Complex Made Simple

A tale of three old and new hotels in Dubai, London and Makkah

"Three hotels with whom I have deep emotional ties have, or will, make international news this week," says Matein Khalid, investment expert.

The fates of all three hotels tell harrowing but also hopeful tales about the financial markets and hospitality business in the Middle East The news that the billionaire Barclay brothers plan to sell the Ritz Hotel in London’s Mayfair/Green Park for £700 million ($918 million) did not surprise me at all There is no doubt in my mind that investing in asset light, long lease four star branded hotels in Makkah is the most profitable yet defensive real estate investment asset class in the world

Shangri La Hotel, Dubai

Three hotels with whom I have deep emotional ties have, or will, make international news this week – the Ritz Hotel in London, the Shangri La Hotel on Shiekh Zayed Road, Dubai and Asas Capital’s Park Regis Hotel, scheduled to open in March 2020 in Makkah, Saudi Arabia.

Shangri La Hotel

The fate of all three hotels tell harrowing but also hopeful tales about the financial markets and hospitality business in the Middle East. I was horrified to read that the Shangri La Hotel in Dubai has been sold in auction to an anonymous bidder on the Emirates Auction platform for the minimum bid of AED 700.2 million ($190.6 mil). I have loved this hotel’s central location on Sheikh Zayed Road, its excellent and discreet business center, its amazing Vietnamese and Chinese restaurants and, above all, Dune Café which I always considered the chill-out drawing room of downtown Dubai. I cherish the memory of a three hour dinner at the Hoi An with the then Vietnamese ambassador to the UAE, a gentlemen who survived Nixon’s napalm bombing of Hanoi in 1972 express his delight at his country’s reconciliation with the US, France and China – now that is what I call class and His Excellency told me Hoi An was the only authentic Vietnamese restaurant in Dubai. The Shangri La in Dubai always evoked the charm, ethos and luxury of the Asian/Hong Kong hospitality milieu in the heart of Dubai to me.

(Hoi An restaurant. Image: Shangri La Hotel)

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Frankly, a $190.6 million price tag for a 41 floor tower, five star luxury hotel seems low to me. Yet the circumstances of the hotel’s sale reflects the grim realities of the post 2015 oil crash and economic debacle in the Gulf. The Shangri La was sold by First Abu Dhabi Bank at auction after its Abu Dhabi based owner, the family owned contracting firm Al Jaber Group was forced to undergo a $1.5 billion debt restructuring with its syndicate of bank creditors. The tragedy of Al Jaber Group’s catastrophic debt debacle is a tale of mismanagement and excess well known to insiders in UAE banking and finance. Now it is evident that its main creditor First Abu Dhabi Bank accepted a minimum auction bid of AED 700.2 million, selling a trophy asset in a glutted five star hotel bear market to offset its loan exposure to Al Jaber. This is a sad but cautionary moment for UAE family offices on the fatal risks of excessive leverage and lack of asset diversification, one whose macro lessons I will never forget. It is just not a good idea to invest in a fleet of private jets and yachts with borrowed money.

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Ritz Hotel

The news that the billionaire Barclay brothers plan to sell the Ritz Hotel in London’s Mayfair/Green Park for £700 million ($918 million) did not surprise me at all. After all, the Barclays paid a mere £75 million ($98 million) for the same hotel in 1995, a property that is, frankly, stuffy and old fashioned (but so quintessentially faux-English!). For sheer luxury and discretion, I do not believe the Ritz can compete with the Lanesborough on Hyde Park Corner, where every room has a personal butler and GCC royal celebrities in the lobby are a common sight, as I can attest from memorable stays there a decade ago. Yet the Ritz has charm, pedigree and unbeatable location at the edge of Mayfair/St. James in its favour – not to mention the English high teas I have enjoyed since I was a boy with my parents on trips to London Town.

The regional press speculates that Saudi Arabia’s Sidra Capital will bid for the hotel on behalf of some of the kingdom’s leading families for £700 million plus. At this nosebleed price, I doubt if the Saudi investors will be able to make money in a Darwinian market in post Brexit Britain. As Gulf investors have learnt the hard way, trophy assets in London’s West End bought at inflated prices with borrowed money can hemorrhage cash for decades. I just do not believe even the luxury grand-dame hotel in Mayfair makes financial sense at £700 million and chump change. Yet my emotional umbilical cord to the Ritz London as a guest and well wisher will remain intact no matter who owns it.

