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With more than 11.6 million guests last year, Dubai's hospitality market is becoming increasingly attractive to investors. According to figures from the Department of Tourism and Commerce Marketing, the numbers were up by 5.6 per cent from 2013, as hotel and hotel apartment room revenues rose by 12 per cent to Dh15.2 billion during the same period.
With more tourists than residents, Dubai is different from other major hospitality markets. ''Consider that its population is about 2.2 million, but attracts more than 11 million tourists, and [has] one of the busiest airports in the world,'' Filippo Sona, Director and Head of Hotels — Middle East and North Africa at Colliers International, tells Property Weekly. ''[It] has more inbound tourists than China [excluding Hong Kong].''
It is this strength that has put the emirate's hospitality assets on the radar of international investment funds. Experts say the market is poised to introduce newer investment structures and vehicles that will make it possible for retail investors to carve a share from this asset class. Nick Maclean, Managing Director of CBRE Middle East, explains that funds from the Asia-Pacific, for example, have been persistent in their interest in entering the region. ''Asia-Pacific funds are the key market makers at the moment,'' he says. ''They want exposure to the Middle East. The logical location is Dubai since it has the strongest sector. The Makkah-Medina [market] is strong but very difficult to acquire. Investors are assessing prices and we expect some deals to close by the third quarter of this year.''
But such deals have been on the verge of coming to fruition a couple of times since last year.
''There has been a difference of opinion on how the hotel sector has behaved in the past three quarters of ,'' Maclean says. ''It did not behave as strongly as anticipated, which would affect the price of [a] deal. However, recently, we saw some statistics from the Dubai government that suggest it has been getting stronger.
''The pricing of oil impacts air fares and lowers travel prices and brings in more tourists. We are reasonably confident that the sector will perform well.''
Maclean's optimism is shared by others in the market, and it would seem that it is only a matter of time before investors and owners find a way to coexist.
''From a financial trading point of view, Dubai benefits from one of the highest average room rates in the world, combined with hotels achieving gross operating profits,'' says Sona. ''For an investor, the conversion from each dollar in revenue is higher than other international hubs. Therefore, Dubai is an attractive hotel investment destination.''
Typically, ownership restrictions ensure that hotels are owned by local investors, at least in the non-free zone areas. However, with funds keen to enter the market, realities are shifting to accommodate complex leasehold deals. ''In the past two years, we have [had] increased interest from foreign investors to purchase hotels or land plots to develop hospitality assets, [mostly from] the GCC, Qatar and Saudi Arabia in particular, as well as India and Turkey,'' says Sona. ''In our opinion capital flow towards hospitality assets has increased by 18-20 per cent for the period ending December.''
The churn in the market is a sign of maturity and some elements are typical of properties entering a second cycle. Sona sums up the trend, saying, ''The market will witness some hotel asset disposal, particularly at the four- and five-star level or in serviced apartments. Some of these transactions could involve assets that are in need of major refurbishment and the owner would prefer to exit rather than reinvest. Some owners will also exit as their development is completed and ready to trade.
''Traditional transactions [and] developments will dominate as the three years to 2020 [have] the highest market growth forecast for the hospitality industry, therefore owners would want to maximise cash flow rather than exit the investment.''
It is believed that Dubai's developer-owners are more likely to hold on to assets and are reluctant to sell. But Ashish Dave—Partner at KPMG UAE, disagrees. ''I am not sure it's correct to say Dubai doesn't like to sell. The real question is, why would they sell? The hospitality sector is performing well and with the Expo 2020 on the horizon, together with significant citywide investment in tourism — for example, Meraas is building theme parks — this is likely to continue.''
The market is gaining traction and interested parties are finding newer ways to access it. Maclean says the initial interest was in the assets to be fully owned, followed by partnership structures in non-freehold areas. ''The entry point for most Far Eastern funds is direct,'' says Maclean. ''The [most attractive hotels] are in the free zones. [In this way] the investor creates a headlease interest [and] funds get the benefit of the income from the operators.''
