Middle East & North Africa hotel owners upbeat despite challenging market conditions

“I take comfort in the fact that in our industry, the basic requirements of having a good night's sleep and a great shower is here to stay. It cannot be disrupted. It cannot be digitized,” said Khalifa Bin Braik, managing director of hotels at UAE’s Majid Al Futtaim.

Like Braik, other hotel owners acknowledged the adverse economic impact of COVID-19 during the Arabian Hotel Investment Conference 2020 (AHIC), held online from September 29 to October 1. But instead of being preoccupied about lost earnings they are focusing on their long-term visions and express confidence in the sector.

The report “MENA Hotel Market Sentiment”, published in April by commercial real estate services firm Colliers International, echoes the owners’ positive attitude.

MARKET SENTIMENT

Colliers conducted interviews across 25 cities in the Middle East and North Africa, with the majority of respondents' investments being in Saudi Arabia, UAE, and Egypt. Over two-thirds of them own operational hotels, others have hotels under development.

Overall, 65% of owners will not scale back hotel construction or development; 35% will scale back due to COVID-19.

Other key findings:

• 52% of respondents expect to see development opportunities in the medium-term.
• 39% would like to focus on refurbishment and property upgrades, 26% on acquisitions, and 22% on restructuring.
• Only 7% of respondents said they do not see any opportunities in the medium-term.
• When it comes to expected changes to the industry in the long-term, over a quarter of the respondents (26%) believe the market will return to “business as usual”.
• In comparison, the vast majority (74%) agree the industry must be better prepared in the future for a similar type of event by implementing better crisis management planning.

ASSET DEALS

Notwithstanding this positive market sentiment, real estate professionals are keeping a very close eye on hospitality assets, considering the current economic climate.

“Hospitality assets transactions have gone down significantly to a level of 30% of previous years,” said Dubai-based Dr. Martin Berlin, PwC Partner & Global Deals Real Estate Leader, during AHIC.  

“However, we see parts coming back.”

Dr. Berlin pointed out that many of the published or executed deals in the second quarter were initiated and agreed upon before the crisis hit.

The third quarter, “a pure COVID-19 quarter”, according to Dr. Berlin, will give a clearer picture of business transaction.

GlobalData, an analytics company, reported that during August 2020, the global travel and tourism sector announced 115 deals. This is a 4.5% increase over 110 deals during the previous month.

“I haven’t seen distressed sales yet. I think a lot of people hold on and are betting a lot on the vaccine,” Dr. Berlin explained. But he anticipates that there will be divestments.

“I expect that it's more in the space of the mid-size hotels and the smaller groups.”

As valuations and cashflow have been down, Dr. Berlin predicts an opportunity for buying hotel real estate assets.  

“On the buyer side, private equity has built a lot of dry powder — $3.7 billion in private equity in the U.S, alone,” he said.

“This dry powder needs to be brought to work, and that opens the floor for acquisitions in the hospitality area.”

According to GlobalData, the notice of private equity, partnership, and equity offering deals increased during August. The number of venture financing, mergers, and acquisition and debt offering agreements decreased.

BULLISH

Rahul Chaudhary, managing director of Nepal-headquartered CG Hospitality Holdings, is one of the industry players waiting to pounce on distressed assets.

“CG is going to move forward towards an acquisition strategy that is going to be predominantly in the segment of wellness, leisure, and experiential,” Chaudhary said at AHIC.

“We believe that's how customer preference and customer behavior is shifting due to COVID-19.”

In June, the firm acquired two Fairmont properties in Kenya, adding 27 suites, 143 rooms, and 51 tents to its portfolio.

Chaudhary bought the two hotels for 2.8 billion Kenyan Shillings ($25.7 million) from Saudi conglomerate Kingdom Holding as Prince Al-Waleed restructured his assets, following his corruption-related detention, according to local news.

CG Hospitality’s portfolio comprises over 135 hotels and resorts in twelve countries and more than 95 destinations with over 6,000 keys.

By 2025, the portfolio is expected to grow to over 200 hotels and 10,000 keys.

OWNER REASSESSMENTS

Beyond strategy, hotel asset owners concentrate on a revitalized owner–operator relationship.

Taking the larger risk, asset owners expressed the need to be more immersed in operational activities as front-end actions affect their business.

Requirements include constant dialogue, more transparent fee structures, and return ratios.

Also, the title holders are concerned about using the discounted cash flow (DCF) model. Estimating an investment's value based on its future cash flows in the current climate is outdated as it doesn't reflect an asset's actual bricks-and-mortar value.

(Reporting by Petra Loho; Editing by Emmy Abdul Alim [email protected])

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