Hotel operator selection in the UAE

Choosing the wrong operator could cost a hotel investor millionsCharles Bott

As the hospitality landscape in Dubai continues to heat up on the back of leisure developments and projected requirements in the lead-up to the World Expo 2020, there are still many hurdles developers face when selecting the right hotel operator for their projects. In the past, numerous hotels have opened and closed within a short span of time, while some have changed management companies before we’ve even had time to notice the flag outside. Others have become white elephants and even more have been unable to achieve their full potential because they failed to secure the right partner.

The first step to failure with a hospitality development is failing to commission an independent feasibility report, which is essential for attracting both the right partner and requisite investment. These reports typically contain the anticipated return on investment, demand demographics, site analysis, design features, competitive performance and, most importantly, a market positioning statement, which points to certain types of operators, i.e. a potential partner.

Lost value

If developers fail to commission a bankable, feasibility report at the outset, not only will they find it a struggle to source investment funding, they won’t attract the right partner that could enhance the value of the asset and maximise returns.

Another common mistake is for owners to show their eagerness with certain operators at the very beginning. This plays into the hands of the operator, who could enjoy a strong position when the contract is negotiated. The search for an operator should involve a variety of candidates.

Furthermore, the owner could appoint an advisor to help find the right operator and negotiate a good deal. A good advisor could mean  enjoying more than 50 per cent in additional value from the contract. Without an advisor, owners could end up signing a contract without the right clauses. For example, an owner would not be able to cancel a contract for an underperforming property if there are no break clauses or performance tests in the agreement. This will seriously affect the net operating income (NOI) and value of an asset. If the operator isn’t willing to negotiate, then it is probably not the right company to partner with for the next 20 years or so.

Enhancing returns

Some owners also assume that agreements drafted by the operator already meet the industry standard. This is not always the case as with any contract the clauses should be discussed, adapted and negotiated. Sometimes a closer look shows hidden fees and heavily biased  commercial terms.

For instance, agreements with sub-brands are often heavily weighted in favour of operators, giving them total control of the hotel and heaping responsibility onto the owner, who is already carrying the majority of the risk. Owners may think that the only clauses that need negotiating are operator fees and the terms. However, other considerations include royalty fees, licence fees, marketing fees, training fees, reservation fees, loyalty programme fees and brand standard fees.

Some owners are not only unaware that these clauses are negotiable, they also do not know these clauses exist. Sometimes, they even fail to understand what these are for. Additionally, these fees are based on gross revenue rather than gross profit, which does not incentivise the operator to reduce costs. It is also imperative for owners not to handover design control to an operator, which may focus on its own brand standards, restricting the appeal of the property to other operators in the future.

The financial difference between the right and wrong operator could run into millions. A reputable international operator will drive revenue through its wide distribution channels, return healthier profits, reduce payback period, deliver a healthier balance sheet and hand the owner an exit strategy. It may mean that the operator charges slightly higher fees, but the value to an owner will be significant. In this regard, engaging an advisor will bring the right brands to the table and help owners achieve this added value.

Source: Property Weekly


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