In­vest­ment essen­tials

In our lat­est in­ter­view, we talk to James Wrenn, Se­nior Man­ager, Col­liers In­ter­na­tional, on the var­i­ous forms of ho­tel in­vest­ment avail­able across the re­gion, both tra­di­tional and al­ter­na­tive

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De­vel­op­ment

The most com­mon form of ho­tel in­vest­ment in the re­gion con­tin­ues to be in de­vel­op­ment, whereby en­ti­ties buy or are passed the un­der­ly­ing land, and de­velop a ho­tel project on a site by them­selves, or via some form of joint ven­ture. Many of the re­gion’s most iconic ho­tels have been de­vel­oped by high-net-worth fam­i­lies, semi-gov­ern­men­tal de­vel­op­ers, govern­ment min­istries or funds, or spe­cific tourism de­vel­op­ment funds through this model. Given the am­bi­tious plans of re­gional gov­ern­ments to con­tinue to ex­pand and en­hance tourism across the Mid­dle East, de­vel­op­ment is ex­pected to re­main at the fore­front of in­vest­ment in the years to come. Dubai, in par­tic­u­lar, is wit­ness­ing a con­tin­ued fo­cus on de­vel­op­ment within the mid-mar­ket lodg­ing sec­tor, es­pe­cially in the build-up to Expo 2020. De­vel­op­ers are show­ing them­selves keen to ex­plore this seg­ment of the mar­ket, which is tra­di­tion­ally more ro­bust dur­ing dif­fi­cult trad­ing cy­cles. This trend, cou­pled with lower de­vel­op­ment costs and the op­por­tu­nity for typ­i­cally higher re­turns at present, ver­sus op­por­tu­ni­ties in the up­per-up­scale/lux­ury seg­ments, is con­tin­u­ing to make the mid-mar­ket ho­tel space an at­trac­tive de­vel­op­ment con­sid­er­a­tion. Although there is a big drive across not only Dubai, but the broader re­gion, to­ward the mid-mar­ket space, the de­vel­op­ment of the lux­ury arena will re­main a key char­ac­ter­is­tic of re­gional hos­pi­tal­ity mar­kets. The re­cently an­nounced Red Sea project in Saudi Ara­bia, which will see the de­vel­op­ment of ap­prox­i­mately 50 is­lands off the west­ern coast of the coun­try into a world-class lux­ury tourism des­ti­na­tion, is tes­ta­ment to this.

As­set sales

In­vest­ment in the form of pur­chas­ing ex­ist­ing ho­tel as­sets hasn’t fea­tured widely in the re­gion’s real es­tate mar­kets to date, un­like more ma­ture mar­kets, such as those of Europe and North Amer­ica, where the vol­ume of as­set sales is much higher. Most de­vel­op­ers/in­vestors who con­structed ho­tel as­sets in the Mid­dle East re­gion have tra­di­tion­ally adopted a ‘build and hold’ strat­egy. How­ever, we are cur­rently see­ing a grow­ing num­ber of in­quiries from own­ers who are open to ex­it­ing their ho­tel in­vest­ment(s). A key rea­son for this is the in­creas­ingly chal­leng­ing trad­ing cli­mate. Although, for the most part, ho­tels are con­tin­u­ing to pro­duce healthy lev­els of prof­its, prof­itabil­ity has, on the whole, been down on pre­vi­ous years. Ad­di­tion­ally, we have seen a grow­ing num­ber of small and medium-sized de­vel­op­ers/in­vestors en­ter­ing the ho­tel de­vel­op­ment space over the past decade or so, mark­ing a de­par­ture from their tra­di­tional area of ex­per­tise in the res­i­den­tial, re­tail and of­fice seg­ments. Many of these de­vel­op­ers/ in­vestors are open to the idea of sell­ing their ex­ist­ing ho­tel in­vest­ments, as they move to con­cen­trate on their core busi­ness(es). How­ever, the price they are will­ing to ac­cept to dis­pose of their ho­tel

as­set(s), is of­ten un­re­al­is­tic, fail­ing to match what a buyer would be will­ing to pay. On the buyer’s side, there re­mains a strong co­hort of in­di­vid­u­als, funds and ho­tel groups in­ter­ested in pur­chas­ing trad­ing as­sets in the re­gion, but un­able to in­vest, due to a lack of suitable op­por­tu­ni­ties. Go­ing for­ward, how­ever, we ex­pect pric­ing lev­els be­tween sell­ers and buy­ers to edge closer to con­ver­gence, with a higher vol­ume of as­set trans­ac­tions tak­ing place, sup­ported by the in­creas­ing num­ber of de­vel­op­ers/in­vestors re­fo­cus­ing on their core busi­ness(es) and be­gin­ning to exit from the more spe­cial­ized ho­tel sec­tor.

Al­ter­na­tive ho­tel in­vest­ments

For in­di­vid­ual in­vestors who are keen to ob­tain ex­po­sure to the hos­pi­tal­ity sec­tor, es­tab­lished op­por­tu­ni­ties ex­ist in the ho­tel-branded res­i­den­tial space. Dubai has been at the fore­front of these open­ings for a num­ber of years, of­fer­ing units that are avail­able in both ex­ist­ing and up­com­ing (off-plan) schemes. Typ­i­cally, buy­ers can choose from pur­chas­ing a unit within a ho­tel de­vel­op­ment, which they can ei­ther live in or use as a sec­ond home, or opt to join a rental pool scheme and have their unit man­aged by the ho­tel op­er­a­tor, while re­ceiv­ing an in­come. It’s worth not­ing that some of these ho­tel-branded res­i­den­tial schemes have fixed con­di­tions on how the unit can be used and join­ing rental pool scheme may be manda­tory. In many cases, most no­tably un­der a manda­tory rental pool ar­range­ment, de­vel­op­ers are of­fer­ing guar­an­teed re­turns for in­vestors in the ini­tial years of the in­vest­ment, in the re­gion of 6 and 10 per­cent. The in­tro­duc­tion of ho­tel fund schemes has also be­come a re­cent fea­ture of the mar­ket in the UAE, pro­vid­ing in­di­vid­ual in­vestors with an op­por­tu­nity to pur­chase a share of a ho­tel scheme. The funds are be­ing launched for a pe­riod of be­tween seven and 10 years, pay­ing in­vestors an an­nual coupon, to­gether with a lump sum at the end of the term. These var­i­ous op­por­tu­ni­ties en­able in­di­vid­ual in­vestors to gain ex­po­sure to hos­pi­tal­ity in­vest­ment, away from the tra­di­tional forms of de­vel­op­ing or buy­ing ho­tels, through ho­tel-branded res­i­den­tial in­vest­ment, or by buy­ing into a fund. In the fu­ture, the po­ten­tial launch of spe­cial­ized hos­pi­tal­ity real es­tate in­vest­ment trusts (REITS) in the re­gion is an­other pos­si­bil­ity. These op­por­tu­ni­ties and po­ten­tial open­ings not only of­fer in­di­vid­ual in­vestors the chance to ‘get in on the ac­tion’, but are also tools used by ho­tel de­vel­op­ers/ in­vestors to raise fi­nance to fund projects.

Although there is a big drive across not only Dubai, but the broader re­gion, to­ward the mid­mar­ket space, the de­vel­op­ment of the lux­ury arena will re­main a key char­ac­ter­is­tic of re­gional hos­pi­tal­ity mar­kets

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