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Mr. Engel

Revenue Management

Sharing Hotel Investment Knowledge in the Middle East

A Cultural Collaboration

By Tom Engel, Principal, T.R. ENGEL Group

As an American working with colleagues in other parts of the world, nuances about collaboration in the business is key. This takes experience, savvy and know-how. Hotel investment decisions, opportunities in the Middle East and opportunities for those from the Middle East looking elsewhere are shared from the eyes and insights of a seasoned hotelier and hospitality-focused financial advisor.

The devil is in the details. Embracing this mandate is the cornerstone of underwriting a hotel investment.

The focus is to "get under the hood" - to fully understand market demand drivers, the product, brand affiliation, and property management's skill sets. In addition to this focus, the single biggest challenge remains accurately defining the future incidence of new rooms supply including hotels under construction, those in permit phase, and those reportedly in planning stage. Typically, the introduction of new guest rooms into a market has an immediate, negative affect on the existing hotels growing their average daily room rates.

In the hotel business, if it can go wrong, it will. The three P's are a good tool to use to ensure that the asset manager, investor, and investment advisor collaborate for the smooth operation of the asset with steady financial gains. The three P's reflect: The Product (subject hotel, condition, competitiveness); The People (who's running the asset? do they have sufficient skills to manage the asset well?); and The Plan.

Various factors can also be utilized to mitigate risk when acquiring an existing hotel or investing in a new-build property. Primary factors utilized to mitigate risk when investing in commercially-oriented hotels (e.g. upscale, full-service hotels in major metropolitan markets) include the following:

  1. The Commercial Environment - Are there reliable, sustainable corporate room night demand generators in the market area?
  2. The Brand Management Platform - Is the existing or proposed brand affiliation and property management company fully resourced to compete effectively in the subject market?
  3. The Investment Basis - Is the projected average daily rate sufficient to justify the estimated investment cost per guest room to be acquired or to be built?

Considering these factors will assist in the risk and feasibility studies necessary to share with the investor. And when an investor happens to be from the Middle East, there are other skills, experiences and knowledge necessary for establishing trust and moving ahead. Knowledge of the region is essential.

Hotel Investment in the Middle East

This year and within the next five years, the six Gulf Cooperation Council (GCC) countries will invest more within their own states as well as acquiring new hotels in the United States and Europe.

In terms of the GCC and Kingdom of Saudi Arabia (KSA) states investing within their own region of the world, the most active player is likely to be Qatar. This is largely in response to the country's hosting of the World Cup in 2020. There is now considerable activity in Qatari developments in preparation of the milestone spotlight event.

A close second and third leader in terms of hospitality development, are Dubai and KSA. The demand for more accommodations during the annual, 30-day Ramadan Pilgrimage to Mecca has prompted the boost in hotel and tourism development and infrastructure. To put numbers into perspective to validate the rationale (according to The Economist) in 1950, 50,000 pilgrims traversed the Kaaba, the heart of the haj ritual. In 2015, the number reached 7.5 million. "And within three years, the authorities are planning to double that huge number."

The hotels in Mecca on the horizon are predominantly large B&B's built to accommodate vast numbers of tourists and guests. This is an extremely specialized field that will continue to demand investment capital for an overarching project that will encompass years to come.

For the next ten years and beyond, the types of hotels that the Middle Eastern investor will purchase are likely to change. And there are three major trends to anticipate:

  • Select-Service - As the industry sees increasingly sophisticated select-service hotels, investors will be looking towards these instead of the traditional full-service hotel. The future hotel investment portfolio will include more select-service hotels as the Hilton Garden Inns and Marriott Courtyards, for example, are found more appealing. The select-service hotels will continue to be part of beautiful presentations that investors will seek to acquire.

