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WHITE: Transperancy and honesty is the key to operator relationships.

Dubai Investment Group Real Estate managing director Derek White outlines the company's portfolio, future expansion plans and what it looks for in its hotel-operator relationships.

What does Dubai Investment Group Real Estate (DIG) have in its portfolio?

DIG is a global organisation, and we have properties here in Dubai and Europe, as well as in the US and Asia. Broadly, we own directly and we also invest in real estate companies that own directly, in addition to the fact that we also asset manage for third party owners as well in a broad spectrum of asset classes.

Right now our portfolio, which includes what we own and manage, has a value of about US $7 billion, and that includes currently 4000 hotel rooms, about 850,000 square feet of retail space or malls, and more than a million square feet of office space.

Primarily in the US, we own a large office building portfolio, and then we have hotels spread out in Chicago, San Francisco and New York.

Looking at your global portfolio, where are the majority of your assets located?

The majority would have to be in Dubai and we are very heavily invested in tourism in Dubai - which is primarily the Jumeirah Group's Dubai portfolio, with the exception of Bab Al Shams.

In terms of expansion, what markets do you see opportunities for growth in?

Right now we are seeing a lot of opportunities in South East Asia, but we are also looking for well-positioned assets in growth markets that at a micro level could be in South East Asia or maybe the US, but we are certainly looking into the MENA region. It's a very global business, with a local scale.

In the Middle East in particular, where do you see the opportunities for growth?

Dubai is growing and obviously we think Dubai continues to be a strong growth story as well as Abu Dhabi. Other markets which are starting to get a lot of attention are Morocco and Tunisia and we have seen a fair amount of trading in Egypt, plus we have noticed an increased activity in Saudi Arabia, although not directly.

However, there are markets that always seem to struggle, like Algeria.

In terms of the hotel operators, what are you looking for?

For operators, it all depends on the style of the hotel, the location, and our requirements and objectives.

Therefore, we look for operators with a proven track record - at both ends of the profit and loss - in RevPAR and we also look at profitability. A lot of operators spend a lot of time touting the RevPAR statistic, but we as the owner are obviously more concerned about the bottom line.

So GOPPAR (Gross Operating Profit Per Available Room) is a more meaningful statistic to us as we look at possible operators.

We also look at the strength and depth of marketing, and consumer brand awareness.

There are certain markets where brands are not as strong as others and transparency in reporting is a real key one when we talk with operators.

Getting them to be completely transparent and honest about the expenses that are being charged against the hotel from corporate and central charges is a bone of contention between owners and operators, and transparency in that reporting is key.

Integrity of the brand standards that support owner returns, and standards that are there for the benefit of the brand versus the standards that are there to support the owners' returns and create more value for the owner. A lot of operators don't understand that distinction, and the ones who get it are the ones who are making the most for their owners.

Commitment to and understanding of owners' visions and requirements is also important. Every property is different, every property has its own unique issues, and some operators will come in with a cookie cutter approach when most buildings require specific attention to the details of that building and the physical attributes of that building, and I think that is important.

The ability to reconcile the owner's investment perspective with the short term needs of the business is also important.

There needs to be consistency in senior leadership within a brand. There have been some brands with leadership changes and that makes things a little bit unstable, so there needs to be consistent leadership.

And then finally, there's reliability and accountability.

And typically there are some instances where we have inherited operators, where we have purchased a property and there is already an operator there under a management contract, but in cases where we are buying a brand new hotel then we will go through a rigorous RFP (request for proposal) process which outlines the opportunity for the operator and what our business terms would be.

Do most operating companies provide an appropriate response to the RFP?

Yes, most of the operators have managers focussed on expanding through third party management agreements, so they understand what owners and developers are looking for, and they will put together proposals that respond to particular areas.

Most operating companies have development people who are pretty spread out with a regional perspective, so there is a regional developer responsible for the markets we are interested in and would respond to us.

So we like to conduct a thorough process with the operators and analyse their strengths and weaknesses to see who can bring the best value to an asset for us. And because assets and locations are unique, some are more appropriate to a particular operator's style than others.

Do you find there is an appropriate level of differentiation between the big players in the hotel management side of things, or are they becoming convergent in their offers to owners?

No, I think each one of the operating companies does have its own personality, and each has its own issues. Each one comes to the table with a different set of organisational objectives, which affects how their proposal on operating the building might look.

You have operators who have owned hotels before, and they understand the needs of the owners. I think the good operators understand the owner's vision and the requirements of return on investment. The operator who best understands that is probably going to be the one who is awarded the management contract.

But the key to an operators' success is distribution and loyalty to the brand, because a lot of the value of the brands are in the loyalty programmes they have created.

What are you looking for in the relationship between yourselves as owners and the operating company?

We look for openness and honesty. We also look for aligned goals, and we like to have management contracts which align the goals of the owner and operating company as much as possible, and that means placing appropriate incentives at certain profit levels.

What sort of properties do you see as generating the best returns?

In our experience, when we think about properties that generate the best returns it is not necessarily about the location alone. It has a lot to do with active ownership and professional asset management.

From our perspective, buildings which have the active involvement of the owner and a professional asset management team in place are the ones that are achieving the best returns right now, and will be the best placed to survive any downturns in the economic cycles.

There is a lot of speculation about the possibility of a US lead global recession - do you think the Middle East market will be immune?

There is no doubt that this will have ripple effects and it already done so in the UK. In the UK you have the housing market experiencing some of the pain of the US market, and certainly with the credit crunch - given the importance of the US capital market - it has effects everywhere.

I think the economy here is somewhat insulated from that as there is certainly no lack of liquidity and capital markets.

But I think what they are going through is probably a healthy thing. If you look at Citigroup writing off $10 billion - they are taking the pain and cutting it off and cauterising the wound, and I think it will allow them to recover much more quickly.

From a real estate perspective, particularly in the hotels sector in the US during the 1980s there were a lot of perverse tax incentives that created a lot of overbuilding, and lenders that kept on lending as well.

I think lenders have learnt their lesson, and I think ultimately the tightening of lending will benefit the owners of hotels because it will limit the supply coming into the market. While it impacts the demand, it also impacts the supply in a positive way.

What's in store for DIG this year? What can we expect?

In terms of our assets, I think we will continue to see growth, even in the US markets. We are looking forward to the challenges of the continued growth in Dubai and the new supply.

We think that the developments such as Bawadi and Dubailand and the investments put in the airport and tourism infrastructure will only benefit Dubai as a destination.

There may be some room for supply-demand imbalances as we go through that, but I think Dubai is putting in the infrastructure to deal with that and putting the structures in place to be a leader in the region in terms of tourism - if not the world.

I think with all these rooms coming in they are going to have to hire and train a lot of managers and staff, which will be and is currently a challenge, and I think owners who have operators and asset managers addressing that issue now and being proactive are going to be the ones that succeed.

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