40% of hotel projects may not meet 2015 deadline

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Many of the proposed hotel projects in the Middle East and North Africa (Mena) region will either be delayed or abandoned altogether like other sectors of the real estate market, a new report has revealed.

Around 20 per cent of hotel room supply in the Mena region, particularly in the GCC, proposed for completion by 2010 will not be ready while the delay rate for those projects slated for completion by 2015 could be as high as 40 per cent, according to an industry report by global hotel investment services firm Jones Lang LaSalle Hotel.

The total supply of hotel rooms across the Mena region during 2007-2015 is likely to be in the range of 200,000, around 35 per cent less than the total number of proposed rooms. As would be expected, most of the likely reduction in future supply is experienced in the GCC region, although some delays are also forecast in both the Levant and North Africa region.

The announced hotel rooms supply in GCC for 2010 was 411,410 out of which only 310,00 would come onstream. For 2015, it forecast that the GCC would see an addition of 380,000 rooms compared to 470,550 rooms announced for completion during the period, a shortfall of nearly 90,550 rooms.

In the overall Mena region, Jones Lang LaSalle predict that 680,000 new hotels rooms would hit the market by 2010 against the announced addition of 817,623 keys. By 2015, the Mena region is expected to add 780,000 hotel rooms, a shortfall of around 100,000 keys in the announced projects.

Jones Lang LaSalle attributed the delay to increased competition for resources (especially labour and construction materials), rising costs and tough financing due to global credit crunch.

It said some sectors of the market are approaching saturation with limited potential operator interest.

"Market conditions are becoming more competitive, so only well planned and researched projects are likely to succeed. Even if all the proposed projects (in Levant and North Africa region) come to fruition by 2015, the number of hotel rooms would increase by just 25 per cent," it said.

While the anticipated level of future supply will be somewhat below the proposed one, the market will still experience significant levels of completions over the next few years. The total stock of hotel rooms across Mena is expected to increase by around 32 per cent, the majority of these additional rooms will be in the GCC, where the 2007 stock is forecast to increase by around 60 per cent by 2015.

The Middle East and North Africa (Mena) hotel market has experienced impressive trading performance over the past five years, driven largely by the substantial growth in both business and tourist arrivals. This strong performance has resulted in massive interest in further hotel development.

"Despite the buoyancy of the hotel industry, it is safe to assert that not all proposed hotel projects will be developed within the same time frame as proposed on their launch. Understanding just how much of the proposed supply will materialise in the next 3-5 years is critical to predicting the future performance of this asset class," it said.

The report found that though not all projects would proceed, the region would still witness a major increase in hotel supply over the next few years.

Jones Lang LaSalle Hotel report said that if all the hotel projects that have currently been announced were to materialise, the stock of hotel rooms across the Mena region would increase by more than 50 per cent over the next seven years.

As with other sectors of the real estate market, most of the potential hotel development over the next few years is focused in the GCC region. If all the proposed projects were to proceed, current stock would almost double to some 470,000 rooms by 2015 which would result in the GCC increasing its share of the total stock of hotel rooms across Mena from 41 per cent in 2007 to 53 per cent in 2015.

Potential increases in supply are more muted in Levant and North Africa. In the Levant region, ongoing political instability is limiting the growth in both business and tourism arrivals.

The hotel sector in North Africa region has received shot in the arm, thanks to strong inflow of international tourists and massive investments in the sector from the GCC region, which is currently estimated at $16 billion.

Top key trends in the Mena hotel market
Asset management
Developers will continue to enter into new multiple asset management agreements with internationally-recognised operators. At the fore of this trend are the Crowne PlazaCrowne Plaza and Intercontinental hotels at Dubai Festival City which have benefited from business synergies, economies of scale and operating efficiencies. Given these attractions, and the increasing interest from major hotel brands in this region, Jones Lang LaSalle expects this trend to gain further momentum over the course of the year.

Partnership
With an extensive number of hotel rooms coming up in the market, developers are increasingly seeking strategic partnerships with multi brand operators. Recent examples of such strategic partnerships include a joint venture between Premier Hotel and Emirates Group, a partnership between Siraj Capital and Intercontinental Hotels Group and Nakheel's regional agreement with Kempinski. As local developers continue to seek regional growth opportunities, Jones Lang LaSalle expects similar partnership agreements emerging over the coming months.

Ownership
A study by Jones Lang LaSalle Hotels has found that only one hotel company's ownership was foreign whereas 83 per cent were privately-owned with the remainder in the hands of public and government bodies.

This trend is likely to continue in the short term, but can look forward to seeing increasing foreign and public ownership of hotel assets as tourism markets continue to remain buoyant and the overall reduction in risk perception grows in relation to this asset class.

Acquisition
The hotel development market in the region still far exceeds the acquisition market due to continued availability of development land, low acquisition yields, and a comparatively low development risk perception. The shortage of available acquisition opportunities locally, coupled with investors' interest to diversify risk in more mature markets is expected to lead to increased cross-border acquisitions and equity stakes in real estate and hospitality deals.

Residential plans
There is great interest being generated by branded hotel chains to manage residential properties alongside hospitality operations. Investors are keen on this concept as it provides strong up-front cash-flows and a stable income through the collection of service charges. Jones Lang LaSalle research indicates that the branding of a residential product has an upward impact on sales values. As access to debt continues to limit developers, the company expects to see hotel projects continue to marry with residential developments in an effort to hedge the risks typically associated with a cyclical and capital intensive industry.

Shariah-compliance
While the market originally envisaged the Shariah-compliant product to appeal solely to regional travellers, it has already proved to appeal to a much wider audience attracting discerning international travellers searching for an authentic experience. This segment of the market is expected to grow by 20 per cent.

Entry of new brands
The strong performance of the Mena hotel market has attracted a number of new brands, specifically from Asia and Africa, such as Fairmont Raffles, Banyan Tree, JAL Hotels and Sun International.

By Waheed Abbas

© Emirates Business 24/7 2008