  • Food & Beverage - How investors will choose to manage food and beverage within hotels and resorts continues to evolve, particularly within the full-service asset. There is increased leasing of space to outside dining restaurants as opposed to brand managed, simply because lease income is risk free to the owner; and if the location is a competitive one, the restaurant owner will also be an F&B stakeholder. This risk free income as well as better customer service from an invested stakeholder results in happier hotel guests. In addition, the F&B managers of the dining establishment sees less turnover than an F&B manager working for a hotel brand.

  • Partnerships - Consolidation will result in necessary partnerships between brands and investors. As evidenced by the recent Marriott acquisition of Starwood, today's hotels are "eat or be eaten." A recent experience with a Middle Eastern investor who sought to acquire a U.S. Marriott and a European Marriott was proven successful because of the partnerships and relationships already in place and that actually resulted from the recent merger.

The US Hotelier and Middle Eastern Investor: A Cultural Collaboration

Conducting business in the Middle East requires a nuanced business acumen. Numerous factors come into play, and one's "cultural competence" and "professional etiquette" is always being tested.

Western investors are more "circular," while Middle Eastern investors are more "linear." Closing a deal takes more time and planning than you would anticipate even when planning for delays. While one may have confirmed times and dates for a specific meeting, for example, in reality, those are just "targeted times," and moving targets at that. Thirty plus years of working with Middle Eastern hoteliers and investors have taught us to fly in from the States, arrive over a weekend, and simply wait in the hotel to be contacted. Monday becomes Tuesday, and Tuesday becomes Wednesday. That's perfectly okay. It's just not what we are accustomed to in the Americas or Europe. It's Middle Eastern protocol. One must be patient, tenacious, and willing to keep open the lines of communication. However, once the "deal" is closed and the business agreement has been approved, then a switch has been flipped. One is expected to immediately execute the terms of the deal - promptly and correctly.

Working in this part of the world, one cannot be a "suitcase advisor." The hospitality executive cannot just have boots on the ground Monday through Thursday. One has to evolve into a stakeholder in the country to be taken seriously at all. Today, Middle Eastern investors are sorting and choosing with whom they will engage in business. These potential investors in the US or European hotel scene, for example, will determine who is a "real" rather than a "superficial" player in their region of the world. Those who are the sources of capital set the rules. As such, an outsider must have property in the region to be considered a true stakeholder - to be considered a trusted voice ensuring the success of the deal. A true investment in the region contributes to one's image and enhances the industry working relationships - such as with influential development businesses and authorities including the Qatar Finance Authority, for example. The trusted relationships are invaluable.

In 2016, the United States Saw a Record Proportion of Offshore Capital Investment

In 2016 and 2017, Abu Dhabi, Saudi Arabia, and high net worth families within Qatar have been among those investing heavily in American hospitality assets. Over the last 12 to 18 months these families sought hotel assets to acquire and negotiated deals to manage their businesses.

While Middle Eastern countries continue to invest heavily in US hotel assets, the globalization of hospitality ownership impacts Europe and Africa too. According to the latest hotel investment outlook by JLL, the EMEA region is expected to see global hotel sales volumes grow to US $22.5 billion from US $20.5 billion last year. Institutional investment is expected to stay steady this year, while private equity buyers could become more active. Adapting our Western proclivities to the needs of the international buyers will be essential to obtain a share of this market forecast.

Tom Engel is principal of T.R. ENGEL Group, a hospitality and real estate advisory specializing in transaction services and project and asset management for hotels, convention centers, and mixed-use commercial real estate. Mr. Engel brings years of experience in hotel brand management and commercial real estate as well as leadership in prior work to his role as President of T.R. Engel Group. He focused his career in brand management at Unilever and Revlon, Inc. He co-founded three lodging brands across varying hospitality segments — Embassy Suites, Crowne Plaza Hotels and Resorts, and Hawthorn Suites by Wyndham Hotels. Mr. Engel served eight years as Executive Vice President at Equitable Real Estate Investment. Mr. Engel can be contacted at 617-451-1701 or thomasengel@trengelgroup.com Please visit https://www.trengelgroup.com for more information. Extended Bio...

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OCTOBER: Revenue Management: Technology and Big Data

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