Opportunities in local hospitality sector attract major chains

Lease Contracts will continue to rule supreme for major chains casting and eye on opportunities in the local hospitality sector.
“You don’t have freehold in the best locations as a foreigner, that’s for sure,” says Sascha Lang, Director of Project Development Europe & Middle East, Shangri-La.
“But I think it will change, especially in Dubai. In the long run more and more owners are looking for lease contracts. For example in Dubailand foreign investors want to have land.
“But the land cost is tremendously high, so are building costs. That is why they are looking to go in with lease contracts.

Across prime Middle East destinations, the hospitality sector now operates mainly on management contracts and for good reason. “In the EU with management contracts you go nowhere as you don’t have such powerful companies anymore like here,” comments Lang.

“Here it is similar to Asia – you have a lot of financially powerful owners. They want to have an icon, they want to be proud of saying that they have a Shangri-La, Four Seasons, as my operator, but it is my building.
“It is still a bit of prestige thing, which helps companies of five stars deluxe to get nice management agreements.”

In addition, it is easier to operate in new markets with a local partner. Shangri-La goes for that option in India and the Middle East.
“Egypt wouldn’t work by owning ourselves. Lebanon can, but it is better to be in bed with someone who is locally established,” comments Lang. “For sure management contracts in this part of the world are still recommended.”

Accor Hospitality records a similar experience. “Local partners have more ability to retain land rights which speeds up our development. Otherwise you have problems of ownership and investment,” Says Phillipe Baretaud, the Development Director for the region.

“In Qatar even for an Emirati it is difficult to invest. The GCC has huge amounts of liquidity – so we do not need money but focus mainly on management contracts.
“And not franchise because we need to keep control over quality.”

The group still owns 25 percent of its hotels, primarily in Europe. This is despite a Continental trend of the last couple of years with an ‘asset light’ policy being adopted by the larger hotel groups such as the InterContinental Hotel Group.

“They sell the brand and the franchise under pure management without investment in the property. It is about listed companies which need to have more liquidity, a better debt ration and focus on management,” adds Baretaud.

Accor has seen a reason to lighten its ‘load’ to a lesser extent. Its 2010 development plan calls for just over 60 per cent franchise or management contracts worldwide.

“It puts worldwide pressure on development because your portfolio has to live on franchise or management revenues, and losing a lot of revenue generated by owning hotels,” the official adds.
“You need five managed hotels to offset what you have lost by selling another property in terms of revenues. You get the fees but you don’t get the bottom line.”

In other words, more liquidity is great, but it puts pressure when it comes to competing. “Hotel companies today are beaming brand sellers with huge investment in marketing as you have to convince investors that your brand provides the value you need to outperform the market,” adds Baretuad.

Asset Right vs. Asset Light

Accor therefore went for what Baretaud calls the ‘Asset Right vs. Asset Light’ policy. It uses the money ‘won back’ from sales wisely.

“We sell a lot of our hotels in Europe and America for variable leases or longterm management contracts. We then refinance by pumping this cash into strategic developments and acquisitions, equity shares and complementary opportunities in emerging countries,” he explains.

One strategy is to take advantage of joint ventures, as is the case in Pakistan. “We are willing to invest through partnership and manage on a joint venture basis, not franchise for quality control. Our investment is based on brand strategy, which means that we invest mostly in the budget segment but go for management in the four-and five-star segments,” Baretaud.

Shangri-La, meanwhile, prefers to own. Only about 13 out of around 50 hotels forming its portfolio are managed. “Owning ourselves means that we are not under pressure to just sign to grow like other companies with management contracts,” Lang explains.

“As our head office is in Hong Kong it is difficult to manage contracts with different owners. So where we do have to manage we keep it as simple as possible with least owners.” Lang explains. The Shangri-La properties in Abu Dhabi and Dubai for instance, have the same owner.

In addition, owning hotels as an operator can also makes specific sense depending on the circumstances. “We used to manage our hotel in the Maldives, but then the owner had financial difficulties and we took it over, he explains.

Other hotel group with intentions to expand in the Middle East might ‘mix and match’ between these strategies.