What Is The Right Format For Hotels In Dubai?

Is the rental format in Dubai for hotel business is changing? If so, what is the change?

For decades, the Owners have been renting out the hotel building to the Investors/Tenants who has the knowhow to operate the hotel business. Investors/Tenants in turn made profits running the hotel; the Owners got their rent and both were happy. With the hospitality industry flourishing in Dubai, the Owners felt they deserve higher returns considering their investment and risk and started demanding more rent to take the share of the perceived higher profit generated by operation. This has led to conflicts and many businesses are in verge of closure due to the high rent component. Let us see this in a different perspective.

Due to the flourishing hospitality business in Dubai during the year 2002 to 2008, every land owner wanted to build a hotel and rent it out; and more so when the hotel apartments were introduced to Dubai. Many of the residential apartments were converted to hotel apartments as it was giving better yield and return on investment. The Owners expected investment payback within 7 to 8 years.

Although, the financial turmoil of 2009 did teach a lesson to some extent in streamlining the banking procedures for financing the real estate projects, Dubai was resilient to the crisis and came back with a big bang from 2011. Once again, the hospitality industry started picking up supported by various initiatives of the Government of Dubai.

From the Owners’ perspective, Hospitality industry is going great in Dubai. Every hotel has had good occupancy and the average daily rates much above other city in the world. With the occupancy rate surpassing 85% every Owner has a reason to believe that the Investor/Tenants are making higher profits than before. Thus, the Owners feel they should be compensated with a higher share of rent.

From the Investor/Tenants’ perspective, Yes, industry has been doing well in Dubai. The revenue generation has increased, however, the costs have also significantly risen. Thus, the ultimate, bottomline has been hit and hence unable to sustain with the hiked rent which is a fixed cost. Whether good or bad business, rent has to be paid. With the kind of rate war happening between hotels across different segments cutting each other, the Revenue Per Available Room (REVPAR) has been hit badly although the occupancies are good. This is also leading to damaging the positioning of hotels in the market.

The question to ask here is, with the increase in supply of hotels, can the current rent format be sustained? The industry can sustain itself only when the “Live and let live” position is embraced by both the parties, as this is the law of nature. More transparency is required amongst the Investor/Tenants’ in presenting their earnings to justify the need for reasonable rental agreements with the Owners. The time has come, where the owners also cannot expect investment payback in 8 years, they have to extend this to 11 to 14 years which is normal for hotel projects. This will help in facilitating hospitality business in the long run. This is the ideal format which can mitigate the supposed high risks for both parties. For achieving maximum benefits for both sides, a consensus for co-existing needs to be reached.

The alternative for the Owner is to give the hotel building to a good Operator to run the place and for the Investor/Tenant to build his own hotel in freehold areas. The Owner still runs the risks of not received his deserved share of returns unless Operator does well; Operator contracts are more complex, and the Investor/tenant has a possibility of not being able to repay the huge debt finance that is borne by him.

Having analysed this, do we leave it to these two parties to decide the best course of action? If you are undecided, we can help you through it!