Promise of rich pickings from Dubai's serviced apartments

Serviced apartment operators in Dubai are bracing themselves for a fall in room rates as investors attempt to convert commercial office space into short-term let apartment blocks to take advantage of potentially high returns.

According to experts at the global banking group HSBC, property investors in Dubai are putting their money back into hotels and serviced apartments as the sector benefits from the emirate's recent tourism boost.

At a round-table meeting yesterday, HSBC officials said investors were especially drawn to Dubai's serviced apartment market where assets are producing double-digit yields - something Nicholas Levitt, HSBC's head of commercial banking in the UAE, says is unsustainable over the long term.

"If you've got a double-digit yield on any real estate asset, either prices have to go down or the rental rates have to go up because you can't sustain that over the long term and if you have a whole bunch of investors moving in to that type of asset class you soon create an oversupply that becomes an issue if the yield becomes that high," Mr Levitt said.

"If you've got a large commercial complex which was massively overstocked in Dubai at the moment it makes more sense to convert it into serviced apartments. Is that sustainable in the long term? There's not many markets in the world where double-digit yield curves are achievable in the long term."

Susan Potter, the group director of hospitality services for MKM Commercial Holdings, the hospitality group behind Raffles Dubai as well as three-star and serviced-apartments, said her company was expecting a fall in serviced apartment room rates although it had not noted any evidence of an oversupply.

HSBC estimates that last year the UAE ranked about fifth in the world in terms of the number of new hotel openings behind the United States, India, China and the United Kingdom, which was staging the Olympic Games.

"That's a significant amount of assets arriving on to the market, which is already very concentrated with assets," said Mr Levitt.

He added that the number of requests his bank received for major hotel financing in the UAE increased last year from "virtually none" the year before to about 12 properties.

The bank added that 12 to 18 hotels were set to open in Dubai this year while another eight were scheduled to open in the Northern Emirates - of which four were located in Fujairah.

Hotel operators report that room rates increased by about 8 per cent last year but still remain about 25 per cent lower than their pre-financial crisis level when supply was much lower. Occupancy levels, they report, have returned to pre-crisis levels.

However, operators report that much of this growth has come from the lower budget end of the market, driven by consumers cutting back on spending, improved technology enabling customers to get a better deal online and on an increase in the number of tourists visiting the UAE from developing markets.

The change in demographics is encouraging budget hotel operators to operate in the emirates. Premier Inn plans to open 50 hotels across the Middle East over the next decade and Holiday Inn Express has also said it plans to expand in the region.

"Clearly there is a commitment by many of the international brands such as Premier Inn and Holiday Inn Express to increase their portfolio in this region. So I am concerned about the supply line in terms of hotel rooms in the sector in the medium to long term. I do feel that revenue per available room will be affected in the long term," said Ms Potter.

However, hoteliers said they remained optimistic about the industry's prospects and did not think there was a wider oversupply of hotels in the market.

"There are more hotels coming, and every time there are more hotels, people thought is the market going to be able to handle it. But we've seen that business has grown as much as the rooms have grown. It's just gone hand in hand," said Sanjay Luthra, the general manager of the Metropolitan Palace hotel in Dubai.