Summary: Our annual Middle East and North Africa (MENA) hotel market survey gathers the views of some of the most influential industry professionals, providing valuable insights and predictions for the hotels industry over the year ahead. This year’s results paint a significantly more positive picture compared to our survey last year, although our respondents believe that a rebalancing of power is required in the owner-operator relationship.
Below we provide the full analysis of our key findings.
1) 72% of respondents predicted there will be “some growth” in MENA RevPAR in 2017 whereas last year most predicted “no growth” or a “decline in growth”.
72% of respondents predicted “some growth” in RevPAR in MEA, with only a small portion predicting “no growth” (15%) or a “decline” (5%) in growth and 7% predicting “strong growth”. This is significantly more positive than last year where only 43% predicted “some growth” with the majority forecasting “no growth” (27%) or a “decline in growth” (25%).
Like last year’s Survey, the primary “key issues” impacting respondents’ businesses and their estimates of future performance were the general economic downturn and related sanctions in key source markets (e.g., Russia/CIS, although this is improving) as well as the more regional impact of low oil & gas prices and the lack of available finance for projects.
Interestingly (and perhaps contra to actual reality), geopolitical uncertainties and terrorism/safety concerns were seen as far less of an issue than compared with last year. As several respondents’ commented: “People have gotten used to these obstacles (a slowing economy, low energy prices, geopolitical uncertainty) as the “new norm” and have adapted.”
Another commented; “This is the environment we have to work in and we just have to get on with it.” There clearly was a sense that these head wind factors were not going to go away or significantly improve in the foreseeable future and that declining hotel profitability for the region in comparison to prior years was likely to continue. Overall, however, people felt that the impact of these otherwise negative factors was either improving or stabilising and that people had or were adapting accordingly.
2) Cities with the most stable governments, sound tourism infrastructure and a well-established tourism plan lead MENA RevPAR growth forecasts and as potential hotel development sites.
Of the cities most likely to see the highest RevPAR growth, Dubai comfortably led the pack followed by Abu Dhabi, Doha, Muscat and Ras Al Khamaih. This in spite of the fact that all of these cities have, or are expected to see, significant increases in supply. Respondents cited the reasons for such confidence as pointing to fundamentals:
- more stable regional governments,
- better planning and investment in infrastructure; and
- well-developed and thought through tourism plans and policies.
Examples cited were Ras Al Khamaih’s tourism promotions pitch as well as Doha’s recent “visa on arrival” transit arrivals programme. Also, Abu Dhabi’s CNN and other channels’ marketing push towards emphasising itself as a leisure destination in order to offset the decline in its traditional business tourism sector.
As for Dubai and its addition of 6700 rooms in the coming year (and likely 59,000 by 2020), one respondent said; “You can’t argue against the World’s 4th largest tourism destination. They have come from nowhere fast and done it well.” Oman was also cited as a destination for optimism based on its diversity of offerings, cultural and heritage aspects, as well as significant improvements to the transport (airlift) infrastructure. Even though somewhat distant on the horizon, upcoming events such as Expo 2020 in Dubai and the 2022 Doha World Cup were cited for offering the type of positive publicity buzz that would lead to an uplift of interest in such destinations.
Makkah, which was not on our list of cities, and Jeddah were also noted for possible significant growth based on the hope of ongoing talks between Iranian and Saudi authorities to allow visa access for Iranian nationals to the Haj.
On the lower end of RevPAR growth estimates came Manama and Luxor. Egyptians cities such as Cairo, Sharm el Sheikh and Hurghada showed relatively high estimates of growth, but this was – as admitted by several respondents – based on their starting from a low base. Tehran was mid to upper tier in RevPAR expectation but down on previous years, reflecting a peak in the rapid growth of recent years in this undersupplied market as well as the result of additions in supply and the perhaps over expectations of many hopeful investors as to the pace of economic reforms in the country.
