Hotel Survey - Outlook,

INTERNATIONALHVS Market Trends and Opportunities

This report is produced by the London office of HVS International 2007 Edition

Hadrien Pujol and Bernard Forster

INTRODUCTION Table 1 Performance of First Class Hotels in the Middle East 1994-06 AND HIGHLIGHTS

● The HVS Middle East Hotel Survey for 2007 features 150 hotels totalling 45,000 rooms. Our sample includes branded four-star and five-star hotels, but we have excluded certain super-luxury hotels as these could skew the results of this survey. We only select hotels with more than three years of operating history in our annual survey to avoid distortion due Source: HVS International Research to the initial years of a hotel operation; Table 2 RevPAR vs GOPPAR Trends 2006 (US$)

● Using HVS’s extensive database of hotel operating results for the Middle East, developed with continuous support from all the major hotel companies present in the region, we prepared a GOPPAR (gross operating profit per available room) analysis for each market;

● 2004 and 2005 witnessed continued

growth for all -related indices Source: HVS International Research and Analysis in the region. In this regard, we ● Hotel gross operating profits grew on alternative accommodation. Other consider 2006 to be a further step average by 9%. GOPPAR improved reasons for this modest downturn in toward a more ‘mature’ market. Some from US$85 in 2005 to an average of occupancy have been the conflict in markets are still experiencing US$92 in 2006. The growth in , instability in and significant growth but, in general, GOPPAR is largely attributable to the tension over the energy programme growth is slowing down. Occupancy growth in RevPAR (both at around in Iran, resulting in tourist arrivals for among quality hotels decreased by 9%). This highlights the weight of the region growing below the world two percentage points to 71% in 2006. rooms departmental profits in a average, in 2006. In terms of average Average rate for the region increased hotel’s profitability; room rate the increased liquidity and by approximately 11% from, US$125 disposable income from regional in 2005 to US$139 in 2006. The ● With the exception of and travellers and the continuing resultant RevPAR (rooms revenue per in and in appreciation of the euro (Europe available room) posted a further 9% the UAE, most markets experienced a being the largest feeder market after increase to US$98 in 2006 when modest decline in occupancy, as room regional travellers) against the US compared to significant rises rates were increased, which had an dollar (the currency to which most experienced in 2005 and 2004, of 23% effect on demand as price sensitive currencies in the region are pegged) and 16%, respectively; customers were displaced to have had a beneficial impact;

HVS International Middle East Hotel Markets - Outlook, Trends and Opportunities 2007 1 increasingly look at the opportunities Table 3 Winners and Losers – Percentage Change in RevPAR in 2006 arising in the region from the diversification and privatisation programmes. Dubai, , , and , where leisure tourism is predominant, are benefiting from rising global economies and continuing appreciation of the euro.

Tourist arrivals in the region continue to account for less than 5% of the total arrivals worldwide. According to the World Travel and Tourism Council Source: HVS International Research (WTTC), travel and tourism is expected to grow by 5.9% in 2007 and by 4.7% per ● In terms of GOPPAR, is What are the Trends? annum, in real terms, between 2008 and the clear winner in 2006 with a 50% 2017. Main access to the region is by air, increase in GOPPAR over 2005, to with Middle Eastern countries setting The Middle East remains the fastest US$130. Riyadh experienced growth out ambitious airport expansion plans, growing region in terms of tourism of 42% while for Dubai and Muscat while three national carriers (Emirates, arrivals. According to the World GOPPAR increased by 32% and 28%, Tourism Organisation (WTO), figures Airways and Etihad Airways) respectively. On the other hand, show that while the number of tourist are establishing themselves as global and Damascus experienced arrivals worldwide has grown at a players. sharp declines of 37% and 15%, compound annual rate of 3.7% over the respectively. We note that the highest past decade, in the Middle East growth GOPPAR recorded was at quality Airports and Airlines reached 10.2%. We note that the pace of hotels in Doha at US$267. The lowest growth slowed in 2006, and the war in GOPAR recorded was for the Cairo – Airport passenger counts are important Lebanon and the resultant instability in Pyramids hotel market at US$30; indicators of hotel demand. We note the neighbouring countries (Jordan and that trends showing changes in ) has certainly played a role in ● Our general outlook for the hotel passenger counts reflect business reducing growth. industry in 2007 and 2008 is positive activity and the overall economic health although with approximately 50,000 of an area. As illustrated in Table 6, Growth of tourism in the region is new rooms entering the different trends in tourist arrivals and passenger mainly driven by intra-regional countries in the region, a market movements are almost identical which visitation. With the exception of Dubai, correction is likely to happen with is further demonstrated by a correlation Arab visitors account for the majority of lower occupancy levels and declines coefficient of 0.99. tourists in the region. The increase in in average rate, especially in the UAE disposable income and liquidity and Qatar, as the new supply is Airport authorities are planning generated by high oil prices is a primary absorbed. The long term outlook for major construction projects (airport driver of visitation. Tourist arrivals the region as a whole, however, expansion, building of dedicated from the Americas and Europe are remains positive. terminals for low-cost airlines and so dominated by corporate travellers who forth) to match the projected growth in Table 4 Winners and Losers – Percentage Change in GOPPAR in 2006 passenger numbers. Airlines and airports throughout the region are upgrading and extending their fleets and infrastructure. It is estimated that authorities are investing approximately US$25 billion in airport construction projects in the region with the UAE accounting for nearly three quarters of the region’s airport investments.

