Dubai’s budget hotel industry will outperform the broader market. Here’s why.
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Dubai’s budget hotel industry will outperform the broader market. Here’s why.

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Dubai hotel industry is gearing to meet the potential demand expected in Dubai through 2020. It is expected to service ~20 million tourists in 2020, on the back of i) Dubai’s Expo 2020, ii) a host of upcoming tourist attractions, and iii) a steady economic growth despite the oil price slump. Dubai already served 14.2 million overnight visitors throughout 2015, up 7.6% (13.2 million in 2014).

It’s known for its lavish expensive 4-5 star hotels in the Upscale, Upper scale and Luxury segment, is now witnessing a shift from luxury to mid-range or budget hotels since past few years to cater to a broader market segment. The market share of luxury hotels2 (2016: ~60%) is slowly declining whilst that of budget hotels is fast increasing. Budget hotels follow a lean service model of ‘pay-what-you-use’, by providing focused facilities like last minute booking, 24-hour check-in, and 6-12-hour checkout; and offering the amenities including well-connected location, clean rooms, comfortable bed, uninterrupted Wi-Fi; and ‘No Room Service’!!

Dubai’s Department of Tourism and Commerce Marketing (DTCM) estimate a total requirement of 140,000 to 160,000 rooms by 2020 – which means massive expansion opportunities in this sector. And, to achieve these massive numbers and also to cater to varied demand expected through 2020, the shift from classes to masses is kind of obvious.

A gradual shift from luxury hotels to budget hotels is evident in the market:

The budget hotels have been outperforming the broader industry on several key performance indicators. During 12-month period Q1-20151, the YoY change in occupancy, Average Daily Rate (ADR), and Revenue Per Available Room (RevPAR) for broader industry was -2.2%, -5%, and -7%, respectively; whereas budget hotels outperformed with occupancy -0.8%, ADR 1.3%, and RevPAR 0.5%. And, 2016 performance is not very different for luxury brands given the continuing pricing pressure due to excess supply in the market. The key factors contributing to this shift towards budget hotels include:

  1. Changing mix of Dubai tourism:
    1. Increasing visitors from Asian mid-income population
    2. Solo & solo-women visitors emerging choice towards safe and affordable accommodation
    3. Rising demand from gulf region towards medical tourism in Dubai
  2. Government support, policies and incentives to support budget hotels in Dubai
  3. Availability of no frills and low cost connectivity by airlines for budget travellers


Business events, tourism attractions and Government’s incentives to leisure industry will give big push to the hotel industry especially budget hotel segment:

  • Dubai is hosting a large business event coined as The Dubai’s Expo 2020; and ~25 million visitors across the world are expected to attend this event. This may result in business opportunities across sectors including public infrastructure, hospitality, leisure, transportation, entertainment & retail.
  • A significant investment in various tourism attractions (projects) including Dubai Parks (expected year of completion is 2016), Dubai Water Canal (cost: AED 2bn; 2016), Bluewaters island (AED 6bn), Dubai Frame (AED 160mn; 2016), MBR City – District One ($10bn; 2017), Resorts entertainment complex, Al Mamzar beachfront (AED 10bn), Deira island ($550mn), Aladdin City (AED 1.8bn; 2018), the Bollywood Park, and the Museum of the Future (2017), will attract tourist across the regions/ religions/ age groups/ classes/ tastes & preferences.
  • The state-of-the-art infrastructure coupled with strong incentives by the government including:
    • DTCM waived off the standard 10% district charge on development permits for three and four-star hotels till December 2017
    • Reduced the timeframe for all regulatory approvals to two months
    • A single-window system for all the necessary approvals from Dubai Municipality
    • Designated government land for development of three and four-star mid budget hotels
  • In addition to leisure, corporate, regional tourism, Government is trying to promote medical and sports tourisms, which may add new dimensions to the Dubai tourism industry and especially budget hotel industry

Adoption of budget hotels strategy is markedly visible:

The investment interest in the budget hotels in Dubai indicates good prospects primarily due to relatively lower construction & operational costs, and short payback period. Also, the business expansion by some of the luxury brands into this segment (e.g. Accor – ibis; Emmar – Rove; Intercontinental Hotels & Resorts – Holiday Inn) confirms the market potential. Also the room rates are in the affordable range of ~$55 to ~$100/night.

Acute pricing pressure, low occupancy, and huge inventory post-Expo 2020 event, are some of the industry challenges/ risks:

Despite strong demand, the delivery of additional room keys by 2018 will exert further downward pressure on ADRs and RevPARs.

Fast forward to 2021 (after Dubai’s Expo 2020 event), I expect a huge chunk of excess supply & a steep drop in ADRs/RevPARs, as the demand from tourism alone will not be able to absorb the excess supply. Dubai government may have to plan other such mega events to support this sector (e.g. Qatar’s FIFA 2022 World Cup).


I expect a secular shift towards budget hotels in next 3-4 years. In terms of market share, Dubai’s current budget hotels’ share (2016: 51%) when compared with the US (89%) indicates high potential for growth – albeit it may not match with the US due to different tourism mix. However, the budget hotels sector may outperform the broader market in terms of KPIs & thus on the investment returns.

From the investment perspective, the large brands with entry into budget hotels are a relatively better bet for investments due to diversification advantages (high value and high volume market). Also, the pure-play budget hotels with decent presence in and around Jebel Ali (the Expo 2020 venue), the Al Maktoum airport (closest to the venue), and the business districts (i.e. Downtown Dubai) are expected to do relatively better due to convenience and proximity to the event. Both categories can offer good returns in a 4-5-year period on the back of emerging demand, shorter payback period, low construction and operations costs, and lean service model.



1 – The comparable KPI numbers of broader market and budget hotels for 2016 were not available, hence Q1, 2015 have been considered. The KPI numbers for Dubai’s broader hotels market for 2016 is available.

2 – Does not include 4-5 stat hotels in Upscale and Upper scale categories


Department of Economic Development Government of Dubai, Department of Tourism Dubai, Emirates 247, Deloitte, Knight Frank, PWC, ValueAdd, Zawya

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