The oversupply of hotel rooms across the Middle East is a problem that shows no signs of abating. Mounting costs and a need for profitable solutions is prompting conversations over whether third-party management agreements will be the future, much like those used in the U.S. and Europe.

First, take a look at the numbers.

The Middle East saw a 9.3 percent year-over-year increase in hotel rooms in construction as of April 2019. That month’s pipeline data showed 424 hotel projects accounting for 125,052 rooms in construction in the Middle East. United Arab Emirates led with 56,701 rooms, which represented 33.6 percent of the country’s existing supply, followed by Saudi Arabia (42,571 rooms, 42.9 percent of existing supply), according to STR data.

Zeroing in on Dubai, STR’s data for the second quarter of 2019 revealed that supply has now outgrown demand in the city for six consecutive quarters, and the occupancy level was the lowest for a second quarter in Dubai since 2009, while levels for the absolute average daily rate and revenue-per-available-room were the lowest since 2003.

Owners are looking for alternatives, and the question is whether third-party management offers them a viable option. Bani Haddad, founder of third-party management company Aleph Hospitality, believes that the same wave of interest seen in Africa for this model is now slowly emerging in the Middle East, and in the Arab states of the Gulf, in particular.

Sluggish business in the region’s hospitality industry is one of the reasons behind this. Occupancy has been stressed, rates have dropped and the performance in hotels is not what it used to be, Haddad said, adding that owners want more value from their hotels. “Instead of us knocking on doors, prospecting, and trying to educate the market about third-party management — which has been the case so far — now investors and brands are coming to us,” Haddad said.

Control Factor

Despite this optimism, there’s no doubt that the third-party management model is still in its infancy in the Middle East when compared to the U.S. and Europe, with many hotels still being managed directly by operators or by an owner franchising a brand.
One of the reasons for the difference in approach to third-party management in the Middle East can be attributed to owners wanting to assert a sense of control over operations. The challenge for third-party management companies will be to convince owners to relinquish control and pay out franchising as well as third-party management fees.

Jerome Briet, Marriott’s chief development officer for Middle East and Africa, revealed during the 2019 edition of the Arabian Hotel Investment Conference that the management fees for Marriott’s hotels in the Gulf region are the lowest in the world percentage-wise on revenue. This is not the same case in Africa, where the company works with the likes of Aleph Hospitality with whom Marriott has signed a property in Liberia. “There is room for franchise and third-party management fees, but when you have compressed management fees on base and incentive … how much room is there?” asked Briet. This is potentially why third-party management companies are struggling to gain a Middle Eastern foothold, he claimed.

However, investors in the Middle East are looking for choices and if a third-party or white label management company comes with in-depth market knowledge and a reliable infrastructure, developers are more likely to pay attention. Hilton’s senior vice president development, EMEA, Patrick Fitzgibbon, said during a conversation at the Arabian Hotel Investment Conference: “My sense in this region is that the only third-party management companies that will be successful are those that are in this region and understand the region.”

Abu Dhabi National Hotels, one of the well-established owner-operators in the region, has also gotten in on the game and revealed this year that it has launched a white-label management company — while not publicly revealing which Dubai-based hotel it is already operating under this arm.

Local Talent

Hiring good talent is another concern with third-party management companies. With established operators being able to attract talent by way of their reputation, there’s no guarantee that a third-party company has access to a similar caliber of talent pool.
Furthermore, international brands do have a strong local presence in the Middle East and have the benefit of local teams which they can dip into as and when needed. Whether or not third-party management companies will be able to attract great hoteliers or not, without a brand to necessarily back them up remains to be seen.

International operators, however, do look at franchising and third-party management as a method of increasing brand footprint. Faster growth with fewer complications arising from day-to-day operations while still pocketing royalty fees should be a real incentive for operators, according to Aleph’s Haddad.

However, hoteliers aren’t completely convinced. During a panel discussion at the Arabian Hotel Investment Conference, a number of hoteliers spoke about franchising being part of the future for the GCC – specifically owner-operator franchising – rather than third-party management. Hilton’s Fitzgibbon said that managed contracts will reign dominant, and predicted it will remain so for the next 10 years.

Photo Credit: An oversupply of hotels rooms in places like Dubai (pictured) is prompting third-party management companies to offer their services. Rickisfriends / Visual Hunt