The leading RevPAR cities were also selected by respondents as those offering the best potential for new hotel investment and development. Again the reasons cited were the current level of economic development and the requisite infrastructure in those cities as well as government stability and their success in developing and promoting a long term tourism vision and plan.
With respect to hotel performance and development, clearly there is a consistent recognition by respondents of the link between an well-established tourism planning structure (be it local government or a regional tourism board) and the success of a region’s hospitality sector. As one respondent noted, “These leading cites are simply far more sophisticated in planning for, packaging and marketing a tourism product than the others, including some with potentially far better product offerings, but who lack the leadership, vision or message to sell it.”
3) Respondents once again rated MENA hotels more favourably as an asset class than office, retail, residential or warehousing and saw hotels as no more risky than these other asset classes.
Respondents once again rated MENA hotels more favourably as an asset class over retail, residential, office or warehousing alternatives in respective order. Respondents were evenly divided on whether hotel investment was a more risky commercial property asset class than other forms – an improvement on last year where the majority viewed hotels as more risky than other asset classes. Those viewing it as “more risky” cited the greater complexity involved in hotel development and operation, the added up front investment costs required before any revenues are generated, the absence of any pre or long term lets and the fact that hotels are generally more susceptible to external “events” such as economic downturns, terrorism concerns and other uncontrollable factors.
Those seeing it as “less risky” or “no more risky” than other asset classes cited the classic marketing mantras of the right “location”, “product” and “design” as being the determinant of success. Pointing to the fact that tourism continues to lead all other market sectors in global year on year growth and the belief that this would continue given global demographic trends yielding an ever growing tourism customer base, several respondents emphasized the very high returns that are achievable when you develop and market the right product in the right place.
Notwithstanding the fairly favourable view of hotels as an investment class, it was evident that geopolitical perceptions and terrorism factors potentially weigh more heavily as risk factors in the MENA hotels market as compared to European or other markets. As one respondent noted: “All it takes is one or two incidents somewhere remote to taint the entire “Middle East” in many foreign tourists’ minds. This is hard impossible to guard against.”
Nonetheless, the fact that half of respondents see hotels as less or no more risky than other types of real estate assets is a positive for the region and certainly reflects a better showing than BLP European Hotels Market Survey or indeed typical investor sentiments.
4) 72% believe that the market for buying/selling existing hotels in the MENA region to be relatively inactive and closed, particularly to foreign investors.
Consistent with last year’s Survey, the majority (72%) believe that the market for buying/selling existing hotels in the MENA region to be relatively inactive or closed, particularly to foreign investors. The reasons cited include a relatively small (albeit slowly growing) number of transactions, the difficulty in establishing realistic prices, particularly given the often absence of transparent performance data on which to base pricing, and that often the prices quoted are not realistic when compared with the historic numbers.
As for MENA hotel assets being potentially attractive to foreign investors, there was a feeling of “potential” but only in the longer term. Reasons cited were:
- the existence foreign ownership restrictions in many countries;
- a lack of confidence in the legal and regulatory regime by foreign investors;
- their unfamiliarity with the local business;
- cultural regime compounded by often negative stereotypes of the region;
- the absence of clear information to enable typical pricing metrics for evaluation by such investors as compared to their home jurisdictions; and
- unrealistic pricing assumptions by existing owners.
Cited again and again, as with last year’s Survey, were references to the MENA hotels secondary market as “opaque”, “offline”, “closed” and an “old boys club” limited mainly to influential local insiders or existing investors.
Said one local respondent, “Properties rarely come to the secondary market and when they do they rarely are marketed through the normal channels; so it would be very difficult for people outside the loop to participate”. That said, several noted an increase in the number of hotels placed for sale in the past year (albeit again mostly “offline”) which they attributed partly to the development timelines and exit strategies of investors in these properties.
Emphasising this “closed” perception of the market, and again consistent with last year’s Survey results, those investor/developers whom respondents believed would be the most active in the MENA hotel market in 2017 were led by existing property/hotel developers followed by local high net worth individuals. Foreign private equity investors, sovereign wealth funds or direct government investment were not seen to as likely major players in the hotels market.