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Park Regis Hotel

Asas Capital’s Park Regis Hotel in Makkah’s Ibrahim Al-Khalil Street has dominated my life since March 2016, when the project was in its planning stage. I raised the capital for this fabulous 338 room hotel and Asas Capital’s project team in Makkah constructed and furnished it at a cost of only 440 Saudi riyal ($117) per square foot. Since I passionately believe that the Gulf’s developer upfront premium model is immoral and inflicts excessive financial risk on the buyer/homeowner, we invited our investors to partner with us at SAR 440 per square foot, the exact cost of construction and furbishment. Our – and mine – real financial payoff will come when this hotel and its sister hotel (total 682 rooms) tower on the other side of the street, are sold to a strategic buyer, a Saudi REIT or listed in an IPO on Tadawul’s growth exchange Nomu.

In Wall Street, I learnt that the big money secret in real estate is to always invest in an “asset light” business model that can be operated for high cash annual dividends and then floated, with a dollop of cheap, collateralized bank leverage on a local stock exchange where the retail investor desperately seeks a high yield, recognizable brand asset. This was the model of the Blackstone/Hilton Hotels management buyout that was the most profitable LBO in the history of global hospitality and Wall Street private equity.

Religious tourism is a national priority for the Saudi government, as its dramatic liberalization of Umra visa rules in 2019 attests. There is no doubt in my mind that investing in asset light, long lease four star branded hotels in Makkah is the most profitable yet defensive real estate investment asset class in the world, let alone the Middle East. Why? Makkah, a holy city for 1.6 billion Muslims worldwide with a 1410 year old tradition of pilgrimage, is the highest source of inbound foreign tourism in Saudi Arabia. Vision 2030, the kingdom’s blueprint for economic transformation, aims to triple the number of Haj/Umra pilgrims to 20 million visitors in the next five years.

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The House of Saud derives its legitimacy from its role as the custodian of the Islamic pilgrimage. Saudi Arabia’s founder King Abdul Aziz united the Arabian tribes to establish the Saudi kingdom in 1932. Religious tourism, while 5% of the Saudi GDP, generates hundreds of thousands of jobs for young Saudi men and women, a policy priority of mission critical importance for the Royal Court and Council of Ministers.

This is the reason successive governments since the reigns of Kings Faisal (1964-75), Khalid (1975-82), Fahd (1982-2005), Abdullah (2005-15) and Salman (2015-present) have spent at least $50 billion in infrastructure projects to facilitate and expand the pilgrimage in Makkah. The Saudi government has expanded the perimeter of the Grand Mosque to accommodate 2 million pilgrims, increased the capacity of King Abdulaziz Airport in Jeddah, established a high speed rail service to link Makkah, Madina and Jeddah and expanded the highway routes into Markaziyah, the heart of Makkah.

The crash in crude oil prices in 2015-16 has galvanized Saudi policymakers to focus on religious tourism and only enhanced the strategic importance of the Hajj and Umrah pilgrimage to the Saudi economy.

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Since land prices in Makkah are among the highest in the world and 85% of its branded (international hotel operator) hotels are five star, my Saudi partners and I decided to focus on a branded four star hotels with an average daily room rate (ADR) of $105 – 110, constructed on thirty year leases granted by local Waqfs (Islamic endowments) with no inflation clauses even though the Saudi CPI is 4% per annum. The 30 year Waqf land lease can be renewed in 2048 as we have the right for first refusal when the lease is repriced 28 years from now since construction took two years at a concessional rent.

Efficient project management, a 30 year non-commercial Waqf land lease, a world class hotel brand owned by a Tokyo Stock Exchange listed hotel conglomerate Seibu Holdings, (owners of The Prince Hotels brand in Japan) were the ballast we needed to develop this amazing 338 room hotel at a cost of a mere $25 million or $70,000 per room. The Park Regis Makkah will open for business and a Big Four feasibility study model projects 12 – 14% annual cash on cash dividend yield and a gross leveraged IRR of 33% based upon $105 ADR and a mid 50% occupancy ratio (the real time occupancy ratio for branded Makkah hotels was 68% in 2019).

Since I am capital markets specialist, the real juice in this hotel project is not the annual dividend paid out every three months to our investor syndicate led by Asas Capital but the potential to double the NAV of the project when the hotel is finally floated to the public in an IPO or sold to one of the fourteen Saudi REIT’s who are desperate to acquire long lease, 12% plus annual income generating projects in the kingdom. So, yes, much as I love to sip coffee and tea at the Ritz London or Shangri La Dubai with my friends and loved ones, my real emotional and financial bond is with a hotel I helped create – the Park Regis Hotel Makkah.

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