Middle East hotel investment booms

Trust Prince Walid bin Talal to pick a winner. No one can forget his continued investment in Citigroup in the mid-1980s, which was a major factor in making the prince one of the world's richest men, with a net worth of $20 billion. Now bin Talal seems to have spotted long-term potential in the Mideast hotel sector, once again defying expectations.

Bin Talal recently raised his equity holdings in the Fairmont and Movenpick chains, putting $400 million into projects in Lebanon, Egypt and Dubai. His $140 million Movenpick resort in Beirut, which opened in the summer, has already had an overwhelming response; every one of its $300,000 chalets was sold prior to the opening. And the prince is not stopping there: a 250-room Four Seasons property is being built in the Lebanese capital.

Nearly 150 new hotels are being developed across the region over the next four years. Indeed, the sector is booming, and banks seem only too willing to open up their vaults to these investments, despite the sector's long return on investment cycle.

The Dubai government has plans to include 80 hotels on the two artificially created islands that make up the Palm Project. Meanwhile, within months of the opening of a Fairmont property in Dubai, Walid bin Talal entered a joint venture to develop a $20 million Movenpick property in the emirate.

Not to be outdone, Bahrain is working on three projects where hotels will play a major role. There is Amwaj Islands project, plus the beach resort developments of Durrat Al Bahrain and Al Dana Resort. To the surprise of many, the island state took in about 4 million visitors in 2001, placing it among the top three Middle East destinations.

Saudi Arabia, with a focus on boosting tourism within the kingdom, has a range of new projects in the works, and has realized that untapped destinations such as Medina have a great deal of potential. Qatar, too, has earmarked a multi-million dollar budget to develop its infrastructure and hotel sector.

Across the Middle East, hoteliers are eager to put the immediate aftermath of September 11th behind them. At the height of the crisis, there was a precipitous 40-50 percent drop in average occupancy rates at hotels across the region. The last quarter of 2001 may well have been the most difficult to date for the Middle East hotel sector, and there was a consensus of sorts that recovery would take a long time.

Leading chains either laid off staff or asked all non-essential staff to take long periods of unpaid leave. Rates were slashed across the board to entice nervous travelers back. But there was no getting around the strict ban imposed by multinationals on their executives flying into the Middle East unless absolutely necessary. Leisure travelers preferred to stay away as an undercurrent of anti-Western sentiment manifested itself in the region.

Some industry sources even resorted to spin in a bid to convince travelers that everything was normal - the general manager of one of Dubai's most prestigious hotels issued statements to the media that he had over 90 percent occupancy and that there were no layoffs. In reality, his hotel was recording 20 percent occupancy and at least 60 staffers were laid off.

However, by the start of the second quarter of 2002, the numbers started to pick up, taking much of the industry by surprise. The summer months - a traditionally weak spot in the hotelier's calendar - were particularly successful.

"It is remarkable that the UAE has managed to bounce back quickly since September 11th. The leisure market has picked up as well, which is largely a result of immense government support," said Guy Epsom, regional director of sales and marketing for Hilton International.

"The market that has been slow to pick up is meeting, incentives, conferences and exhibitions, but there are signs it is now picking up speed."

Even the most optimistic projections would have failed to predict the actual number of tourist arrivals streaming into Egypt and Lebanon in 2002. This was despite the near constant strife in Palestine and fears of a conflict in Iraq, which have resulted in a spate of travel advisories from Western embassies.

The Egyptian hotel industry has had one of its strongest performances in years. This has given fresh impetus to the new hotel developments in and around Sharm El-Sheikh, which at the height of the 9/11 crisis faced the possibility of costly delays.
Leading chains, such as Hilton and InterContinental, are moving forward with their commitments to the Egyptian and Lebanese markets.

Hilton will open five new properties in Egypt by 2005, while two projects are due for completion this year in Lebanon. InterContinental, for its part, has initiated a major refurbishing of its five hotels in Egypt and three in Lebanon as part of a global $1 billion program.

Hilton's Epsom explains the chain's commitment to new and existing developments: "Business and leisure travel continues to become an increasingly integral part of everyday life. Regional airlines are continuing to expand and develop new routes. As tourism boards, along with hotels, market the region, there will be continued demand for hotel accommodation for the inflow of travelers."

This part of the world may also benefit from tragedies elsewhere, the case in point being Bali. For the sun-seeker, the likes of Dubai, Sharm El-Sheikh or Beirut may well be perceived to be much safer in the long term. However, there are the skeptics who believe that some regional destinations, particularly Dubai, are moving too fast to create more capacity capacities in the sector.

Already, the number of available four- and five-star hotel rooms in Dubai has shot up to 16,000 from 9,000 just four years ago. And promoters balk at any suggestion that they should be investing in niche segments, or even consider three-star hotels or serviced apartments.

Putting 80 hotels onto the two islands of the Palm Project is thought excessive by some, but the project's promoters have attracted an impressive cast of developers for the initial lot of hotels. But what would such a concentration of hotels mean for the 400-odd hotels in the UAE, over 200 of which are in Dubai alone?

According to one industry observer, "For the hotel chains, this region still represents growth in their global context. This may be one reason why many would still opt to expand their presence in the Middle East. But caution has to be the watchword."
Save in a few cases, the average room rates in the region have continued to drop. Consequently, gross operating margins are under constant pressure from increased competition among chains and the sector's ever-expanding capacity.

There is already tension in the relationships between the owners of properties and the hotel chain's management. A leading five-star property in Abu Dhabi was the scene for such a strained relationship, which led to the unceremonious exit of the hotel chain from the management contract years before it was due to expire.

Another chain was brought in to take over the management. But this chain recently decided to pull out, citing factors such as delay in meeting objectives. Recently, the owners of the property decided to renew their ties with the previous hotel chain.

In Dubai, a leading European hotel group saw the property owner reneging on the terms of the contract, leading to the former's exit. According to sources, legal action is pending in the UAE courts on the issue. It looks like both parties are in for a long battle.

Saudi Arabia is another interesting case in point. With the authorities' historical reluctance to open up the country to overseas travelers - not to mention the many restrictions that are placed on entering the country - the kingdom does not fit the profile of a natural tourist destination.

However, the authorities do believe they are on to a good thing by targeting the devout Muslim traveler, especially to destinations such as Mecca and Medina. Another potentially lucrative source of tourist dollars would be Gulf travelers, who have recently demonstrated a clear preference for regional destinations.

Epsom believes that the kingdom has lots of potential. "Saudi Arabia has a huge and constantly growing domestic tourism market," he says, "and is cleverly developing tourism from outside, through the religious visitors who come to visit the holy sites. We witnessed an increase of 4.5 percent in year-on-year arrivals from the Middle East. Some foreign companies are being allowed to develop its mineral wealth. These factors will certainly ensure growth in the hotel business."

So what should the prospective investor in a hotel project in the Middle East do? Refrain from taking the plunge on the grounds that there is an overcapacity problem in the sector? Or should he take a tip or two from Prince Walid bin Talal, who did not become one of the richest men in the world by taking inspired guesses? The next couple of years should provide some clear answers.