According to the International Air Transport Association (IATA), growth

Source: HVS International Research in passenger movements is forecast at

2 Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 HVS International Table 5 Worldwide Tourism Trends and Distribution 2005-06 Foreign Direct Investment

According to a survey of global foreign direct investment (FDI) flows by the United Nations Conference on Trade and Development (UNCTAD), the Middle East attracted US$43.3 billion of FDI in 2006 compared to approximately US$33 billion in 2005.

The high level of liquidity and strong oil prices generated greater investor interest for the growing domestic markets. Services are among the sectors attracting foreign investors. Similarly, there is a significant flow of FDI originating from the Gulf countries to the other Arab nations, mostly in real estate developments.

Hotel Performance and Investment

Tables 9, 10 and 11 illustrate average Source: World Tourism Organisation annual occupancy, average room rates 6.9% per annum in the period 2006-10. Future contenders in the Middle East skies achieved and RevPAR for the different The Middle East is geographically well are the low-cost carriers. Low -cost airlines markets we covered in the Middle East located as a hub for Europe-Asia Pacific would undoubtedly benefit from the hotels survey, for the period 1994-06. and Asia Pacific- routes. Modern highly urbanised and growing population, aircraft can fly direct from Doha to Los the absence of alternative transport modes Investment in hotels is increasingly Angeles or Dubai to Sao Paolo. We (such as rail) and the low penetration of becoming sophisticated. More expect Emirates, Qatar Airways and existing low-cost carriers (1.4% market innovative financing terms from Etihad to generate significant additional share according to the National Investor regional and international debt demand for hotel accommodation in compared to approximately 25% market providers require different approaches their respective hub with an increased share in Europe and up to 80% in Asia to project funding away from share of passengers in transit. For Pacific). These regional low-cost airlines historically low loan to value ratios. In instance, hotels in Doha are already include Air Arabia and Jazeera Airways the meantime, initial public offerings on benefiting from increasing passengers and will be joined by NAS Air and Sama the regional stock markets of hotel real in transit from Qatar Airways. Airlines in 2007. estate owning companies (such as Kingdom Hotel Investments) increase Table 6 Middle East Tourism Arrivals and Airport Passenger Movements 1995-06 the sources of finance for future developments. Numerous investment funds have been set up to tap into this growing market.

In terms of hotel asset classes, the development pipeline is no longer dominated by full service and luxury properties. Numerous projects have been announced by the likes of Ibis, Express by Holiday Inn, Tulip Inn and Centro by Rotana to develop networks

Sources: World Tourism Organisation estimates and Airport Council International

HVS International Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 3 This year, we have identified Table 7 Airport Expansion Projects approximately 253 hotels that are likely to enter the market throughout the region in the next four years. We estimate that the capital investment in these hotel real estate projects totals approximately US$16 billion.

