Dubai: Four-star hospitality in Dubai sounds just as good as the five-star version … more so for investor-developers.
βThe government is offering huge incentives for developers of three- and four-star properties until 2019-2020 β this translates into extremely attractive yields,β said Saeed Khalifa Mohammad Al Fuqaei, chairman of the Shuraa Group, which has been involved in three such transactions to date. βAnd if you go by businesses that have consistently done well even since 2008, four-star hotels in Dubai have provided exceptional returns apart from investments in restaurants or supermarkets.
βWhen you have incentives from the government to create more hotel stock outside of five-star, you run with the opportunity.β
Investors and developers have also been helped by more areas of the city opening up to mid-tier hospitality projects. In fact, the four-star hotel boom has closely followed most of the mixed-use communities that are getting created in the city. And as the development activity stretches out to the Expo 2020-Dubai South location, the options for hospitality operators scale up accordingly.
And there are prospects shaping up offshore as well, through the Deira Islands development. Apart from the high-end resorts, the Nakheel master-development will also see a fair sprinkling of more value-based hospitality offerings.
βThe margins enjoyed by developers who own and operate their hotels vary with the scale of their operations,β said Amruda Nair, CEO and managing director of Aiana Hotels and Resorts, in a recent interview. βOften the challenge is to manage the costs of a single asset due to high administrative and infrastructure costs that are required to market the hotel successfully.
βIn such cases, often a franchise model or management contract with a brand is often more cost-effective.
βIt is usually when the operations are scaled by multiple properties that the own-and-operate model works to the developerβs advantage and can result in a 6-8 per cent increase in their returns.β
For Shuraaβs Al Fuqaei, the intention is to build, but not own the properties. βI made a quite successful exit from our first project, which was a joint venture and with a location in Bur Dubai,β he said. βWe started early 2012 on the construction and sold it in 2014.
βFor the other two projects, I opted to do it on my own β the profit realisations are definitely better this way. But unless you have deep pockets, itβs best to do one project at a time.β
His company is close to finalising an exit for its property at Jaddaf, which leaves it with an ongoing development at Jumeirah Village. Going forward, Culture Village has the makings to be a good investor prospect, Al Fuqaei added.
Now that the Dubai Parks and Resortsβ built theme parks in Jebel Ali are up and running, there could be growing investor interest for hotel-specific projects in and around that vicinity. In its projections for early 2017, the consultancy ValuStrat reckons that Dubaiβs hotel sector performance will be βdriven by additional tourists seeking newly opened attractionsβ.
And, according to Al Fuqaei, βThe moment a particular emerging location gets the bulk of its infrastructure ready, that would be a good time for investor-developers to launch mid-market hotel projects. Land prices are still attractive.
βThe best part of having such a project is it takes less time if the funds are there. And when you have the property ready with a hotel operator on board, the price you can sell at carries a higher premium.
βThis status will continue all the way up to 2020 … and even thereafter. Itβs one reason why Shuraaβs development profile will remain strictly confined to hospitality.β