Where is the Middle East’s mid-market pipeline?

Largely known for its 5-star and luxury hotel offering, the Middle East has slowly but surely been waking up to the mid-market trend. But will this segment dominate supply eventually?

The midscale and upper-midscale segments represented 21.2% of the Middle East pipeline, and upper-upscale and upscale accounted for 60.9% of future supply, according to STR data from 2017. According to HotStats and TRI Consulting, 90.3% of future supply in Abu Dhabi, and 81.7% in Dubai, is upscale to luxury. In Abu Dhabi alone, upper-midscale and midscale rooms will grow 9.8% and 6.6% respectively, while no future supply of economy hotel keys has been announced, according to TRI.

Dubai, upper-midscale, midscale and economy rooms will grow 57.0%, 34.4% and 9.2%, respectively. However, market share of economy-to-upper-midscale rooms will decrease on the back of rising market share of upscale-to-luxury inventory.

With source markets increasingly diversified and the governments of Middle Eastern countries working on easing visa-on-arrival regulations for many nationalities, the need for mid-market hotel offerings is still strong. Certainly, local tourism authorities are encouraging this segment’s growth: In 2013, Dubai launched financial incentives for developers behind mid-market hotels.

PwC partner Martin Berlin asserts that while the demand for luxury hotels will continue, tourists entering the region include those who are happy to have a hotel room without all the trappings and facilities of the 5-star segment. The supply, he says, will balance out eventually, especially to cater to an increasingly diverse tourist segment.

In Muscat, Oman, the majority of upcoming supply is upscale with 35.4%, luxury at 23.5% and upper-upscale at 14.2%, according to TRI; economy/midscale/upper-midscale segments in Muscat account for 53.2% of existing supply, says STR.

Challenges

Some of the challenges facing the re-balancing of the supply between luxury and mid-market include land prices, infrastructure and perception among owners and investors.

Chris Hewett, Director at TRI Consulting, admits that the demand infrastructure can pose a problem. “Mid-market hotels are generally located in secondary and tertiary locations; they might not have the right demand in the initial years, and you simply have to wait it out for the demand to kick in, whether it’s corporate or residential and leisure,” he said.

With higher land prices and rising construction costs in coveted areas, it’s difficult to support a 3- and 4-star hotel in a primary district. Berlin says that these projects, especially in Dubai, are essentially located “away from the sea” and in areas where land is more affordable.

Investors who aren’t educated about market conditions and ROI potential could hesitate with putting money against a mid-market property, but this, the experts think, will change with time. According to a 2016 PwC report on mid-market hotels, its experts believed that owners could achieve similar cash flows with either a 5-star or mid-market hotel on the same plot of land – if managed correctly.

Hewett points out the current growth of brands such as Rove, Aloft, Park Inn by Radisson and more across the region as a sign of change. “That shows there is traction and a growing sense of maturity for this kind of product,” he said.

“What we’re seeing now is the supply paradox, which is a hangover from the days where this was promoted as a luxury destination, and that’s why 5-star still dominates the supply,” Hewett added. “There hasn’t been enough time for the other sectors to grow and mature. Normal supply should look like a pyramid with luxury on top. At the moment it’s upside down, and it will take time to flip over.”

So the situation will change in the region – just not to the extent that can be seen in other markets. Rabih Feghali, vice president of hospitality consultancy Ròya International, is direct when he says that the region’s hotel market will close the gap between its segment ratios but will not end up like New York or London.

“At the end of the day, you have a lot of demand for luxury and high-end. Dubai is going to be a diversified destination with offerings for all kinds of visitors, for example, but I feel we will always have a higher proportion of luxury hotels.” The numbers seem to back him up.