5) Management agreements and franchising remain the most popular MENA growth model for hotel brands.
“Asset- light” remains the strategic model for growth for the major hotel brands enabling them to achieve scale and growth more quickly. Unlike in last year’s Survey, where respondents felt that the franchise model would lead over management contracts, this year management contracts were viewed as the primary growth model. It is hard to point to any reasons for this.
Also different from last year’s Survey, a number of respondents ticked asset ownership as a growth model, perhaps reflecting the efforts of a number of regional developers to develop and operate their own in-house brands in direct competition with the international names. Nonetheless, sufficient numbers of respondents pointed to franchising as a growth model, suggesting that they see the MENA region and the existing market participants as sufficiently developed and representative of a mature market able to operate under the franchise model.
What was surprising from last year’s survey was the decrease in interest in the third party or “white shoe” operator management model for hotels in the region. Last year 74% responded yes to the proposition that third party operators offered a more profitable proposition to owners (in spite of the model’s typically higher overall higher costs when the third party manger’s fees are combined with a brand franchise fee), citing reasons that they are better established and know a local market better, often provide better and more detailed management reporting and are more responsive to owners since they “work for the owner and not for the brand”.
Despite this high praise, 75% of this year’s respondents said they had either not signed up or were not considering a third party operator for their properties, significantly down on those who were considering such model last year. The reasons cited for this decreased interest were not all that clear. Some cited the higher costs involved, although that would reflect a lack of understanding the general third party proposition of delivering a better bottom line in spite of the higher costs. Others noted the absence of any established third party players in the market and the recognition that for the model to be successful they need to first establish a regional presence and obtain certain scale economies for them to be effective.
That said, there are some new third party participants (e.g., Aleph Hospitality) who are making inroads, particularly in parts of Africa and smaller or more remote regional cities where the major operators are willing to delegate the management responsibility whilst enabling growth and focusing their efforts on the larger cities with greater development upside. This is not atypical of other emerging regions (e.g. Russia and the CIS) where a number of the major operators initially chose to franchise and left it to third party operators to initially pave the way before themselves entering directly.
Another factor which may help the third party players is the fact (arguably further enhance by consolidation) that many large operators simply do not have the staff or resources to fuel their growth ambitions through the management contact model and, by necessity, have to resort to franchise (often linked with a professional third party operator) to maintain their growth schedules. If the MENA region hotel market evolution is anything like that for the American or – increasingly – European markets, it is likely we will see the appearance of third party groups as a viable alternative operational model in the not too distant future. This may include management of locally developed boutique brands to compete head on with the bigger players.
6) Respondents feel there is a need to “shake up” the traditional management contract model to give owners more control over their asset and its performance.
Last year much of the discussion centred around the potential impact of operator consolidation on the industry. This year our questions focussed on the impact of that consolidation as well as other – quite rapid- changes to the industry, particularly in how customers search for, assess and book today’s hotel product. As one respondent noted, “Today the industry and technology is changing so fast that we cannot seriously expect an owner and operator to contract the “status quo” for 20 plus years.
To the question whether hotel operator performance tests in management contracts should continue to be based on the traditional purely financial metrics (e.g., an agreed % of budgeted GOP and a RevPAR competitive set comparison) or should contain other metrics to reflect changes to what an operator and brand bring to a hotel, 42% said “Yes, naturally; what else but financial metrics would you use!
Yet nearly 40% of respondents said that other metrics should be considered, including social media reviews vs. a competitive set of hotels as well as measures of how many bookings were generated directly through the brands own web site vs. third party alternatives such as OTAs. Said one respondent, “Brands are moving further and further away from managing hotels rather than managing their brands and if they cannot deliver directly on the Brand promise, what is the point?
