The emirate is adding hotels and infrastructure in anticipation of growing visitor demand

According to official figures, there were around 3.5m guest arrivals in Abu Dhabi in 2014. The industry was earmarked as a key target sector for economic diversification in the government’s Abu Dhabi Economic Vision 2030, and the goal is to reach 8m visitors by then. Finding those extra 4.5m visitors will in itself be no mean feat. Yet just as important for the long-term sustainability of the sector will be the way in which such growth is absorbed by the local hospitality market.

Since 2013 the sector has added almost 3000 rooms, bringing Abu Dhabi’s total inventory to nearly 28,000 (including hotel apartments), spread across 157 establishments. Inventory is currently growing at around 10% per year, with total room numbers roughly doubling since 2008. As might be expected, such rapid expansion has pared back average room rates (ARR), which peaked in 2008 at over $300. According to the latest Abu Dhabi Tourism & Culture Authority (TCA Abu Dhabi) figures, ARR is Dh442 ($120), down 1% on 2013.

Government Action

Occupancy, room rates and revenues all represent a fine balance in a growing market. Encouragingly for Abu Dhabi, the decline in ARR appears to be making the local market more competitive internationally, thus driving up occupancy rates. Full-year figures for 2014 show average occupancy rates reaching 75%, up 6% on the previous year despite the additional hotel inventory.

With full-year figures for 2013 also having shown a 10.8% increase in average occupancy rates, it would seem that demand for rooms in Abu Dhabi is currently very healthy. As a result, revenue per available room (RevPAR) rose 4% in 2014 to Dh331 ($90), despite the continuing fall in average room rates.

The RevPAR figures were good news for hoteliers, who had experienced four years of decline following the onset of the global financial crisis in 2008. They are also a vindication of the government’s strategy in the sector, which has involved a considered approach toward expanding capacity predicated upon sustained investment in quality tourism and transport infrastructure.

Leading the developments have been two government-related entities (GREs): the Tourism Development and Investment Company (TDIC) and Miral Asset Management. TDIC is in charge of a portfolio of investments that includes Saadiyat Island, Sir Bani Yas Island and the Eastern Mangroves hotel developments, while Miral has been responsible for marketing existing assets on Yas Island, home to Ferrari World Abu Dhabi, Yas Marina Circuit and Yas Waterworld, as well as developing future assets at the location.

These multibillion-dollar anchor developments have demonstrated the government’s long-term commitment to the sector, and helped spur other investors to add hotel inventory to the market. One example is local private developer Bin Otaiba Investment Group, which recently announced a partnership with the Hilton brand to develop a resort on Saadiyat, which will complement TDIC’s existing St. Regis resort.

Such partnerships tend to be the model in Abu Dhabi, where investment in the hospitality sector is dominated by GREs and wealthy local investors that typically look to bring in internationally recognised brands to manage their hotel portfolio.

This strategy has seen a diverse range of international hoteliers arriving in Abu Dhabi, as investors seek to differentiate their offering in a highly competitive market (particularly in the luxury segment). For instance, in 2013 Thai hotel group Dusit Thani opened a 533-key property in downtown Abu Dhabi owned by DAS Holding. Alternatively, some local investors are attempting to develop their own brand offerings, for instance UAE-based Jannah Hotels & Resorts has so far opened two locations in Abu Dhabi, the Eastern Mangroves Suites by Jannah and the Burj Al Sarab by Jannah.

Investor Interest

While there appears to be no shortage of government and domestic investment in the sector, thus far foreign investment within the Abu Dhabi market has been limited. While the sector is by no means lacking in liquidity, the absence of foreign investors can occasionally cause problems in market formation, as local UAE and GCC investors tend to cluster around the high-end luxury segment. Foreign investors, by contrast, are more likely to address the three- and four-star segment.

There is some evidence to support this argument in the case of Abu Dhabi, with occupancy in the five-star segment the lowest across the sector at 66%, and representing the largest share of inventory at 38%. However, the recent openings appear to be correcting thistrend, with seven new three- and four-star establishments added in 2014, bringing over 1000 new four-star rooms to the market and almost 900 three-star rooms. By contrast, two new five-star hotels were added, taking the total up by slightly over 200 rooms.

As of mid-2014, another 12 new establishments were forecast to open through 2015, adding 3500 rooms to the emirate’s inventory, with these split almost 50:50 between four- and five-star properties. The timing of new hotel openings further down the pipeline is less easy to predict. Industry reports have suggested that the authorities may attempt to control supply by limiting new licences, thus heading off any further potential decline in ARR. Ultimately, market conditions will determine the pace of development: if occupancy remains robust and RevPAR continues to grow, then fewer delays are likely; if RevPAR falls, investors may themselves take the decision to delay entry to the market.

Infrastructure Base

Another factor that is expected to increase investor interest is the importance that associated transport infrastructure plays in the growth of the tourism sector and the significant investment of Abu Dhabi’s authorities in this area. Abu Dhabi International Airport is currently undergoing expansion, with the Midfield Terminal Building (due for completion in the third quarter of 2017) set to increase annual capacity by 30m passengers per year initially and add around 700,000 sq metres of internal space. The opening will coincide with the delivery of the first tranche of Etihad Airways’ recent fleet order. The airline placed a $67bn order for 199 aircraft in November 2013.

In addition to aviation, investment in transport infrastructure will also improve sea and rail links to Abu Dhabi. Redevelopment and expansion of Port Zayed is also under way, which will increase the port’s capacity for receiving cruise ships, enabling the simultaneous docking of two large ships and one small vessel.

For 2014 Abu Dhabi Ports expected a total of 93 ships to call at Port Zayed, an increase from 75 ships last season, carrying approximately 220,000 passengers, up from 189,709 in 2013. In light of the expanded capacity, the authorities hope to attract 130 ships for the 2019/20 season, which would bring up to 300,000 passengers to the emirate. New niche developments are enabling this growth.

Celebrity Constellation, a 295-metre, 91,000-tonne vessel with a capacity for 2170 passengers, recently announced it would sail nine circuits in the Gulf and bring some 15,000 guests to Abu Dhabi during the 2016/17 season.

Rail Links

In terms of rail, the Etihad Rail project is set to link the UAE’s various emirates and also connect to the wider GCC rail network. The focus so far has been predominantly on cargo transport, although inter-emirate passenger connections will also eventually boost domestic tourism potential. Over the long term, passenger services may be offered on the entire GCC rail network, providing regional visitors with an additional means by which to access the emirate.

It is clear that Abu Dhabi’s current investment in tourism infrastructure follows a planned and orderly strategy, aimed at mitigating the risk of the kind of sharp drops in occupancy and room rates which can knock the wind out of an emerging sector. Rather, competitive room rates are attracting new visitors to the emirate, while high (if seasonal) occupancy rates are protecting RevPAR for hoteliers.

As new facilities on Saadiyat Island begin to open (complementing those already in place on Yas Island), and as capacity on air, land and sea expands, the industry is well placed to absorb the growing visitor numbers they will bring to the emirate, creating just enough room to grow, without the danger of oversupply.

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The Report: Abu Dhabi 2015

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