InterContinental Hotels Group CEO India, Middle East and Africa Pascal Gauvin InterContinental Hotels Group CEO India, Middle East and Africa Pascal Gauvin

The mid-market hotel segment in the Middle East abounds with investment opportunities, driven by a confluence of factors, industry experts say, a topic which will be discussed in depth at the Arabian Hotel Investment Conference 2017 (AHIC) to be held at Madinat Jumeirah in Dubai from April 25 to 27.

“Economic conditions impacting consumer spend and the current supply-demand ratio in many markets in the Middle East, which are saturated with luxury developments and underdeveloped in the mid-market, have combined to encourage investors to see the potential in midscale hotels," AHIC founder and Bench Events chairman Jonathan Worsley said.

He added: “In our conversations with owners and operators alike, the mid-market has been identified as a major investment opportunity for 2017. We are, therefore, dedicating two panel sessions to this at AHIC: The Investment Climate Warms Up to the Mid-Market on April 26 and Upscale is the New Luxury on April 27."

“The subject of mid-market expansion has been a hot topic at AHIC before but now, the compelling investment model for lower development costs, a result of bank liquidity, market volatility and lender caution, is finally putting the mid-market in favour. We are looking forward to a debate that will explore the current alignment with a long-term view, looking at costs, rate strategy and returns,” said Worsley.

Global hospitality firm HVS, a sponsor of AHIC, highlighted “the need for additional affordable accommodation in most major established markets such as Dubai, Abu Dhabi, Doha, Jeddah and Riyadh”, said the company’s president Middle East and Africa Hala Matar Choufany.

“A market-wide rate analysis further confirms the development opportunity for midscale and limited service hotels that require limited investments and provide higher returns than traditional upscale hotels and developments,” observed Choufany.

According to research specialist STR, also a sponsor of AHIC, there are 40,231 rooms in the luxury segment in the Middle East and 60,909 in the upper upscale chain, compared to 17,914 rooms in upper midscale chains and 15,991 rooms in midscale chains, as of January 2017. There are 12,571 rooms under construction in the luxury chain segment and 2,897 rooms under construction in the midscale chains, STR data revealed. 

Hotel operators seem to be in agreement.

InterContinental Hotels Group (IHG) CEO India, Middle East and Africa Pascal Gauvin declared that while there will always be a need for luxury hotels in the region, the company was presently focused on the mid-market segment “in order to fill the gaps in the market.

“It is clear that in the luxury segment, the capital costs are high and the ROI is not necessarily high and/or immediate. The mid-market segment on the other hand has lower capital expenditure and does provide high return on investment in a shorter span of time. Given that there is a lack of quality mid-scale hotels in the market, the returns can be delivered in a shorter period,” Gauvin said.

Carlson Rezidor Hotel Group, an AHIC platinum sponsor, had executive vice president & chief development officer Elie Younes disclosing: "When one looks at the dynamics of this particular segmentation and its investment model, the yield factor is the main objective. Mid-market brands, to remain relevant to the investment community, have to be relatively cheaper to build, efficient in design and with minimum back of house. Equally, this lean and efficient design has to translate into lower operating costs and higher profitability – the sum of those two factors result into higher yield and therefore higher interest to investors given their basic objective of ROI.”

Louvre Hotels Group vice president for development & acquisitions Rami Moukarzel, who is speaking on the mid-market session at AHIC, stated,  “With tourism authorities seeking to establish more sustainable destinations, the need for midscale offerings is paramount to achieving the arrival numbers and receipts from travel and tourism. This, coupled with corporations and governmental authorities seeking more cost effecting lodging solutions for their people, has put further emphasis on creating quality branded budget hotels. One can't also discount the importance of offering leisure travellers, groups and transit arrivals an affordable option for their visits.”

For investors, Moukarzel cited the benefits to include low operating costs, low manning requirements and high profitability, with quicker ROIs.

“If designed well and with experienced midscale brands you expect very efficient, streamlined and concentrated spaces. GOP levels are usually 10 to even 20 points higher in percentage points to that of an upscale offering,” said Moukarzel.

One of the leading owners in the economy and midscale hotel segment in the Middle East, Action Hotels PLC, currently owns and operates 12 hotels and works closely with operators such as AccorHotels, IHG and Louvre Hotels Group with brands such as ibis, Holiday Inn and Tulip Inn managing its hotels.

Action Hotel PLC CEO Alain Debare said: “We have developed significant experience in the sector. We ensure our hotels are designed and built efficiently, and managed in a way to drive early and resilient profitability. We focus on delivering attractive investments for our shareholders.”

He also added that in addition to the economy and the mid-market hotels sector being an attractive investment, “there are high barriers to entry in the ME with restrictions on ownership, compliance to local regulations and the ability to secure prime land in the right location.”

Debare explained: “Location is absolutely critical to the success of any hotel and access to prime locations are hard to come by unless you have the right contacts and connections. Action Hotels is spearheading the development of economy and mid-market hotels in the region using the experience and connections of our Board and our early commitment to the sector giving us access to the all-essential prime locations in key gateway destinations. In addition, we are very hands-on: as owners, we know how important it is to be actively involved at every stage of the project from the design development to value engineering moving into operations - to ensure that each element works together and each hotel drives superior returns.”

There is also opportunity for operators and owners alike to create proprietary brands to fill the market gap. An example is Rove Hotels, a joint venture between Emaar Properties and Meraas, with expansion plans for 10 locations in Dubai, and Mysk by Shaza.

AHIC sponsor Emaar Hospitality Group COO Chris Newman commented: “Emaar Hospitality Group is leveraging this opportunity through our Rove Hotels, where we focus on delivering authentic urban experiences for our visitors. Such approaches – where we distinguish the brand by creating distinctive USPs - are important. As operators, it is imperative that we identify and create a new market niche that is not just based on affordability. Rove Hotels, for example, has been envisaged as a social and cultural hub for international explorers.”

For his part, Kempinski and Shaza Hotels vice president development Middle East & Africa Christian Nader, who is speaking at AHIC, said the company was seeing a continued interest in the midscale and upscale segments, especially in Saudi Arabia, Qatar and the UAE.

“Since the launch in April 2016 of our new four-star brand ‘Mysk by Shaza’, the large number of inquiries we received from investors interested in Mysk reflects the shift in market behaviour, investment appetite, and return expectations. Many markets are saturated in the five-star and luxury segment, and diversification of the hotel offering is becoming a necessity,” he said.

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