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
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.