Middle East Strategy Advisors (MESA) predict challenges for GCC hotel owners searching for operators and brands

Throughout the 1980s and 90s, hotel owners and investors in the Middle East enjoyed a position of strength when negotiating management contracts with hotel operating companies. However, as Sven P. Gade, Director Travel and Tourism Development with MESA points out: "securing a good operator or finding the right brand for a hotel property will become increasingly difficult for owners of hotel properties in the GCC going forward".

Three key factors which strongly influence the relationship between hotel operators and owners are a) market supply and demand, b) the ownership/investment structure of a property and the c) level of branding in the micro-market.

The first factor is well covered by daily announcements. To elaborate on the latter two, in GCC countries, Middle East Strategy Advisors (MESA) conducted research into more than 500 existing (branded and non-branded) properties and approximately 140 planned hotel projects throughout the GCC. Their review covered hotel ownership structures, operating models and branding levels.

Market Supply

The supply-induced growth in tourism throughout the GCC region is giving rise to unprecedented hotel, resort and multi-use tourism development activities which is exciting and positive.

The growth also means that many four and five-star hotel properties are about to enter the market, looking for a quality brand operator and there are only a limited number of top branded hotels/resorts present in the GCC market. Brands already established in the GCC market might become less approachable for hotel owners. Alexis Dijksterhuis, Senior Consultant with MESA states: "many operators have a non-compete clause in their contract, limiting the opening of further properties within a defined geographic area. This restricts the expansion of the same brand within say, a city".

Even when several hotel properties with the same brand exist in a city - as is the case in the GCC - they effectively compete and dilute the profitability to their respective owners, as they target the same market segments an inappropriate strategy for any hotel brand or owner, particularly as supply density grows. Hence, the shortage of branded operators may turn the table in favour of hotel management companies.

Ownership/Investment Structure

Compared to other regions, GCC countries show a very high level of private sector ownership in hotel real estate, low institutional ownership and seemingly decreasing public sector involvement. Although it is sometimes difficult to assess the ultimate owner(s) of the property, the findings are intriguing. Glen Osmond, MESA's Managing Partner comments: "Over 70% of hotels in the GCC are owned by private sector entities; entities which are often unfamiliar with the technicalities of hotel operations. In other regions, the percentage is significantly lower and institutional and corporate owners employ hotel experts or experienced asset managers to ensure the performance of their properties." Private owners in the region will face tougher negotiations going forward and will have to secure industry knowledge in preparation, be it in house or insourced.

The data shows a marked reduction of direct government ownership in hotels over the last 20 years. Mr. Osmond explains: "In fact, many of those hotels are owned by hotel co-operations or hotel investment companies which in turn are fully or partly owned by governments following a privatization initiative. This marks a public sector reaction to growth trends and the perceived need for asset management to avoid underperformance. The public sector is in fact setting a trend for private owners and has prepared for turned tables already."

Level of Branding

Of the sample in MESA's research, the branded/non-branded ratio of hotels in GCC countries is 50:50. This puts the GCC squarely between the ratios of the USA (70:30) and Europe (35:65).

In the past the GCC region was not quite as attractive for hotel operators as Europe, where branding is considered a strong factor to improve property performance. At the same time, management agreements are not as standardized as in the USA where owners compete for operators and contract negotiations are less common. Over the last two decades, the GCC has been a phenomenon with high demand for brands, but favourable negotiation climate for owners. It appears that the GCC countries are moving towards USA market conditions where high levels of branding and growing supply will result in owners competing for operators.

Impacts

Until recently, the negotiations environment favoured hotel owners who are currently excited by the projected growth levels in GCC hotel supply. These owners, especially the high portion of private sector entities, should appreciate the impact of supply growth connected to the existing branding ratio: some of the more desirable brands will no longer be readily available. A single hotel brand can only be represented in any one destination with a limited number of properties. In other words, a destination such as Dubai can only sustain so many Fairmonts or Sheratons.

Owners in high supply locations who have contracted a hotel management company should be prepared to find their operator tempted to exit the property when contracts come up for renewal. Better locations or newer hotel properties may seek to attract operators with more favourable terms and conditions.

The next years will bring major change to the way branded and non-branded hotel projects are being managed. Sven Gade predicts: "there may well be a paradigm shift in the way hotel owners and investors interact with hotel operators. MESA has identified a number of likely impacts and developments". According to MESA, the industry in general and owners of hotel assets in particular need to prepare themselves for:

• Fundamental changes in the terms of management agreements
• More partnerships involving Joint Ventures and exclusivity agreements
• Arrival of brands hitherto without or with little presence in the Middle East
• Rise of existing brands from the Middle East which will expand into other regions
• Expansion into three star, two star and budget hotel market segments
• Increase in franchising and owner operated models
• More emphasis on professional assistance in operator selection and the development of operating models
• Professional asset managers representing ME hotel owners and investors

Faced with these major trend changes in the industry, owners and investors are increasingly securing professional advice to develop innovative operating models or identify the most suitable approach for their requirements. Hotel owners engage professional hotel asset managers who will ensure operating efficiency and optimization of capital performance in order to protect and enhance long-term asset value.

MESA tourism and hotel experts are convinced that the industry in the GCC will go through tremendous changes in the next five to ten years and are prepared to address these issues today. MESA assists hotel owners in all areas of hotel asset management and development, and hotel operators in developing appropriate strategies to anticipate and maximize upcoming opportunities.

A series of forthcoming articles will draw further on this feedback. A more detailed report will summarize the findings and expand on the main message of this release.