UK investors are cautiously entering the Middle Eastern hotel market. But it is a slow process. Local investment agencies have seen a flood of enquiries from international financiers, driven by companies looking for ways to spread risk, and the weight of capital pouring into real estate is forcing investors to cast their nets ever wider.
But why are investors so cautious? In a region that has stunned the world with schemes such as the World, the Palm and the first seven-star hotel, the Burj Al Arab, it’s certainly not a lack of scale or imagination that is holding them back. Nor is it a shortage of supply. Development continues at breakneck speed delivering a constant stream of stock.
One possible problem foreign investors face is getting a look in, with Saudi and Kuwaiti money dominating the scene. There is also a lack of financial data and information, which has made it harder for institutions to take the investment leap.
But the good news is that it is becoming easier. Private investors have made inroads thanks to moves to liberalise ownership laws, increase transparency and improve Middle Eastern countries’ infrastructures. Dubai is hosting the first Arabian hotel investment conference and property investment vehicles are gathering steam with the introduction of the first Gulf-based hotel investment fund.
The message from Dubai – the most mature Middle Eastern real estate market – remains strong: tourism is the fastest-growing sector of the Dubai economy, accounting for nearly 12% of GDP and representing $1.9bn of economic activity. Such growth is not expected to stop any time soon; 7% of visitors to the Middle East come to Dubai, and the government hopes to treble the number of tourists visiting the emirate to 10m by 2010.
But whether this is enough to draw UK money to the Gulf region is debatable. Investors are worried that the speed of development in the region will lead to a sudden cooling in investor returns.
The government also aims to increase the number of hotels and serviced apartments by 12% annually. “Developers are looking overseas to help fund new projects; it’s a way of underwriting developments,” says Mark Wynne-Smith, executive VP at Jones Lang LaSalle Hotels.
But, to date, this has been a trickle rather than a crashing wave, led by families and investment groups rather than corporates. Investments are usually minority stakes rather than buy-outs, says Wynne-Smith, adding: “There is still a control issue and a number of local companies like to retain control of assets and have barriers for entry.”
But there are signs of change not only in the origin of investors, but also in the types of investment that are piquing investor interest.
Blair Hagkull, a partner at Gulf-based investment agency RSP Group, says: “Private investors have gone for residential because the returns make sense for them, but I’m now being asked about commercial – and, in particular, hotels.”
Cut your teeth in Dubai
Although countries such as neighbouring Qatar and Bahrain are becoming aware of work done in the United Arab Emirates, Hagkull believes that most international investors will cut their teeth in Dubai. “The risks are so much more measurable here,” he says.
He estimates that, with property in the UK making returns of around 6-7% pa, an investor can make twice or even three times that in Dubai.
Hagkull points to the Gulf region’s first hotel investment fund as a reason for optimism. This attracted $125m and will look to buy $250m worth of hotels off-plan, says Hagkull.
From this, Hagkull believes it would not be difficult to generate yields of around 15%, as tourism growth is strong in the region.
Balasubramaniam, chief executive of Dubai Sports City, a 50m sq ft development on the state’s waterfront, agrees with Hagkull. Bala says international investors could get 12-13% just from rental growth. “You cannot find that anywhere else in the world,” he says. “Commercial property investment in Dubai is a growth sector.”
That is, if investors can get in. Dubai Sports City will include a high-rise hotel, a boutique hotel, serviced apartments and villas to house 70,000 people. Around $2bn-worth of funding has already been tied up with Bahrain-based First Islamic Investment Bank.
Bala says opportunities will be available for international investors through consortia to build the indoor academy at Dubai Sport City.
But talk of oversupply still dogs the market, and many in the international property market question whether the sheer weight of development can be supported. JLL’s Wynne-Smith is one. He remains unconvinced of the projected returns, and he lists oversupply as one of the biggest threats.
“Middle Eastern investors hold property for longer, and they are much more comfortable with long-term capital growth, rather than income returns,” he says.
Dubai to play catch up
Wynne-Smith believes levels of return are below the threshold that make investment in the region attractive to UK investors, and believes it could take as long as seven years for Dubai to reach the UK’s total average return levels of 12% pa.
The local property community is quick to jump to the emirate’s defence. “It really depends on whether you are looking at a trophy property or at something more mid-range,” says Hagkul.
Bala agrees, adding: “Oversupply? They say the same things now as they did five years ago, and look what is still happening. There is hardly anything to reserve in Dubai, there is hardly anything to rent, and finding office space is a nightmare.”
Hotel occupancy figures collated by Deloitte back this up. In 2004, occupancy rates hit 85% in Dubai, rising close to 90% in Jumeirah Beach. Average room rates grew by nearly one-third, reaching $152, and the number of international arrivals rose by 20% against a worldwide average of 10%.
Julia Felton, an executive director at Deloitte, says: “These are some of the best hotel performances I have ever seen. Dubai is leading the way and there’s nothing out there at the moment that should change that.”
But Felton warns: “Dubai’s RevPAR (revenue per available room) rose 40% last year against London’s 11%, which is astounding. I would be surprised if they could sustain those levels of growth.”
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Could a Middle Eastern-style mega-project similar to Dubai’s Burj Al Arab ever be built in the UK? The snap reaction from most of the property industry is “no” – the land simply does not exist. There are too many listed buildings in towns, and planners would never entertain such grand projects. And if developers were to consider building off the coastline for example, in the Atlantic – Jonathan Worsley, consultant at CBRE Hotels, says: “We are talking about calm, protected waters in Dubai. In the UK, one wave would sweep it all away.” But a hotel inspired by Middle Eastern luxury is not beyond the realms of reality. “You’ve got to believe that if there was a market for six-star accommodation, it has to be London,” says Julia Felton, executive director at Deloitte’s tourism, hospitality and leisure department. Pointing to Shangri-La’s prelet of London Bridge Tower, known as the The Shard of Glass, Felton adds: “There’s appetite from a lot of investors. The problem is finding sites or assets.” One window of opportunity could open with the Olympics. If London gets the go-ahead when the 2012 host city is announced in July, the Stratford basin could provide a huge opportunity for hotel developers. A report into what effect the 2004 Athens Olympics could have on the capital, by Jones Lang LaSalle Hotels, noted that convention bid wins in Sydney increased by 34% following the 1993 announcement that it would host the Games in 2000. And Barcelona achieved 21% annual growth in international convention delegates between 1992, when it was the host city, and 1997. Mark Wynne-Smith, executive VP of JLL Hotels, says: “The Olympics transforms a city into a living postcard, and there’s no bigger marketing event on this planet” |