The UAE accounts for nearly 50% of the new supply, followed by Qatar, Saudi Arabia and Jordan. Approximately 23,000 rooms are set to enter the market

Source: HVS International Research in 2007, 27,000 in 2008, 18,000 in 2009 and 13,000 in 2010. of branded limited service hotels in the now extending their search for labour to region. Accor and InterContinental new horizons. If we assume an We estimated the number of hotel Hotels Group appear to be the most employee to room ratio of 1.5 to 2.0 (due rooms branded or operated by the hotel prolific hotel operators in the region, in to the more significant food and companies listed in Table 12 to be terms of new developments. beverage operations at Middle Eastern approximately 47,000, a 55% increase on full service hotels), 123,000 to 166,000 their existing stock. The most active The increased prevalence of mixed-use additional employees will be required. operators in the region in terms projects is noticeable including shared This should be seen as an opportunity of brand expansion are Accor, ownership models, such as for the local labour pool, where InterContinental Hotels Group, Rotana condominiums and hotel residences, currently only Morocco, Saudi Arabia, Hotels and Mövenpick Hotels and while branded serviced apartment Egypt and Oman rely to a certain extent Resorts. components are being added to full on nationals. service hotels; While the construction of full service HOTEL and luxury hotels still represents a A growing threat to investors’ return in major part of the new supply, hotel the region is rising construction costs. DEVELOPMENT companies have recently started With the skyline of the Gulf dominated AND INVESTMENTS announcing the development of limited by cranes, costs have risen significantly service hotels. With the costs to develop in the last three years and are likely to Following the acquisition of the Le full service hotels on the rise, impact projected investment returns in Meridien brand in early 2005, Starwood notwithstanding the increasing price for the future. Hotels and Resorts topped the table in land for city centre locations in most of terms of geographical diversification the markets, limited service hotels According to HVS’s extensive database and the number of existing rooms in the require lower development costs in the of new developments in the Middle Middle East. InterContinental Hotels region of US$80,000 to US$100,000 per East and North Africa, we Group follows closely while Hilton room (excluding land) and the land on conservatively estimate some 82,000 Hotels Corporation and Accor’s which they are built is lower than those rooms (confirmed projects) will enter existing supply is mainly concentrated for full service properties. Furthermore, the market over the next four years. In in Egypt and Morocco, with 62% and these properties’ employees-to-room order to operate these properties 64%, respectively. ratio fall to 0.5-1.0 due to the limited successfully, owners and operators are food and beverage facilities on site Table 8 Investment Inflows 1990-05 (US$ millions) which helps to ensure higher margins, profitability and greater resilience during downturns.

Accor confirmed the signing of ten Ibis hotels and set a minimum target of 20 properties in the Middle East by 2020. Ishraq, one of the first regional hotel investment funds, is developing the Express by Holiday Inn brand from InterContinental Hotels Group. US$150

Source: UNCTAD million are being devoted to opening 20

4 Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 HVS International Table 9 Average Annual Occupancy 1994-06

Source: HVS International Research

Table 10 Average Rates Achieved 1994-06 (US$)

Source: HVS International Research

Table 11 RevPAR Performance 1994-06 (US$)

Source: HVS International Research

HVS International Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 5 Table 12 Hotels by Brand/Operator – Number of Rooms FUTURE TRENDS AND OPPORTUNITIES

The significant number of mega projects, infrastructure developments and marketing efforts undertaken by the different countries in the region are set to establish the region as a sustainable tourism destination in the future and to match the growing demand for tourism. Source: HVS International Research hotels in the Gulf (with the exception of Grace Leo Andrieu Hotels or Bvlgari in Although announcements for the Saudi Arabia). In addition, 23 properties AAA locations with a limited number development of limited service hotels in are expected to be built in Jordan and of units. the region have been made, we consider Lebanon and a further 12 in Saudi there is good potential for this hotel Arabia. Tulip Inn is also targeting Table 28 illustrates the future market asset class as the domestic demand for an expansion in the Gulf with share of the principal hotel companies leisure and commercial travel increases. nine properties currently under present in the Middle East and North We expect these properties to carry an development. Local hotel company Africa region. international or regional brand to Rotana Hotels will open four properties penetrate the market and benefit from in the UAE under its new limited market awareness and exposure. service brand, Centro by Rotana. Finally, property and investment fund Table 13 New Supply by Country (Rooms) Emirates, in a joint venture with the UK’s Whitbread, is set to roll out the latter’s Premier Travel Inn brand; and Yotel with the financial backing of IFA Hotels and Resorts is looking to revitalise and revolutionise the budget sector along with easyHotel’s brand of which Istithmar Hotels acquired the master franchise for the region.

