasing number of leisure tourists: In 2016, consultancy Knight Frank noted that the opening of theme park complexes, Dubai's opera district and retail destinations, as well as Abu Dhabi's development of entertainment and cultural districts lead to a positive outlook for the sector in the mid- to long-run, noting that the utilisation of the country's potential in terms of economy-level tourism will help in maintaining a steady growth in the rather top-heavy hospitality sector of the UAE.
On a different note, Knight Frank also noted that other measures of the emirates' leadership aid in generating tourism demand, for example by investments in airports and airline infrastructure. Plans include boosting capacity at Dubai International to 118 million passengers annually under a new programme named DXB Plus.
However, the emirates, and especially Dubai, for now will have to struggle with an appreciating US dollar and difficult economic conditions. While this is unlikely to have dramatic effects on the emirates' predominantly rich visitors, it will nonetheless keep the country's hospitality sector from skyrocketing anytime soon.
Expo 2020
As mentioned earlier, especially Dubai is undertaking a siginificant effort to prepare its hospitality sector for Expo 2020, which takes place in the emirate. Starting in October 2020, the exhibition will take place under the theme „Connecting Minds, Creating the Future.“
According to the International Monetary Fund (IMF), investments that are leading up to the Expo are already helping the country in resisting the slowdown in growth that has affected most GCC economies.
While the UAE's GDP has been affected by the drop in oil prices in 2014, it has since then recorded a recovery, with a growth of 2.7% in 2016 and expecations for 2017 of 3.1%.
Again, according to the IMF, this figure could go up to 5% by 2020 as a result of Expo 2020 with an expected 25 million visitors during the 6-month period.
Constructions for the exhibition will, however, also benefit the emirate after the Expo ends in April 2021. The exhibition area – Dubai World Central (DWC) – is situated on a 438 hectare site in Dubai South and is being linked to the Dubai metro by a 15 kilometre extension while also being located in the vicinity of Al Maktoum International Airport. Furthermore, Dubai aims to expand DWC even after the exhibition itself has come to an end, partially as a puzzle piece of UAE Vision 2021, a development plan adopted by the UAE's federal government in 2010.
Therefore, even though growth after Expo 2020 might experience a slowdown again, there are a number of lasting effects to be expected from the event. Foremost probably a wide array of modern exhibition and event sites and infrastructure – maybe along with a certain rise in the emirates' popularity among tourists and potential visitors.
Key challenges
Among the main challenges for the UAE's hospitality sector are of course breakdowns in the global economy, which could reduce tourism movements, and political instability in the region – and in the worst case – in the UAE itself, which is, however, a highly unlikely scenario for the time being.
Furthermore, another drop in oil prices could hamper the ability of the UAE's leadership to invest into the tourism and hospitality sector – investments much needed to perform the shift away from being a destination primarily for businessmen and developing the leisure and culture sector.
Related to this field is another issue: If other destinations around the region – namely Egypt, Oman, and other Gulf countries – are able to compete with the emirates over tourists coming to the region, the UAE's plan of tourism development could very well experience some difficulties.
The future outlook
With the governments continued effort and budget allocations dedicated to the tourism sector and its expansion, both in terms of including the middle-class as well as developing leisure tourism, the UAE seems well prepared to boost its tourism figures to unprecedented levels in the run-up to Expo 2020 and beyond.
Considering that Dubai International, already one of the busiest airports in the world, will be developed further and supported by more international airports, the government has taken measures to guarantee easy access for tourists, while it, at the same time, creates new destinations and aims at a pronounced shift towards leisure tourism, especially in Dubai, still the most important emirate in terms of economics in general and tourism in particular. While challenges exist and are not to be taken lightly as the tourism sector is traditionally heavily contested, the UAE's leadership seems dedicated to the development of the hospitality industry.
By Tim Nanns
