• Dubai deflation as oversupply threatens puncture

The hotel property market in Dubai should not be characterised as a bubble but rather a plastic ball that is about to be pricked and thus release air, according to Daniel Thorniley, senior vice president of the Economist Group.

Thorniley was speaking at the Arabian Hotel Investment Conference held at the weekend in Dubai and was addressing directly the fears of oversupply in that country. His metaphor, however, can be extended to the worldwide hotel industry as it nears the peak of the cycle.

The situation in Dubai is astonishing. The next five years will see a doubling of the room supply with 45,000 rooms due to come onstream. Even with the country’s double digit growth in visitor numbers, this is going to lead to a few bumps.

Currently, room rates and occupancy levels are at all time highs. HVS put last year’s occupancy at 84%, up from 82% in 2005, and rate at US$225, up from $192. This meant revpar was up 19% and gross operating profit per available room was up 32% to $183.

In any other market, the impending supply shock would devastate these numbers. But there is confidence that Dubai will hit its visitor number targets. In large part this is thanks to its “build it and they will come” approach.

Mega projects financed by the state are expected to drive tourism. They include Dubailand, a 18,500 hectare development costing $5bn.

In addition, the building of hospitality infrastructure is of itself expected to attract tourism. Four man-made islands of hotels, residential and marinas are under construction.

Palm Jumeirah, Palm Jebel Ali, Palm Deira and the World are spectacular projects due for completion between 2008 and 2010.

Perhaps most gob smacking is Bawadi, a $28bn scheme that will be the world’s largest strip of hotels. Its 10km stretch will have 31 hotels with 29,200 rooms and more than 1,500 restaurants. Completion is slated in phases between 2010 and 2014.

Even so, the country cannot defy gravity forever and it is expected that as the current development pipeline of hotel rooms comes on-stream over the next couple of years, there will be a fall in revpar and profitability.

While the rest of the world is seeing such growth in neither supply nor guest numbers, there are parallels. Demand has grown ahead of supply, both generating short-term exceptional profits for those owners and operators lucky enough to already be trading and generating enthusiasm for more development.

Outside of Dubai and the Gulf, in more mature hotel markets such as Western Europe and North America, the enthusiasm has mostly been for buying existing hotel assets. But these deals are predicated on the belief that performance will continue to be buoyant.

There are no signs of a crash, but revpar growth rates are already dropping. Prepare for that ball to let out some air.

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