Why third-party management could help in the race to diversify Dubai

It was with great interest that I read the recent PwC report, The Great Mid-market Hotel Debate – Are we ready for the future? True to the adage of saving the best until last, the pièce de résistance in this report came on the final page – a striking comparison of the potential cash flow achievable from a five-star hotel versus a mid-market hotel on the same plot of land.

Demonstrated in plain and simple terms and accompanied by some fairly unequivocal commentary, the widely held belief that the eye-watering price of land should inhibit the growth of Dubai’s still relatively barren mid-scale sector was well and truly debunked in one fell swoop.

Among other telling insights, the report stated: “With the increasing demand for mid-market hotel rooms, properties in prime locations should be able to achieve superior occupancies relative to five star properties. Coupled with the lower operating costs of a mid-market hotel, this will result in the same cash flows to the bottom line for the owner.”

Yet according to Emirates NBD, upscale, upper upscale and luxury hotel rooms accounted for more than 50 per cent of Dubai’s total existing supply in 2015 as well as 61 per cent of projected additional supply.

So, with one central theory brushed aside, why is it that the emirate’s hotel market is still dominated by high-end development? And more importantly, what options exist to assist in broadening supply in order to facilitate the transition towards a more diversified tourism destination, aligned to DTCM’s Tourism Vision 2020?

Looking more closely at the PwC statement, it seems the key might lie in prudent hotel management. The assertion that a mid-market hotel should be able to achieve superior occupancies and lower operating costs is certainly true on paper, but would undoubtedly require careful and continuous oversight.

However, as the large multinational hotel companies continue to rapidly expand their portfolios, resources dedicated to hotel operations are stretched in equal measure. The considerable overheads of such organisations also tend to mean they are firmly focused on managing the upscale segment of the market, usually large-scale hotels with upwards of several hundred rooms.

In contrast, smaller regional and local hotel companies and individual hotel owners who manage their own asset may be willing to invest the time and resource required to truly maximise the success of a smaller or mid-scale hotel. However, achieving the kind of returns mooted by PwC may also require the security of an international brand, which, according to Knight Frank, can command a 21 per cent premium in revenue per available room versus an unbranded hotel in the same market segment.

This is where a third-party management company may provide the silver bullet. Appointed by a hotel owner for the sole purpose of managing their asset, the expertise offered by a third-party management company provides the major hotel conglomerates with the reassurance that their brand equity will be protected, paving the way for the hotel companies to franchise their brands to the owner.

Furthermore, with lower overheads and better cost management, dedicated third-party operators are able to provide their services for hotels of all shapes and sizes. And with performance-related remuneration structures, the objectives of owners and third-party management companies are 100 per cent aligned.

IFA Hotels Investments CEO Joe Sita first advocated the use of third-party operators in the Middle East as far back as the 2014 Arabian Hotel Investment Conference. Sita explained at the time, “I think the US model actually works best where brands focus on the brand and the delivery of the business and … then you use third party operators who are more specialised and focused on the bottom line to actually manage the business.”

Given the on-going focus and looming urgency of diversifying the market, perhaps it’s finally time to bite the bullet?

Bani Haddad is founder and managing director of Aleph Hospitality and managing director Middle East & Turkey for Dream Hotel Group.