The world of Nakheel Hotels

Nakheel Hotels chief executive Joe Sita discusses the company's strategies in the shadow of looming global economic uncertainty and explains why he is quietly optimistic about 2008.

What are the implications of the recent merger between Istithmar Hotels and Nakheel?

From Istithmar Hotels perspective, essentially what we did was change our name, and other than that we are business as usual - same team, same business, same strategy, just a hell of a lot more to do.

Because we were a sister company anyway to Nakheel, we were already acting in an advisory capacity to Nakheel for projects both in Dubai and internationally. Now that we are part of the group, we are not in an advisory capacity, but these hotel assets that we were working on will have the ownership transfer to us.

There are numerous projects, like for example Trump International Hotel and Towers on Palm Jumeirah. We were previously acting in an advisory capacity to the Nakheel development group that was handling that. Now the hotel component of that development - because it is a mixed-use development - will reside with us.

There are others, there are more than a dozen hotel projects that are active just in Dubai, and they range from Palm Jumeirah, to Palm Jebel Ali, the Waterfront and even Palm Deira and Ibn Battuta.

How have you been selecting the operators for the various projects?

Our primary responsibility - apart from being the owner and asset manager of any hotels that Nakheel develops - in the pre-development phase is to get involved with design and planning, we do the operator search and selection process, and we negotiate with them the management and technical services agreements.

Ultimately we will end up owning and asset managing those hotels.

What do you look for in an operator?

We have established a number of strategic relationships with a handful of operators, so first and foremost we try, where possible, to work with those operators.

We're investors in most of them. If we start with Kerzner, if we can we try and develop a One&Only hotel or an Atlantis, because we are invested with them. We have a similar relationship with IHI (International Hotel Investments), which owns and operates the Corinthia brand, mostly in Europe and North Africa.

We have also recently announced a relationship with MGM. The Dubai World Group has an interest in MGM, and Nakheel Hotels is developing, in conjunction with Kerzner and MGM, an integrated casino and resort in Las Vegas. We are also talking to MGM about a number of projects here in Dubai.

Similarly, we also have a relationship with Starwood Hotels, and outside of Starwood themselves we are the largest owner of W-branded hotels in the world.

Finally, we also have a relationship with Mandarin Oriental, because we own the Mandarin Oriental in New York, and we are currently working with them on another couple of projects in North America. Those are the strategic relationships we have already established, and where we can we try to work with them. It's not always possible, because there are so many projects.

What we look for in an operator is to make sure that for the specific project and location and market we are working, that there is not a conflict - or that they are not over represented. We also want a strong distribution and presence in source markets, as well as the markets that the project is located in.

They should have a good strong management presence in the market we are talking about, and I mean a local presence - rather than being a North America-based or Europe-based presence we would want a local presence.

Those are the primary areas, and then after that we start to look at capacity. Do they have the depth of personnel to support us in the design process and from a technical services perspective? In many respects, it has become an operator's market. There are many more projects and properties out there than there are operators, particularly in some of the hot markets, so you want to make sure when you partner with an operator that they have the capacity to support you.

Internationally, what other projects are Nakheel Hotels currently working on?

Outside of Africa [which is managed from another office] we are about to announce a new hotel we have acquired in Mexico, which is an exciting new destination for us. We have been looking there for a little while.

We have also done quite a lot in Thailand, which we have already announced. We have a W in Koh Samui which will be a retreat and residence and then we have a W Hotel in Bangkok, and other high-end projects in Thailand.

In Asia we like Vietnam, and ideally we are looking for a mixed-use development in Vietnam to develop with one of our strategic partners.

Singapore is a market that the Nakheel Group, in combination with Elad and City Developments Limited, recently won the Beach Road project that we are jointly developing, and there will be two hotels on that. We will have two very high end projects in Singapore.

And then obviously China and India. We are looking, but we haven't managed to secure anything in that space just yet, but we are certainly becoming better represented in the market. Those are two key markets for us.

We have a joint venture in a fund to develop budget hotels, called Tune. We plan to roll out 30 branded budget-hotels in the next three to five years. We are really focused on that market - we have announced a couple of sites in Indonesia in Bali, we have some in Malaysia, we're very active in Thailand, and we are also looking at the Philippines. We have got all those markets where we are working pretty hard.

In the Middle East, are there any other projects that are coming up?

In the Middle East we are looking at some projects in Jordan at the moment, and we are obviously still actively looking for our easyHotel sites across the region in those countries that we have the master franchise.

With a gloomy global economic outlook, how do you see Nakheel Hotels being affected?

If the economic slowdown leads to a recession in the US, it is going to have an effect on the global tourism industry. The industry tends to be a leading indicator of how the economy is going, as the economy slows then the hotel business tends to be at the forefront of feeling that, and conversely as it starts to pick up it tends to quickly receive that pick-up.

At the moment we are not seeing any impact in North America, or indeed anywhere else. It is not like 9/11, SARS or anything like that.

We are largely invested at both ends of the market in luxury and budget, and the bulk of our investments in Europe and America are in the luxury segment. In the luxury segment 2007 was a bumper year, and the market for luxury goods and services, including hotels and airlines, comes largely out of the banking and finance industry to a certain extent.

Bonuses are still being paid, and I just read a survey that said the propensity for these people to spend is still very high through the first half of this year. So we are actually still expecting the demand for luxury goods and services and travel to remain high.

In our business, I am not expecting any significant downturn in the first half. Most competitors are not predicting growth will be negative in the US, just that it will slow down to somewhere around 2% growth. As that kicks off, one would hope that would keep the momentum going throughout 2008.

Overall, I am quietly confident and reasonably optimistic.

Obviously the other side is the credit squeeze, and clearly that has had an impact. We are in the market at the moment in the US on a number of refinancing projects, and while spreads have certainly blown out, LTVs (loan-to-value ratios) have compressed.

The good news is that the Fed has cut rates significantly, and will probably cut it another 25 basis points, so when you look at your total cost of buying, it is about the same. We are not experiencing a huge increase in the cost of borrowing.

And for high quality projects with good sponsors like ourselves, we still think there are lenders who will provide funding to us.

I think the developers and investors who are more speculative and have lower quality projects in second-rate locations have lots of things to be concerned about.

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