2006 witnessed the emergence of new challenges both for developers and owners. With so many hotels under Source: HVS International Research development in markets such as Dubai, the bargaining power of the hotel Table 14 New Supply by Hotel Companies (Rooms) companies increased and the options in branding a property with a ‘new’ internationally recognised brand has reduced significantly.

We expect a need for professional asset management expertise in the short to medium term to maintain and monitor the trading performance of hospitality real estate investments in the region.

We expect the development of boutique hotels to increase in the short term with Source: HVS International Research Peninsula, Gordon Campbell Gray,

6 Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 HVS International Many Middle Eastern hotels Table 15 Hotels by Brand/Operator – Number of Rooms are government owned and, as privatisation programmes are increasingly applied in the region, there is an opportunity to create a more liquid and transparent hotel investment market, while realistic valuations should be based on earnings, rather than on investor sentiments.

Despite the continuing tension in the region, we remain optimistic and expect hotel operating performances in general to experience another good year in 2007, Source: HVS International Research assuming no significant political Dubai, Qatar, and Abu Dhabi Condominium developments with upheaval in the region. are currently experiencing a hotel rental pool programmes have yet to construction boom and any further emerge in a significant way, but the No investment decision should be made developments in these markets require absence of legislation and a regulatory based on the information in this survey. For the monitoring of the projects under environment in most markets for these further advice please contact the authors. progress, a careful analysis of demand types of investments will hamper their patterns and a ‘unique selling introduction in the short term; About our Team proposition’ before any investment decision is made. We consider that careful attention should HVS International has a team of Middle be given to customer and employee East experts that conducts our As hotel markets in the Middle loyalty in an effort to diversify the ‘hotel operations in the MENA region. The East become more sophisticated, experience’ from the competition while team benefits from international and professional third party services are satisfying all stakeholders. local cultural backgrounds, diverse required to match the challenges of academic and hotel-related experience, negotiating with a proposed operator. Some markets are likely to experience a in-depth expertise in the hotel markets More complex projects such as mixed- decrease in investment return for new in the MENA region and a broad use developments integrating ‘hotel projects due to increasing developments exposure to international hotel markets derivatives’ (residential components, costs, shortage of qualified labour and in Europe. Over the last 24 months, the branded residences, condominiums, the high level of new supply. team has advised on more than 100 and so forth) will require the hotels or projects in the region for hotel understanding of the risk profile Opportunities remain for investment in owners, lenders, investors and of the various asset classes under mixed-use developments, branded operators. Together, HVS has advised development and strong independent serviced apartments, timeshare units, on more than US$10 billion worth of feasibility analysis. branded limited service hotels and hotel real estate in the region. boutique hotels.

Table 16 Hotel Companies Surveyed Market Share

Source: HVS International Research

HVS International Middle East Hotel Markets - Outlook, Market Trends and Opportunities 2007 7 About the Authors INTERNATIONALHVS Offices and Services