Likewise to the – albeit perhaps a slightly loaded – question whether owners needed more effective ways in their management contracts to remove underperforming (or possibly “out of style”) brands in order to satisfy an ever changing guest dynamic, a majority believed that change was overdue. Among the options suggested: using alternative non-financial test metrics such as a comparison of materialised bookings generated direct through the operator’s distribution system vs. materialised bookings generated via OTAs. Others recommended a minimum ratings test on social media sites vis a vis competitor hotels as well as the quality of the responses by hotel operators in dealing with social media commentary- particularly that which is unfavourable.
Many also felt that shorter term management contracts would allow for the owner to reassess the operator’s performance and possibly update their property to a brand or operator more suitable to the hotels’ changing market demographic. Others believed that granting an owner a right to termination “without cause” after some initial stabilisation period (and subject to a pre-agreed early termination fee) gave the owner more flexibility over their investment and made sense in today’s changing market. The operators’ response to this proposal would be that it will negatively impact their share price valuation on the stock markets, as it is based on the present value of these long term contracts. To which an owner might respond, “Well I am not a shareholder in your business, but I am in mine”.
A smaller, but not insignificant, number also proposed the option of owner rights to convert a management contract into a franchise after an initial period. That is clearly the most easy to sell to an operator of the options noted and perhaps was overlooked given it being the more obvious option.
What could be gleaned from these questions and the comments though was that:
- whilst operators had changed in size and scale, in the number and service level of their brands and in what they do today – being more managers of brands than of specific hotels;
- owners had changed with more hotel owners owing multiple hotels and being more sophisticated and/or employing professional asset managers; and
- hotel customers have changed insofar as how they search for, evaluate and book their hotel product, the actual management contract format has remained incredibly static near on 50 years.
This is also the topic of an article on this subject which forms an attachment to this Survey. And whilst there is sentiment for owners to push back and demand some of these changes, there is also a recognition there that operator consolidation has increased the negotiating position of the bigger operators and that owners will only be able to respond by increasingly pushing back in numbers.
The other way may be through the increasing prevalence of small boutique or “niche” operators who are more flexible in terms of the management contract term lengths and terms they are willing to negotiate. This may be the answer for many owners, particularly for hotels at the higher end scale or owners with real local knowledge of their market and the product that will sell there.
Another impact of consolidation is the number of formerly competing brands now held under one consolidated operator roof, meaning that the “brand specific” territorial non-compete you signed with your operator may now be obsolete by way of the operator now operating a – albeit different but – competing sector brand next door to your hotel.
For example, the recent Marriott-Starwood merger has resulted in nearly a dozen formerly competing brands now merged under the Marriott roof. What if the operator wishes to emphasize one brand in the competing sector over the brand you hold, or if the terms negotiated with that other competing brand hotel are more favourable to the operator than those for you hotel? These are very real concerns for owners today and formally there is little they can do since their existing management contract territorial likely limits the non-compete to the specific brand.
55% of respondents felt that territorial clauses need to be modified (possibly even retroactively) to address this issue and that they should be made not brand specific but sector specific. Several noted how easy it was today for the brands to get around territorial restrictions either as an indirect result of consolidation or, more often, by the role out of competing and often more “up to date” new brands. Said one respondent, “With consolidation and the announcement of ever more brands, operators are changing the rules and upgrading their brand portfolios, so why should we not be able to?”
Admittedly, not an operator friendly question, but when asked about the steps operators were taking to combat the threat of OTAs and other disruptors and recapture customers (e.g., offering discounts, upgrades and other promotions to guests) who “book direct” and the costs of these steps on owners, including additional loyalty fee programme fees that operators charge when automatically registering new guests to encourage them to book through their website, an overwhelming 90% of respondents believed that owners were bearing far too much of this cost and that operators should bear a larger cost obligation of enticing guests back to their booking platforms. Only 7 % disagreed and felt that the cost allocation for recapturing the customer was about right.
Suggestions for redressing this perceived imbalance included decreasing the central marketing charges of operators or waiving those charges on guest revenues attributable to bookings not made directly through the operators’ own web sites. Another respondent found the operators signing up of guests to frequent guest programmes to lure guests back (the costs of which are primarily paid for by the owner) was particularly rich: “They are giving themselves a 4-5% “tip” on the guest folio amount for their losing the customer in the first place! Why do I have to pay for that?.”
