Main Photo: The eponymous Burj al Arab hotel
Date: August 2020
Who: Due to lingering travel restrictions and the massive hit coronavirus has had on businesses, many of the UAE’s hotels could still remain closed or operate at minimum capacity further into the year, according to a report by Cavendish Maxwell.
Established in 2008, Cavendish Maxwell is one of the largest and most respected property consultancies in the region, the Middle East and North Africa.
They are a member firm of the Royal Institution of Chartered Surveyors (RICS), and brings together a team of property consultants and surveyors. They publish independent reports, prepared to globally accepted standards, for loan security, bank lending, audit, insurance reinstatement, dispute resolution, risk management, debt recovery, performance analysis, purchase and sale advice, and third-party reliance purposes.
July 2020 gave Dubai hotels a much-needed boost, with the emirate reopening for international guests. Hospitality groups operating across the emirate saw a growth in bookings soon after the news was announced, with many suddenly becoming optimistic for the rest of 2020.
However, according to valuation consultancy Cavendish Maxwell, Q3 2020 will still be a very difficult period for the industry. As of June 2020, 16 percent of the UAE’s hotels tracked by Cavendish Maxwell had either closed or operated at minimum capacity. On a room basis, 27 percent had closed in Dubai vs eight percent in Abu Dhabi.
In the same month, Dubai’s RevPAR crashed by 73.5 percent compared to June 2019, with Abu Dhabi’s falling by 13.6 percent. Abu Dhabi’s resort industry in particular saw RevPAR fall by 48 percent, while Ras Al Khaimah and Fujairah stood at -32 percent and -42 percent respectively.
Q3 2020 is thought to see RevPAR decline by 65 percent for Dubai and 42 percent for Abu Dhabi’s resort sector. The UAE capital’s hotel sector could do slightly better, with RevPAR only thought to drop by 17 percent. RAK and Fujairah meanwhile are forecast to decline by 36 percent and 43 percent when compared to Q3 2019 performance.
Cavendish Maxwell’s research suggests that a typical UAE hotel needs to maintain around 40 percent occupancy to break even.
To determine the likely impact of COVID-19 on hospitality assets, Cavendish Maxwell is conducting the following scenario-based valuations in its reports to assist the reader when making any financial decision.
In each scenario, year three of the forecast is assumed to mirror the base case. Recovery levels will vary significantly from one market to another as key decisions in each emirate and also the main source markets will affect how different types of hotels recover in the UAE.
The shift in the Expo to 1 Oct 2021 – 31 Mar 2022 allows a more aggressive recovery multiplier when compared with main international markets. This contributing factor also allows us to justify maintaining performance from year three onwards as opposed to factoring in a longer-term reduction in occupancy levels relating to the global pandemic.
The Most Likely Case detailed above would represent our opinion of Market Value. This scenario tries to establish a mid-point where an arms-length transaction can occur. Using the Base Case, adjustments to the first two years of the cashflow can include:
Along with this analysis, increased sensitivity is now essential. Effects on smaller shifts in key variables can now be produced to provide further transparency.
Since the outbreak, our valuation models have been continually evolving and adapting to reflect the latest information and trends seen in the market. As of July, key revisions will be made to each valuation scenario that mirrors hotel performance seen during Q2 2020. Adjustments include:
Slower initial recovery to allow for source markets not resuming travel as expected
Higher food and beverage proportion to cater for quicker than expected take-up from UAE residents
Revisions to base occupancy levels seen to reflect Dubai opening its borders on 7 July
Increased reduction of the fixed cost as contracts continue to be negotiated at lower- than-expected levels
The resulting scenario-based valuations aim to demonstrate the impact of the global pandemic. It represents a typical 200- key, leisure-focused hotel with standard F&B provisions operating within our expectation of a Reasonably Efficient Operator (REO).
As the global lockdown eases, medium-term prospects for the hospitality sector are positive
The hospitality industry, specialist in nature, applies a growth-explicit valuation model, focusing on a 5-year forecast. In contrast, other traditional sectors, including office and residential, use implicit models focusing on forecasting income and expenditure on a day one basis and applying growth implicit yields.
The advantage to producing a 5-year forecast is that we can explicitly forecast forward. We can identify reasonable growth assumptions to define an opinion of Market Value whilst considering the current market situation.
Hospitality assets are not transacted based on short-term performance, but investors must have a firm understanding of future forecasts and require reasonable returns to justify the risk of a stunted exit strategy.
The impact of COVID-19 on the world will continue for the foreseeable future with a new ‘normal’ likely to take shape. Yet, the shorter-term impact on cashflows must be incorporated into the valuation. It is therefore highly recommended that valuation analysis is conducted on a more frequent basis as newer data is obtained.
Yields and discount rates should shift but as evidenced by the financial crisis of 2008, there was a noticeable time lag between rising discount, and subsequently, changes to yield profiles.
Even though it will not be a rapid recovery, hospitality performance is expected to recover faster than traditional sectors as occupancy and ADR are much quicker to react to changing market conditions. Countries which have been proactive and have overcome the pandemic relatively unscathed will be perceived to be a safer option for travel when the business and leisure sectors recover. According to the Deep Knowledge Group, as of June 2020, the UAE sat just outside the top 10 COVID-19 safe countries in the world.
Given the sudden decline in hospitality performance and, in most cases, leading to numbers far from break even requires solutions. The UAE government has stepped in—the UAE Central Bank has issued guidance of economic support to the banks including zero-cost facilities, capital buffer relief and holiday payments until 15 September 2020, and an over AED 250 billion package to aid these measures. Whilst beneficial in the short-term, this will indirectly find its way back to banks and eventually, the customer.
Given the relief measures introduced by the Central Bank, market activity will reflect yield and discount rates above historical averages, given the additional perceived risk or high level of uncertainty. As these measures are lifted we should see a shift towards lower leveraged, or even 100% cash transactions.
We expect potential investors to take a longer-term view on hospitality assets. Once hotel performance begins to stabilise and assets are placed onto the market, buyers with higher levels of liquidity will be in a position to acquire assets at prices below both, replacement cost and recent norms. Irrespective of the downward trends associated with market performance, an opportunity for high returns will be created.
THPT Comment: Long have the nay-sayers been predicted that Dubai’s over-population of top-end hotels will be an issue in the next decade…but at least they had the Expo 2020, to look forward to, until…..postponed now to October 2021.
First Seen: Hotelier Middle East
The Hotel Property Team (THPT) is a small group of highly experienced business professionals. Between us, we provide a range of skills and experience which is directly relevant to those involved in the hotel property market.