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Having lived and worked in the region since the turn of the century, it has become relatively easy to spot common themes. The challenge of driving here is one, and the intense hot weather is another.
Professionally, heading down the “cheap” route rather than investing in sound, valuable advice has sadly risen to the top of the league.
In the hotels and hospitality sector, who can fail to notice the many that have opened and closed within a short space of time, hotels that change management companies before we’ve even had time to notice the flag outside, the “white elephants” that seemingly operate in dormancy and the properties that could outperform their competition if only they had the right partner on board from the beginning?
In this region, advice is often misplaced, misconceived, misunderstood or missed altogether. And the first step on the road to failure is not commissioning an independent feasibility report, which is an essential requirement for attracting both the right partner and investment.
The report will contain your anticipated return on investment, demand demographics, site analyses, design features, competitive performance and, most importantly, a market positioning statement. This positioning statement will point towards certain types and niches of operator, i.e., your partner.
You may not be familiar with the operators who initially express interest, they may not be household names, and they may not be who your best friend recommended. But what they will be is a pool of relevant operators, one of which will be the best fit for your project.
See related story: Gulf’s investors go fast tracking on hotel projects
If you fail to commission a bankable, feasibility report, not only will you find it a struggle to source investment funding, you won’t attract the right partner who will have the ability to enhance the value of your asset and maximise your returns.
One of the most frustrating hurdles we face as consultants is the need to overcome predetermined reasons for choosing a particular brand. Reasons can range from “I have stayed there before and enjoyed it”, to “My friend chose this brand, so it’s bound to work”.
This particular brand may be a good fit for one development, but it is by no means a good fit for all developments.
Letting an operator know that you want them on board is playing straight into their hands, placing them in a position of strength when the project reaches contract negotiation stage. The search for an operator needs competition from a variety of brands to ensure that not only are you aware of the market options, but, most importantly, so that other operators know they are in a competition. This will cause them to be aggressively downward with their fee proposals because each operator wants to be associated with your project!
Navigating the hurdles
You’ve already had some contact with operators who approached you directly after discovering your development, and before you know it, you’ve drafted commercial terms, signed a Letter of Intent and are more than half way to partnering with them for the next two decades or more.
The “right-fit” brand and a management contract that has been negotiated with an adviser by your side could mean the difference in value of more than 50 per cent. Imagine an underperforming brand operating your property that you want to break from, only to find there is no break clauses or performance tests within the agreement.
This will seriously affect your net operating income (NOI) and heavily affect the value of your asset.
If the operator isn’t willing to negotiate then they are probably not the right company to partner with for the next 20 plus years.
Often when an operator is selected, they will provide a 100-page management agreement template contract, which the owner will sign without seeking the advice of a professional, assuming the clauses meet an industry standard. This is not the case, and as with any contract, the clauses are there to be discussed, adapted and negotiated.
Too often we discover that management contracts are signed without negotiating when they contain hidden fees and heavily-biased commercial terms. Typically, agreements with sub-brands are heavily weighted in favour of the operator, giving them total control of the hotel and heaping responsibility onto the owner, who is already carrying the majority of the risk.
Over the years I have encountered owners who think that the only clauses that need negotiating are operator fees and the term. However other considerations include fees for royalty, licence, marketing, training, reservation, loyalty programmes, and brand standard.
Owners not only don’t know these clauses are negotiable, they often are unaware that they are in the contract or even understand what they are for.