Middle East Hotel Markets – Outlook, Trends and Opportunities This issue has been published by the London Office of HVS International 2005 Edition Elie Younes and Bernard Forster from the rooms department on be, on average, 12% in 2004, which A Record Year! departmental profit and, thus, gross will undoubtedly whet the appetite operating profit (GOP); of local and regional investors; INTRODUCTION ∑ If we assume an average ∑ RevPAR to GOPPAR conversion development cost of US$185,000 per rates in the region range from 0.6 in AND HIGHLIGHTS room for our surveyed sample, then Syria to 1.2 in Egypt. Factors that ∑ HVS International’s Middle East the total return on investment from influence this conversion rate Hotel Survey for 2005 features 105 operating cash flow is estimated to include average rate fluctuation, hotels totalling 32,000 rooms. Our sample includes branded four-star and five-star hotels, but we have Table 1 Performance of First Class Hotels in the Middle East 1994-04 excluded super-luxury hotels as 80 120 these could skew the results of this survey; 75 ∑ 100 This year HVS International has 70 pioneered a profitability assessment 80 of the Middle East hotel industry. 65 An assessment of GOPPAR (gross 60 60 operating profit per available room; Ref: GOPPAR a Derivative of RevPAR, Occupancy (%) 55 40 Elie Younes and Russell Kett, HVS 50 International 2003) for each market 20 has been conducted by HVS 45 International’s expert Middle East 40 0 team. Our assessment is based on 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 our research and HVS Occupancy (%) Average Rate (US$) RevPAR(US$) International’s extensive expertise in the local, regional and Source: HVS International Research international hotel markets worldwide; ∑ Despite the continued political Table 2 RevPAR vs GOPPAR Trends 2004 (US$) turmoil in Iraq, the hotel industry in the Middle East had a spectacular 150 2004, achieving a ten-year record RevPAR GOPPAR performance and outperforming 130 some of the best-established international markets. Occupancy 110 among quality hotels increased from 67% in 2003 to approximately 72% in 2004. Average daily room 90 rate (ADR) for the region increased .......................................................Average RevPAR 04 US$ 73 by approximately 10%, from US$92 70 Average GOPPAR 04 US$ 62 in 2003 to US$101 in 2004. RevPAR ....................................................... as a result saw double-digit growth 50 of approximately 18% on 2003, registering US$73, the highest since 30 1994; ∑ Hotel gross operating profits grew 10 on average by 26%. GOPPAR Doha Dubai Beirut Kuwait Riyadh Muscat improved from US$49 in 2003 to an Jeddah Amman Manama Hurghada Cairo City Abu Dhabi average of US$62 in 2004. The Damascus accelerated GOPPAR growth is Sharm el Sheikh Cairo – Pyramids Cairo – Heliopolis attributable mainly to the strong Source: HVS International Research and Analysis impact of the incremental income HVS International Middle East Hotel Markets – Outlook, Trends and Opportunities 2005 1 of fully fledged monetary union Table 3 Winners and Losers – Percentage Change in RevPAR with a single currency in 2010 is Between 2003 and 2004 remarkable; barriers to the movement of goods, services, capital and labour have largely been 03 Growth Abu Dhabi eliminated; 04 Growth Amman ∑ Qatar continues to experience one Beirut of the strongest economic growth Cairo – City Centre rates in the region: GDP was Cairo – Heliopolis approximately 9% in 2004; Cairo – Pyramids ∑ GCC (Gulf Co-operation Council – Damascus predominantly oil producers) Doha countries are pressing ahead with Dubai their economic diversification Hurghada programmes, with the UAE (Dubai), Jeddah Qatar, Bahrain and Oman remaining Kuwait City the most committed and proactive. Manama We consider that a unified Middle Muscat East tourism strategy is vital as this Riyadh will restrict intra-regional competition; Sharm el Sheikh ∑ The non-GCC countries also –40 –30 –20 –10 0 10 20 30 40 50 60 70 80 experienced considerable economic Decline % Growth growth, which was driven mainly Source: HVS International Research by low interest rates and an improvement in domestic and international confidence and occupancy, facilities, revenue mix and private and public capital consumption; and labour costs; investment in the industry). ∑ The region remains highly ∑ Demand was boosted by an increase vulnerable to political instability in in regional tourism and by the Iraq, US sabre-rattling over Iran and improved awareness of European MACROECONOMIC Syria, and the continued tensions markets. The increase in ADR was between Israel and the Palestinians. attributable mostly to increased OVERVIEW However, since the election