PHOTO
01 May 2017
Emaar Hospitality Group, the hospitality and leisure business of Emaar Properties, has become the first international hotel operating company to offer management contracts that are based on incentive fees only, the group chief executive told Zawya at an industry event in Dubai.
“If you look at the traditional management agreements that have existed for the last fifty years, the operator gets two fees basically: One is based on the revenue generated and another one based on the profits generated. The first one is called base fee, or the management fee, and the other one called the incentive fee,” Olivier Harnisch, chief executive officer at Emaar Hospitality Group told Zawya in an interview at Annual Hotel Investment Conference in Dubai last week.
“With this new model, which is based purely on incentive fees, we totally eliminate the base management fee, which is based on revenue, and we have a fee which is only linked to profit. This means that we have the same incentives and an alignment of interests with the owner. So there is a perfect correlation between the fees we earn and the profits of the owner,” he added.
The group has already signed a set of management contracts to operate hotels in Saudi Arabia, the United Arab Emirates, Bahrain and Egypt for other hotel owners and developers.
Competition is one main reason why a hotel operating company would offer to forsake a base fee, according to Dr Martin Berlin, Middle East partner and global deals real estate leader at consultancy firm PwC.
“It is also a sign of good confidence in how the market will develop in the long-term, since you basically remove your safety net, and hotel operating deals are usually long-term agreements,” Berlin told Zawya.
This new contract model is likely to be attractive to hotel owners as the risk will be shared between both parties, according to Resa Etmenan, chief Investment Officer at Novum Group Hotels, which is based in Hamburg.
"Even in Europe’s hotel industry, I don’t think we had any such contract offers from hotel operators before,” he told Zawya.
Harnisch believes that profit is a much more powerful indicator of success than revenue, but in the hotel industry he sees a lot of focus on revenue.
“Profits are much more volatile than revenues. When the economy becomes weaker for example, you see a dip in revenues but a much stronger dip in profits. The hotel owner pays his loans back through the profits not through the revenues. The shareholders of a hotel company are rewarded for profits rather than revenues,” he added.
Industry demand
The timing of the move is down to the fact that Harnisch believed there was a demand for it from the industry. “What owners see is that when the economic environment declines, their profits decline much more than the fees of the operator who managed their hotel.”
Harnisch noted that Emaar Hospitality will still offer the traditional model for the hotel owners that prefer the customary management contract.
“I expect this contract model to be a growing trend in the Middle East, but we'll continue of course to see a mixture of base fee and incentive fee in contracts,” PwC’s Berlin noted.
“One thing that hotel owners comment a lot on is that when the economic environment decreases, operators do not sufficiently reduce costs. But the incentive is different when the operator is remunerated based on revenue than when the fees are driven by profits,” Harnisch said.
While there are many different views between hotel owners and those in the operating community,
Harnisch added that a structure that remunerates the managing company purely based on the profit aligns both parties’ interests much better.
“In Emaar’s case, that shows that they are very sure of their operational standards and of their budgets, i.e. they don’t need a base fee to establish their profitability. It is also an attractive point for hotel owners, and aims to get more of them on board,” said Rawaf Bourisli, general manager of Action Real Estate Company, an affiliate to Action Hotels Company, an owner, developer and asset manager of branded hotels in the Middle East.
While Harnisch is confident in the commercial potential of the new contract fee structure he declined to disclose whether any agreements have already been signed based on this new model.
© Zawya 2017
Emaar Hospitality Group, the hospitality and leisure business of Emaar Properties, has become the first international hotel operating company to offer management contracts that are based on incentive fees only, the group chief executive told Zawya at an industry event in Dubai.
“If you look at the traditional management agreements that have existed for the last fifty years, the operator gets two fees basically: One is based on the revenue generated and another one based on the profits generated. The first one is called base fee, or the management fee, and the other one called the incentive fee,” Olivier Harnisch, chief executive officer at Emaar Hospitality Group told Zawya in an interview at Annual Hotel Investment Conference in Dubai last week.
“With this new model, which is based purely on incentive fees, we totally eliminate the base management fee, which is based on revenue, and we have a fee which is only linked to profit. This means that we have the same incentives and an alignment of interests with the owner. So there is a perfect correlation between the fees we earn and the profits of the owner,” he added.
The group has already signed a set of management contracts to operate hotels in Saudi Arabia, the United Arab Emirates, Bahrain and Egypt for other hotel owners and developers.
Competition is one main reason why a hotel operating company would offer to forsake a base fee, according to Dr Martin Berlin, Middle East partner and global deals real estate leader at consultancy firm PwC.
“It is also a sign of good confidence in how the market will develop in the long-term, since you basically remove your safety net, and hotel operating deals are usually long-term agreements,” Berlin told Zawya.
This new contract model is likely to be attractive to hotel owners as the risk will be shared between both parties, according to Resa Etmenan, chief Investment Officer at Novum Group Hotels, which is based in Hamburg.
"Even in Europe’s hotel industry, I don’t think we had any such contract offers from hotel operators before,” he told Zawya.
Harnisch believes that profit is a much more powerful indicator of success than revenue, but in the hotel industry he sees a lot of focus on revenue.
“Profits are much more volatile than revenues. When the economy becomes weaker for example, you see a dip in revenues but a much stronger dip in profits. The hotel owner pays his loans back through the profits not through the revenues. The shareholders of a hotel company are rewarded for profits rather than revenues,” he added.
Industry demand
The timing of the move is down to the fact that Harnisch believed there was a demand for it from the industry. “What owners see is that when the economic environment declines, their profits decline much more than the fees of the operator who managed their hotel.”
Harnisch noted that Emaar Hospitality will still offer the traditional model for the hotel owners that prefer the customary management contract.
“I expect this contract model to be a growing trend in the Middle East, but we'll continue of course to see a mixture of base fee and incentive fee in contracts,” PwC’s Berlin noted.
“One thing that hotel owners comment a lot on is that when the economic environment decreases, operators do not sufficiently reduce costs. But the incentive is different when the operator is remunerated based on revenue than when the fees are driven by profits,” Harnisch said.
While there are many different views between hotel owners and those in the operating community,
Harnisch added that a structure that remunerates the managing company purely based on the profit aligns both parties’ interests much better.
“In Emaar’s case, that shows that they are very sure of their operational standards and of their budgets, i.e. they don’t need a base fee to establish their profitability. It is also an attractive point for hotel owners, and aims to get more of them on board,” said Rawaf Bourisli, general manager of Action Real Estate Company, an affiliate to Action Hotels Company, an owner, developer and asset manager of branded hotels in the Middle East.
While Harnisch is confident in the commercial potential of the new contract fee structure he declined to disclose whether any agreements have already been signed based on this new model.
© Zawya 2017