Another noted that these frequent guest programme fees can be often nearly as high as the base and incentive fees which the operator receives from running the property. “And to add insult to injury, they are still charging me central marketing fees on those bookings they used to do but which have been involuntarily ”outsourced” to the OTAs at my expense!”
Again the preponderance of responses believing that operators should bear more of the costs of guest recapture no doubt partially reflects the non-operator profile of most respondents; in fact 7% of respondents listed themselves as operators!. But no doubt there is a great deal of dissatisfaction in this area and a feeling by owners and other non-operator market participants that the existing fee structures for attracting guests to hotels needs to shift more in favour of owners.
9) 56% feel that operators have adequately adapted their centralised marketing charges and services to address the growth of social media sites over more traditional forms of advertising.
A significant majority (56%) of respondents believe that operators have been alert to and have modified their centralised marketing services provided to reflect the move away from traditional advertising media (e.g., print and advertising) towards more social media driven campaigns. This partially generational change has come about incredibly quickly as our Survey article on the growth of social media and user generated content in influencing hotel booking choices reveals.
Of course some respondents felt that operators were behind the curve on adapting or could do more to exploit the social media driven marketing, but virtually all respondents recognized the power of this new medium and most believed that it can “bring a more effective result for less money.” Several said simply that “It is the best platform for advertising now, period!”
That said, the hotel management contracts and text relating to centralised marketing and services has not been adapted to reflect this shift to social media away from the more traditional advertising methods. Whilst the contract arguably should not be so specific in language to effectively restrict the operator’s ability to adapt its resources to what works best, one might argue that some modernization of these agreements is overdue to at least reflect this very substantial change in how hotels are marketed today.
Not surprisingly based on the responses to previous question, a large majority (67%) planned to spend more on technology in 2017, with only 11% planning to spend less than the prior year. The majority of this spend is being directed towards digital marketing efforts (e.g., websites, apps, email marketing and online advertising) followed by spending on data analytics and updating booking platforms.
A smaller , but not insignificant, spend was directed towards cybersecurity updates, perhaps reflecting concerns of avoiding the PR disasters which several hotel and other retail groups have encountered in recent times where their online customer data has been hacked. Respondents noted the beneficial returns of technology spend. As one respondent said: “Spending more on technology leads to reduced operating costs.” While others noted the efficiencies of digital marketing , particularly it effectiveness in reaching the younger guest segment, a point also noted in our social media article linked to above.
From these results, there appears to be no doubt that operators’ have caught on to the effectiveness, as well as potential cost savings advantages, of digital and social media marketing mediums and are swiftly adapting to this contemporary means of booking hotels.
Iran – not the hotspot investors expected?
Last year, following the lifting of sanctions in January 2016, Iran was the new investment flavour with nearly 80% of respondents saying they were considering or strongly considering business opportunities there. To the similar question in this year’s Survey, 44% said that their interest in Iran hotel investment had increased over last year with 35% saying it remained unchanged. Only 5% said their interest in the Iranian market had decreased and 15% said they were not considering the market at all.
Clearly there have been some success stories over this time with both Accor opening several hotels and Melia, Rotana and several others announcing projects. And the Iranian Hotels Investment Conference sponsored by Bench Events this past February had a very large turnout of both local and foreign investors and was widely viewed a success with many foreign nationals getting their first -quite favourable- experience of Tehran, Iranian hospitality and the market’s potential.
That said, no one will disagree that progress has proved slower than hoped for following the lifting of sanctions, with the still limited banking facilities (very limited or prohibitive lending and no Western credit or debit card facilities available), often uncertain/conflicting and extremely lengthy and costly permitting costs and prohibitive land costs (particularly in Tehran), as well as indirect geopolitical concerns posing a significant- although not insurmountable- barrier towards more rapid development of this untapped “last frontier” destination.