of demand, which stimulated hoteliers ∑ In 2004 the Middle East was the Mahmoud Abbas in succession to into increasing room rate. This was second-fastest growing region after the late Yasser Arafat as the new further enhanced by the continued China. Spectacular economic Palestinian leader hopes for a devaluation of the US dollar (the growth in GDP of more than 5% was potential peace process have been currency to which most currencies recorded in 2004, and this was raised which, if these hopes in the region are pegged), and hence attributable primarily to a materialise, will undoubtedly fuel the increased purchasing power combination of high oil prices, low economic growth and significantly (elastic demand) of the major interest rates and abundant improve international confidence non-dollar-denominated hard liquidity within the region. and thus direct foreign investments currencies; Expectations are that the region’s on all levels. ∑ Our general outlook for the hotel growth is likely to continue to be industry in 2005 and 2006 remains strong in 2005, although growth is OVERALL TRENDS positive in all aspects (operating expected to slow; ∑ performance, investment returns, ∑ The progress made towards the goal According to the World Tourism Organisation (WTO), the growth in the number of tourist arrivals in the Table 4 Real Gross Domestic Product Growth (%) region in 2004 was once again staggering in comparison to 2003. Forecast The number of tourist arrivals in 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 the Middle East in 2004 was up by 20% on 2003, and the Middle East Bahrain 3.1% 3.1% 3.1% 1.2% 5.2% 5.0% 3.8% 4.9% 5.6% 6.4 remained the world’s fastest- Egypt 5.1 5.9 5.0 3.1 3.9 2.5 3.0 1.8 2.7 3.8 growing region in terms of arrivals Jordan 0.8 2.7 2.2 1.5 2.5 2.8 3.6 3.1 6.4 6.0 between 1996 and 2004. This reflects both the potential of the tourism Kuwait 2.9 2.5 0.0 (0.5) 4.0 0.8 (2.0) 4.6 7.2 2.6 industry in the region and its Lebanon 4.0 3.5 3.5 4.0 0.0 0.8 0.9 2.0 4.0 4.5 resilience to political shocks; Oman 3.5 3.5 2.1 1.5 4.7 5.0 2.2 1.1 1.2 1.4 ∑ We consider that the growth in Qatar 8.9 10.5 3.2 3.3 4.3 5.7 4.6 8.5 8.7 8.3 tourism was driven mainly by increased intra-regional visitation Saudi Arabia 1.4 2.5 (1.0) 1.6 4.1 1.7 0.6 3.5 5.3 4.7 (an increase which has been Syria 5.5 4.1 3.4 4.0 1.5 1.6 2.2 0.9 2.2 1.9 noticeable ever since the events of 11 United Arab Emirates 3.0 1.0 (5.0) (1.2) 5.0 2.9 2.4 3.5 5.7 5.8 September 2001), increased Source: Economist Intelligence Unit, February 2005 international awareness of the region, the decline in the US dollar, 2 Middle East Hotel Markets – Outlook, Trends and Opportunities 2005 HVS International ∑ Table 5 Worldwide Tourism Trends and Distribution 2003-04 Most currencies in the region are pegged to the US dollar and, given Tourist Arrivals the recent appreciation of the euro, Millions % Change the region will become increasingly 2003 20041 2003/04 1996/04 attractive, in terms of purchasing power, to the European leisure World 691.0 759.0 %9.8% 27.2% markets; Africa 31.0 33.0 6.5 51.2 ∑ The significant number of large- Americas 113.0 124.0 9.7 6.0 scale developments underway East Asia/Pacific 119.0 153.0 28.6 67.3 throughout the region (in Qatar, Bahrain, Oman, Dubai and Europe 399.0 414.0 3.8 18.2 Lebanon, for example) is likely to Middle East 29.0 35.0 20.7 148.5 stimulate both the level of visitation and private investment. The latter will be further fuelled by the gradual relaxation of freehold Middle East legislation, which will allow 5% Africa regional (and, occasionally, 4% international) investors to take full Americas ownership of commercial and 18% residential real estate; ∑ Public spending continues to drive most of the economic and tourism development in the GCC, whereas non-GCC countries rely on private spending and investment. However, the increased liquidity of the private equity markets in the region will in East all likelihood improve the private Europe Asia/Pacific sector’s role in the investment in 55% 20% and the development of the hotel and tourism industries over the next five to ten years; 1 Preliminary estimates ∑ While hotel financing in the region Source: World Tourism Organisation has in the past been conservative, recent indications show a trend and an improvement in global when compared to other towards more aggressive hotel debt economies. All of these factors have destinations worldwide; financing in aspects including stimulated international leisure and ∑ We expect the region to experience mortgage lending ratios, mortgage corporate visitation; further considerable growth over amortisation period and debt ∑ Tourist arrivals in the Middle East the next five to ten years.