Hadrien Pujol is an Associate Europe HVS Vancouver HVS Mt. Lakes, NJ Director with HVS’s London office. HVS London Suite 400 - 420 Boulevard He joined HVS in 2004 and has five Russell Kett 145 West 17th Street Suite 203 years’ operational experience in the Bernard Forster North Vancouver, BC, Mountain Lakes, NJ, 07046 hospitality industry in Europe. Hadrien Pujol V7M 3G4 (973) 335 0871 Originally from Carcassonne, France, Karen Smith (604) 988-9743 (973) 335 0871 (fax) Hadrien holds an MBA from IMHI Dominique Bourdais (604) 988-4625 (fax) (Essec Business School - France and HVS Executive Search HVS Boston Cornell University - USA) and Chris Mumford HVS Toronto 607 Boylston St. Diplomas in Hotel Operations from 6 Victoria Street 4th Floor the Lycée Hotelier Savoie - Léman, 7-10 Chandos Street Toronto, ON, M5E 1L4 Boston, MA, 02116 Thonon Les Bains and the Lycée Hotelier Quercy - Périgord, Cavendish Square (416) 686-2260 (617) 424 1515 Souillac. Hadrien is currently preparing his MSc in Corporate London, W1G 9DQ (44) 207 878 7700 (416) 686-2264 (fax) Real Estate Finance and Strategy at Cass Business School in HVS Newport, RI London. Since joining HVS he has advised owners on many (44) 207 878 7799 (fax) HVS Miami 327 Village Road hotel and hotel-related investment projects and strategic Tiverton, RI, 02878 HVS Hodges Ward Elliott 8925 SW 148th Street developments in Europe, the Middle East and Africa. (763) 591 7640 Charles Human Suite 216 Bernard Forster is a Director with Rudy Reudelhuber Miami, FL, 33176 Pascal Bichon (305) 378 0404 Asia & Australia HVS’s London office, heading the HVS New Delhi MENA region. He joined the (305) 378 4484 (fax) 1 Lancaster Place C-67, Anand Niketan company in 1997 from Accor Hotels New Delhi, ND, 110021 & Resorts where he focussed on London, WC2E 7ED HVS Dallas 44 207 257 2000 (91) 11 4166 3031 property management systems, yield 2601 Sagebrush Drive 44 207 257 2009 (fax) (91) 11 4166 3032 (fax) management and guest-history Suite 101 Flower Mound, TX, 75028 systems in Europe, the Middle East HVS Singapore HVS Madrid (972) 899 5400 and Africa. Previously, Bernard 79 Anson Road HVS Shared Ownership (972) 899 1057 (fax) worked in various operational Services #11-05 management roles for the Savoy Philip Bacon 079906 HVS Atlanta Group (now Maybourne Group) in London as well as for the (65) 6293 4415 2386 Clower Street Dolder Grand Hotel in Zürich. Bernard holds an MSc in c/ Velázquez, 80 6to Izq. (65) 6293 5426 (fax) Suite C101 Property Investment from City University, London; a BSc Madrid, 28001 Snellville, GA, 30078 (Hons) in Hotel Management from Oxford Brookes (34) 91 781 6666 HVS Shanghai (678) 639 3334 University; and a diploma in Hotel Administration from (34) 91 575 1450 (fax) 47th Floor, Unit 16, Hong Institut Hotelier ‘Cesar Ritz’, Le Bouveret, Switzerland. Kong New World Tower HVS Denver HVS Athens 300 Huaihai Zhong Road 1777 South Harrison Street 5th Floor Shanghai, 200021 17 Akadimias Str Suite 906 (86) 21 5116 2856 HVS SERVICES Athens, 10671 Denver, CO, 80210 (86) 21 5116 2882 (fax) (30) 69 7447 7713 (303) 512 1222 • Valuation Services (303) 691 3799 (fax) HVS Hong Kong North America 1-2/F • Consulting Services HVS New York 7883 S. Locust Court 24 Sai Kung Tai Street 372 Willis Avenue Centennial, CO, 80112-2426 Sai Kung • HVS Hodges Ward Elliott Mineola, NY, 11501 (303) 771 4104 (852) 2791 5868 (516) 248 8828 • HVS Shared Ownership Services (303) 290 6533 (fax) (852) 2791 5699 (fax) (516) 742 3059 (fax) • Development Services HVS Washington, D.C. South America HVS San Francisco 1300 Piccard Drive • Asset Management & Operational Advisory Services 116 New Montgomery HVS São Paulo Suite 102 Street Av. Brig. Faria Lima 1912 • Executive Search Rockville, MD, 20850 Suite 620 cj.7F (240) 683 7123 01452-001-São Paulo/SP • Organisational Assessments/ Performance Cultures San Francisco, CA, 94105 (415) 896 0868 (240) 683 7120 (fax) (55) 11 3093 2743 • Convention, Sports & Entertainment Facilities (415) 896 0516 (fax) (55) 11 3093 2783 (fax) HVS Chicago Consulting HVS Boulder 205 West Randolph Street HVS Buenos Aires • Food & Beverage Services 2229 Broadway Suite 1650 San Martin 640 - 4° Piso Boulder, CO, 80302 Chicago, IL, 60606 (1004) - Buenos Aires • Restaurant Management & Advisory Services (303) 443-3933 (312) 587 9900 (54) 11 4515 1461 (303) 443-4186 (fax) (312) 587 9908 (fax) (54) 11 4515 1462 (fax) • Gaming Services • HVS Compass Interior Design © 2007 HVS International. All rights reserved. • Marketing Communications Published by: HVS International, 7-10 Chandos Street, • Technology Strategies Cavendish Square, London W1G 9DQ • Hotel Parking Solutions Tel:+44 (20) 7878 7700 Fax:+44 (20) 7436 3386 • Golf Services For further information please contact: Hadrien Pujol - [email protected] • European Hotel Financing Bernard Forster - [email protected] or visit our website at: www.hvs.com

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