Sona adds in the same vein, ''GCC sovereign wealth funds [SWFs] tend not to invest in the region, preferring international destinations. Foreign SWFs entering Dubai are typically entrepreneurial funds, which also invest in developments in the form of land ownership in free zone areas, or equity investors in projects with [an] exit strategy upon [their] practical completion or the fifth year of operational trading.''
Such structures have not yet been seen in the UAE. But Maclean says, ''We've been in discussions to make it happen [and] sooner or later it will work. In most Western markets this structure is available. Long leaseholds are common practice. Operator-owners sell either the long lease or freehold.'' He cites examples of Holiday Inn Express in Europe and Australia. This structure sometimes creates three levels of ownership — the developer, owner and long leasehold or freehold interest by the investor.
Developers have also been looking at initial public offerings (IPOs), which cannot be ruled out for hospitality assets. ''There has been talk of hotel developers exploring the possibility of an IPO, especially following some successful listings in the past 12 months [by Emaar and Meraas],'' says Dave. ''I think there is a strong possibility that this will occur, but will rely on the IPO market in Dubai as this is likely to be a local listing.''
IPOs are also a way to structure businesses and bring in both funds and transparency, thus appealing to traditional family-owned companies. ''We forecast an increase in IPO activities from hospitality groups leading to 2020, particularly for those family-owned businesses that need to make the transition to a more corporate structure,'' says Sona.
''This will also be necessary for more corporate structured organisations to grow from a regional to a global company, capitalizing on the strength of the UAE aviation industry and [opening up of more] international airline routes.''
IPOs allow retail investors to participate in growth. In a year or two, analysts expect more people to consider hospitality assets for investment. ''This is how the retail investor can be involved in the hotel sector,'' says Maclean, adding that this route also paves the way for greater investments in a preferred sector. ''There are some hotel owners and operators who are listed so retail investors can invest via equities.
''The appetite for real estate never goes away. One of the key frustrations of overseas investors when it comes to this market is limited stock for sale. If they could invest in real estate indirectly through funds, Real Estate Investment Trusts or stock markets, investors would welcome it.''
The run-up to Expo 2020 will see a lot of supply in Dubai. ''There are comparatively lesser options in terms of budget and three-star hotels compared to other countries,'' says Dave.
''However, we expect a move towards this in the lead-up to the Expo as Dubai seeks to attract a wider range of visitors, [and] the government has pledged its support. With the abundance of land, relatively nascent zoning and building regulations and cheap labour, hotels can be built very quickly.''
KPMG states that the Expo is expected to create demand for a further 45,000 rooms. ''Since only around 13,000 rooms are expected to be added until next year, there would be 32,000 rooms required [from] 2017-20.''
Colliers forecasts tourism to grow at a compound annual growth rate of 8.25 per cent until 2020, potentially reaching more than 24 million tourists by the end of 2020. ''Our estimates suggest that Dubai may well reach a total hotel and serviced apartments supply of 139,000 keys by 2020, with demand reaching close to 39 million room nights for the same period,'' says Sona.
The region provides enough opportunities for developers. ''There is a lot of interest in developing hotels in Dubai and Doha in the run up to 2020 and the 2022 [Fifa World Cup],'' says Maclean. ''If you look at the statistics, the number of air travelers has gone up by 10 per cent and even with 20,000 new rooms being delivered in the next three years, we're not going to have enough. The demand shows there is room for [growth] in the region.''
Most of the development is expected in the budget and mid-market hospitality segment. ''Global benchmarks suggest that [such] hotels tend to have added higher economic value to malls or [other] affluent retail destinations,'' says Sona. ''On average, a guest staying in one of these hotels tends to visit a retail destination three times over a five-night stay and spend $3.2 (Dh11.75) for every $1 spent on overnight accommodation.''
He adds that newer concepts such as experiential or artisanal boutique hotels could also contribute positively to retail.
Source: Shalini Seth, Special to Property Weekly