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Adjusting the formula
 

Adjusting the formula

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Viability's Guy Wilkinson writes a monthly column for Hotelier Middle East Magazine. This article originally appeared in May 2010. ...

Viability's Guy Wilkinson writes a monthly column for Hotelier Middle East Magazine. This article originally appeared in May 2010.
For more information about Viability, please visit http://www.linkedin.com/company/2347942 or http://www.viability.ae/

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    Adjusting the formula Adjusting the formula Document Transcript

    • 24COMMENT Adjusting the formula Viability director Guy Wilkinson says market changes take the industry back to the importance of a good location and demands hoteliers reassess developments they previously committed to the mirage of future market growth. This is where artist’s impressions and computer renderings can be so misleading. One can actually believe in the gleaming towers of the neighbouring mega resort, theme park or industrial city shown in the image, until a glance out of the window over a patch of barren des- ert jolts one back to the frightening balance sheet on the desk in front. I have been witness to such pipe dreams in locations from the North- COLUMNIST ern Emirates to Cairo, and am repeatedly amazed at the number of et’s compare the hotel devel- serious development professionals, L opment formula that used to work, in Dubai for example, with what’s happening now. In the boom days, developers would buy land, use it to leverage a proj- including major corporations, who still cling to the fantasy shared by so many of us just a few years ago — particularly with regard to the exis- tence of limitless high net worth cus- ect up to 90% and open to similar tomers — but is now so startlingly levels of occupancy at record room disproven by business failures at rates. Agreed, land and construc- every level, from small contractors tion costs were increasing at alarm- to government mega developers. ing rates, but then so were room If you have been given the task rates and with limitless growth on If a project has left you stranded in the desert, it’s time to walk away and prioritise location again, says Wilkinson. of operating a hotel built on future the horizon — so we thought — ev- prospects that will not be realized erything looked great. Nowadays, for another 10 years, bite the bullet! there is to all intents and purposes HOTEL BUILD COSTS APPEAR TO HAVE The truth is that you can fill almost no debt finance available, demand BEEN MUCH MORE RESILIENT THAN any hotel at the right room rate, but growth and especially room rates have fallen, and the only encour- HOTEL ROOM RATES that rate may simply not be suf- ficient to pay back the investor in a aging sign is that occupancies are period that would previously have holding up surprisingly well in for a much lower price. In reality, indeed, cancelled altogether. It also been considered acceptable. And many parts of the city — at least hotel build costs appear to have explains why a number of almost if you’re poring over a cash flow until the rest of the future rooms been much more resilient than hotel finished luxury hotels Dubai are analysis that is not showing the kind supply comes on line. room rates, for example. According currently for sale at silly prices that of returns that you were once used So let’s now dispel a few myths to global quantity surveyors Davis will cover the developer’s invest- to, then have the wisdom to accept facing Gulf hotel developers today. Langdon, a five-star room in Dubai ment, but will never provide a sen- that the old development formula One is that the recession brought a cost US $3400 per square metre to sible return on investment profile to is no longer applicable. Nowadays, welcome respite in the growth of build including FF&E in the second prospective purchasers. your best bet is to build cheaply, sell construction costs. That appears to quarter of 2007, rising to $4100 in your rooms cheaply, ensure that you be only partially true. Many hotel the same quarter of 2008, and falling MARKET MIRAGE have a high profile brand and wide projects were stopped immediately back to $3410 in the second quarter A number of these almost-com- chain distribution, and make sure following the onset of recession of 2009. In other words, a hotel costs pleted hotel projects around the you concentrate on ‘the three Ls’ – for retendering, or as some erro- more or less the same to build now region are in locations that would location, location, location. HME neously put it, value engineering. as it did in one of the peak years of have been fantastic if the madness The theory was that the recession the development boom. This may had continued, but are (or should be) put a deflationary pressure on con- explain why many projects, some now facing the reality that they have struction costs, lack of work made of them future landmarks in Dubai, been stranded in secondary sites Guy Wilkinson is a director of Viability, a hospitality and property consulting firm in Dubai. contractors more competitive, and have been ‘on hold’ for the last 18 with limited demand and in some For more information, e-mail: guy@viability.ae that projects could be completed months, postponed indefinitely or cases, excessive capacity based on May 2010 • Hotelier Middle East www.hoteliermiddleeast.com