The hospitality industry in the region came to a standstill when it was announced that Five Holdings, owners of the $1.2 billion Viceroy Palm Jumeirah, had taken over the running of the property. A further twist in the tale emerged days later when it was confirmed that DIFC Courts had ruled in favour of the operators, saying that Five Holdings had to allow Viceroy access to the property. Hotel News Middle East asks industry leaders just why owners decide to take over the running of a hotel from the operators.
While neither Viceroy or Five Holdings would be drawn on the issue, due to ongoing legal issues, Hotel News Middle East picked the brains of some of the leading lights of the sector to see how situations like this come about.
“Hotels get deflagged for a number of reasons, the first one is really the management contract with the hotel operators has expired,” says Chris Hewett, associate director TRI Consulting.
“When this happens it means the owner and operator have agreed to effectively end the sector management of that hotel through the operator.”
Management contracts will have a set term, according to Hewett, which can be ended by mutual consent. One such example is when Rotana and Dubai International Real Estate agreed to the termination of the management agreement of Al Bustan Hotel and Al Murooj Hotel in Dubai, from 1 January, 2017.
The owners took over the running of the property under the name of Roda Hotels & Resorts, as the newly formed company’s CEO, Imad W Elias, explains.
“It was a mutual agreement that Rotana would operate other hotels in Dubai and they would not renew the management agreement with Dubai International Real Estate,” he says.
“It was reasonably easy for Roda to hit the ground running as many of the staff from the property were still there when they took over. They hand-picked a few others like myself who had been with the owner on a consultancy basis.”
Elias says that while the company was confident of success, he was taken aback by the speed at which it has arrived.
“Guest satisfaction jumped from 75% to 95% and while we lost 15% in international travel we have more than made up for that in business from GCC guests giving us a higher occupancy,” he says.
“We had expected in the first year to have to adopt a wait and see approach and might experience an initial decline but people have responded to us being managed by a regional company and we look forward to a continued high level of performance.”
He posits the theory that the market will see more and more owner-run hotels in Dubai.
“The future of the five-star international chains is a real question mark in Dubai,” he says.
“Standards are already so high here that you have to wonder what the international companies can bring that’s new to the market. There are already so many hotels and hotel schools here that the standards are already in place, we don’t need hotel chains from the States or the Far East coming over here telling us what to do.”
Elias goes as far as to say that the international chains are taking Dubai and the Middle Eastern market for granted.
“International operators should stop padding the market with brand after brand until they become like supermarkets,” he says.
“There is no doubt there has been a decline in business in the United States, Europe and the Far East so now they are putting all their eggs in one basket – the UAE – and it is only a matter of time before we see an oversupply.”
A rise in the number of owner-operated hotels in the region is inevitable, says Hewett, due to owners becoming savvier and educated about the business but he urges caution.
“Some owners think they will make immediate savings on management fees from the contract. While that’s true to a degree, a lot of them don’t understand it’s a very complex operation,” he says.
“Operators have the marketing and distribution networks which can help fill up rooms straight away.”
Because owner-operated hotels don’t have the distribution and marketing power of the chain hotels they will inevitably be competing against, they could end up being over-reliant on third-party websites like Booking.com, warns Hewitt.
“Another thing that is important to remember is that operators are able to maintain the technical aspects of the building,” he adds.
“When owners have to redistribute their own money for maintenance it can be more difficult to uphold those standards and that could reduce the value of a property over time.”
Rabih Feghali, director at Roya International Hospitality and Leisure Consultants says that while it is an advantage to save on the percentage an operator takes, it is not the main advantage that comes from an owner running its own hotel.
“That comes from having full control over the destiny of the property,” he says.
“The disadvantage is that you don’t get the uplift that comes from established branding. An owner could think that all the bookings are coming through Booking.com and they aren’t coming from brand.com, for example, but trust me when people are booking through Booking.com and see a Hilton or Sheraton, for example, it gives you more confidence in that propery versus ‘Hotel ABC’.”
Feghali points out though that not everyone is looking for the same experience and some hotels have managed to carve out a successful niche for themselves in the market.
“There are some highly successful hotels that if you put a brand on them it would lose appeal,” he says.
“Sometimes people are in the market for an anti-brand – look at the case of Media One Hotel in Dubai.”
The key to a successful relationship between owners and operators, Feghali says, is communication.
“Operators need to be transparent with owners and show what they are doing to avoid losses, especially when times are so challenging,” he says.
“You don’t want to be summoned into a meeting with the owners, be pro-active, show transparency and clarity.”
A breakdown in relations between an owner and operator is always unfortunate but it could have far-reaching implications beyond one project, says Filippo Sona, director of the hotels division for the Middle East and North Africa region of Colliers International.
“There is a danger that it could damage the brand reputation for the whole of Dubai,” he says.
“What happens if foreign investors hear about this? People want to know they are investing in a good, regulated place where business is thriving.”
He called for the public sector to become more involved in the process, adding that the continuing legal dispute at Viceroy Palm Jumeirah doesn’t reflect well on anyone.
“My advice before announcing something in the public domain is to make sure there are no outstanding legal matters,” he says.
“The public sector should be regulating these matters and it should be dealt with completely before a public announcement is made. It doesn’t give the right perception of how business is done in Dubai otherwise.”
TIMELINE: Viceroy Palm Jumeirah dispute
- 22 June – Viceroy confirms injunction issued by the DIFC Courts prohibiting Five Holdings from taking any further actions to prevent Viceroy from exercising its exclusive authority to manage and operate the hotel. Five Holdings responds by filing the case with Joint Judicial Committee (JJC), JJC’s role is to consider whether there is a conflict of jurisdiction between DIFC Courts and Dubai Courts. If such a conflict exists, the JJC rules on the appropriate jurisdiction.
- 29 June – Confirmed by the Dubai Joint Judicial Committee to suspend the matter/injunction pending before DIFC Courts and Dubai Courts until it decides which is the relevant court – and further ratified by a letter issued on 3 July, 2017.