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Oversupply forces Dubai hotels to start undercutting

|TAP Special| Faced with a continued upswing in capacity creation, Dubai hospitality sector is under pressure and is forced to continuously make price adjustments to remain competitive. This has already meant lower revenues, posing a question mark over the hotel sector’s performance.

According to the latest Hotel Intelligence report of JLL, performance of the hospitality sector in Dubai is expected to remain under pressure this year. This is attributed to numerous factors, including falling oil prices, appreciation of the US dollar and the geo-political situation in the region that will affect demand, coupled with continuous additions to supply.

But growth in demand from key source markets such as Russia and its neighboring countries, which experienced an 18% decline in volume during 2014, as well as an emergence of new feeder markets will likely help the Dubai tourism market to limit the decline in performance.

After witnessing the highest performance in 2013 since 2009, revenue declined 2.3% in 2014. Average rates remained under pressure as the market became more competitive with additional supply and a softening of demand from key source markets.

At the end of 2014, Dubai had 413 graded hotel establishments with a total of about 65,000 rooms, up 3,500 compared to 2013. Supply has grown at a CAGR of 5% over the last 5 years. Total room supply is expected to grow 12.5% per annum between 2015 and 2018.

More than 21,100 hotel rooms are due to enter the market by the end of 2017. Most of this new supply will belong to the upscale and upper upscale segments, yet a trend towards midscale properties is emerging. Investment appetite remained strong for Dubai, underpinned by the overall growth in tourism in the city as well as continuous investment in tourism infrastructure.

Preliminary 2014 estimates indicate nearly 12 million tourist arrivals in the emirate, registering an 8% growth over 2013. The upward trend reaffirms Dubai’s efforts to achieveits 20 million visitor target for 2020, the report pointed out.

In 2014, passenger traffic at Dubai International Airport rose 13.5% to 70.5 million. The second half of 2014 witnessed challenges from some of the key source markets due to geo-political situations in these countries and the wider Middle East Region.