By Elie Younes and Bernard Forster

The following excerpt was taken from a report titled "Middle East Hotel Markets; Outlooks, Trends and Opportunities, and Hotel Valuation Index." Published in spring 2006, it was prepared by the London office of Hotel Valuation Services International (HVS International).

According to the EIU, real GDP growth in the UAE is forecast to be around 6% over the next two years. The booming economy is driving higher inflation
(projected to be approximately 5% in 2005).

The government is pressing ahead with its reform programmes, and multibillion-dollar infrastructure, real estate and tourism projects are taking place in the country with Dubai and, now, Abu Dhabi being at the forefront.

The number of visitor arrivals in the UAE increased by approximately 8% in 2005, with Dubai and Abu Dhabi absorbing most of the growth (in actual terms).

Dubai is now one of the leading destinations worldwide in terms of transient leisure and business demand, and it appears that Abu Dhabi is being carried along by this momentum.

Quality hotels in Dubai achieved staggering RevPAR growth of almost 40% in 2005: RevPAR climbed from US$124 in 2004 to US$171 in 2005.

In spite of the aggressive pricing attitude of the hotels and the new supply that became fully operational during the year (Park Hyatt, Le Meridien Grosvenor House, Radisson SAS, Villa Rotana Suites, Al Mourooj Rotana) occupancy was 85%, compared to 86% in 2004.

Moreover, average room rate grew by approximately 40% on 2004, to US$202. GOPPAR was estimated to be US$180, an improvement on 2004 of a phenomenal 60%.

As shown in Table 13, 17,000 rooms are likely to enter the market in Dubai over the next four years, and this will undoubtedly have an impact on the trading performance of the market, resulting in a likely correction (return to 'normality') between 2008 and 2009.

We would highlight that as a considerable proportion of the new supply is located on The Palm, Jumeirah, some hotels may not enter the market in 2007 and 2008 as currently planned. This depends on the severity of the correction and on the likely completion date of Palm Island. RevPAR in Abu Dhabi was US$110 in 2005, an increase of 47% on 2004.

Growth was driven primarily by an uplift of 40% in average rate and an increase in occupancy of one percentage point (which came despite the opening of the new Kempinski Palace Hotel in 2005).

GOPPAR was US$93, an impressive 87% higher than it was in 2004. Due to the limited amount of new supply entering the Abu Dhabi market between 2006 and 2008, we expect the market to benefit from continued growth in trading performance over the next few years; this will undoubtedly further stimulate investor appetite.

Table 13 illustrates the new hotel supply that is likely to enter Dubai and Abu Dhabi over the next five years. As of January 2006 hotel investment values in Dubai were US$450,000, the highest in our Middle East HVI, reflecting a regional penetration of approximately 200%.

We would highlight that our HVI excludes the underperforming assets in the market (such as the four-star hotel properties in Deira). According to our assessment, hotel values in Abu Dhabi were around US$290,000, and values are likely to experience further growth by the end of 2006.

Elie Younes and Bernard Forster are Directors of HVS International's office heading the Middle East and Africa region. For more information about the Middle East markets, please contact Mr. Younes at eyounes@hvsinternational.com, +44 (0)20 7878 7728, and Mr. Forster at bforster@hvsinternational.com, +44 (0)20 7878 7719.

© HVS International 2006