The Middle East Hotel Construction Market: Bucking the Global Trend
Real Estate & Construction and Hotels & Leisure
Despite an overall slowdown in year-on-year hotel construction activity globally, there is a strong pipeline of construction activity projected in the MENA
Law Update: Issue 359 - Real Estate & Construction and Hotels & Leisure
Leith Al-AliSenior Associate,Construction & Infrastructure
Rashed Abdel HadiParalegal,Construction & Infrastructure
After a period of uncertainty and stagnant growth as a result of government imposed Covid-19 restrictions and lockdowns, hotel construction activity in the Middle East is, despite the global economic slowdown, showing signs of increase with potentially significant growth ahead.
In this article we will briefly examine recent market trends in the Middle East hotel construction market and identify some of the key considerations developers, owners and operators should be aware of when embarking on hotel construction projects in the region.
Recent data published in April 2023 by the Global hotel research and monitoring firm STR in its pipeline data report (the “STR Report”) shows that, despite an overall slowdown in year-on-year hotel construction activity globally, there is a strong pipeline of construction activity projected in the Middle East and Africa this year, with the region the only part of the world forecasting an increase in overall pipeline activity.
The STR Report states that the region currently has 119,505 rooms under construction (down 5.8% from 2022), with 45,529 rooms in the final planning stage (an increase of 20.4%), 84,116 rooms in the planning stage (an increase of 21.2%), with 249,150 rooms currently under contract (an increase of 6.4%). Saudi Arabia (with 42,033 rooms) and the UAE (with 22,325 rooms) are bucking the global downward trend, leading a surge in hotel construction activity in the region. In doing so, it places Saudi Arabia as one of the biggest hotel construction markets in the world, third only to China and the US. This is particularly significant in a region where the growth and development of the hotel and hospitality industry is seen as playing a key role in countries’ economic diversification strategies.
However to remain competitive, developers and operators must not only provide more hotel rooms but also be mindful of the need to adapt hotel facilities to changing consumer trends, including a heightened traveller focus on quality with luxury and premium travel experiences increasing in demand, coupled with a more acute consumer awareness of the importance of sustainability and the desire for more environmentally responsible travel.
Demand for premium and high-end luxury hotels in the Middle East is rising, with certain hotels expanding their existing portfolio as an increasing number of travellers look to spend (and indeed expect) more to receive a premium travel experience. Well known hotel projects such as the Burj Al Arab, Atlantis- The Palm and more recently Atlantis- The Royal have underlined that hotels can be significant tourist attractions, in and of themselves, luring in visitors from all over the world wanting to experience the unique, luxury offering provided by such high-end establishments. Stakeholders will therefore want to ensure they are able to tap into this growing demand and in doing so cater towards travellers accordingly, with the provision of high-quality, cost-effective, environmentally conscious hotel and hospitality facilities.
Sustainability has proven to be an increasingly important theme in the hotel construction market. Developers, owners and operators are placing sustainability higher up the business agenda resulting in an increased focus on sustainable construction and design initiatives. One such initiative is the Leadership in Energy and Environmental Design (“LEED”) certification, which over the past decade has seen an eight-fold increase in the number of LEED certified projects in the region. With LEED widely recognised as one of the most used green building rating systems globally, its focus on energy efficiency and environmental impact in the design and construction process is helping the industry advance its sustainability agendas while also (in the longer term) enabling operators to potentially benefit from reduced operational costs as a result of the implementation of various energy saving initiatives.
There are numerous considerations hotel developers, owners and operators need to be aware of when procuring works for hotel projects. We briefly examine some of these below.
Design development: Whether a project involves the construction of a new, high-value luxury resort or the small-scale renovation of an existing facility, developers and contractors should ensure the design is developed in accordance with the design specifications and standards prescribed by the hotel operator. Accordingly, the design review and approval process should be clearly prescribed in the construction contract, setting out each party’s rights and obligations and aligned with any design requirements imposed under the hotel operator agreement and any other relevant third-party agreements. In addition, it is important for the various project stakeholders including the design consultants, to meet regularly during the design development process to ensure they are aligned. This can help minimise the risk of variations that can lead to delays and cost overruns.
Quality: One of the often-sold features of a hotel is the quality of its facilities. However, the focus on quality should begin well before the facility has begun commercial operation. The developer should invest time and resources at an early stage in the procurement process to undertake comprehensive legal, technical and financial due diligence to ensure the proposed contractor possesses the necessary sector specific knowledge, experience and financial capability to complete a project of the value, nature and complexity envisaged. Additionally, to mitigate the risk of sub-standard works being executed, project stakeholders should ensure they regularly meet to evaluate in good time any quality requirements, issues and concerns that arise.
Defects: The construction contract should include a clear and robust defects rectification regime which mandates the contractor to not only resolve (free-of-charge and in a timely manner) patent defects that arise prior to handover of the works and during the defects liability period but also any latent defects that arise thereafter. This is especially important within the context of a hotel project where unresolved defects can potentially be highly disruptive and costly (both reputationally and financially) given the negative impact this can have on the guest experience.
Coordination and interface: Coordination and interface issues can significantly hinder a project. The construction contract should therefore clearly prescribe the contractor’s obligations with respect to coordinating and interfacing the works with any third-party contractors and consultants that have been engaged. This includes prescribing detailed timing and programme requirements which ensure the works are scheduled in a manner that minimises disruption to guests and other users.
Delay Damages: Arguably the most important date in the project programme is the completion date. Any delays in handover can have a significant cost and reputational impact on the hotel operator who will have invariably already set a date by which the project must enter commercial operation in order to receiving paying guests. To mitigate against this delay risk the construction contract should include a detailed delay damages regime which affords the employer the right to levy delay damages for contractor culpable delay. This should be a quantified amount that ensures the employer is adequately compensated for any potential loss, damage or other cost it may incur due to the works not being completed on time. This should also be coupled with an acceleration mechanism which requires the contractor to accelerate (at its cost) where actual progress of the project fails to correspond with the agreed programme.
Operation & Maintenance: From an employer and contractor’s perspective, responsibility in respect of the works significantly diminishes on completion. For a hotel operator however there remains the need to ensure the facility is correctly operated and maintained. It will therefore be important to ensure a well-draft operation and maintenance agreement is entered into which clearly prescribes the scope of services required, each party’s rights and obligations, including any objective key performance metrics (or ‘KPIs’) that must be achieved including the penalties that may be imposed if these are not satisfied by the appointed service provider.
The Middle East hotel market is undergoing a period of significant growth. With demand for travel in the region projected to only increase, to stay competitive, developers, owners and operators should ensure they are alive to and adapt with these changing market trends.
Appropriate consideration should also be given to the myriad of legal, technical and commercial issues that can arise on a project, which should be appropriately addressed in good time at an early stage in the procurement process and documented in a robust and well-drafted construction contract.
For further information, please contact Leith Al-Ali.
Published in June 2023
