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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COMMENT
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