What are investors feeling?

Early May is a busy time for the hospitality sector in the Gulf; the Arabian Hotel Investment Conference (AHIC) is followed closely by Arabian Travel Market (ATM), so for the lucky ones it’s a full week of exhibiting, meetings and networking events.

There is still a lot of doom and gloom, but before we assess investor sentiment and discuss some of the key issues that arose at these events, let’s look at some facts about the region (with thanks to Deloitte and STR Global):

• During the first two months of 2009 the Middle East was the only region in the world to experience a growth in air traffic (+1.7%) and the International Air Transport Association (IATA) predicts that this growth will be sustained through 2009 (+1.2%).

• During the first quarter of 2009 the Middle East comfortably retained its position as the highest global revPAR earner, despite the correction experienced in one of its key destinations, Dubai, where revPAR fell by 36%.

• GDP is forecast to grow at 1.5% in the MENA during 2009, exceeding the world average.

On the surface this paints a relatively rosy picture for the existing hotel stock in the region, but to what extent are these positive demand indicators offset by supply growth?

Lodging Econometrics forecast of new supply suggests that a total of 23,374 new bedrooms will enter the Middle East market in 2009, of which 13,250 (57%) are in Dubai — the destination suffering the largest revPAR fall so far this year — while only 3549 (15%) are in Saudi Arabian cities, which are enjoying the largest revPAR increases.

While an inevitable correction in Dubai hotel rates and greater barriers to entry in Saudi Arabia may be factors, these new rooms look like a case of ‘right time, wrong place’.

While many developers are reluctant to admit it, a number of projects are being delayed.

There are two reasons for this, one enforced, the other voluntary.

In the first category is lack of liquidity — a factor that is more likely to affect developers whose cash flow has been restricted by Dubai’s real estate woes, and in the second, a recognition that there is little to be gained from opening in such poor trading conditions, better to batten down the hatches and ride out the storm.

On this basis it is probably fair to assume that not all of these new rooms will be realised on schedule, and it is in those markets where demand has weakened sharply that delays are most likely.

So, turning to AHIC investor sentiment and the first point to make is that there were fewer investors at the show this year.

This is no great surprise, visitor numbers are down at pretty much every conference and exhibition as travel budgets have been cut, however, lack of attendance does send a message on sentiment.

There were also fewer bankers at AHIC than in 2008.

Why? Well first of all because there are fewer bankers around now and secondly, because most are not in a position to do deals. Interestingly the ones who did attend were not the ones who have been making all the news, for all the wrong reasons, over the last 12 months.

So what was the mood of the investors? The sense that came from the seminars and informal discussions at last month’s events was that they recognise that now may just be a good time to be looking at prudent deals in the right location.

Reduced land prices (some hot spots excluded) and construction costs are assisting ROI calculations, and with a two- to three-year development timeline we are likely to be back in the sunlit uplands by the time projects open.

The other key message that came through was that this time there is less appetite to develop without the benefit of both a robust feasibility study, and advice on operator selection and management agreement terms. Alongside this, the hotel operating companies know that they need to be more flexible than last time round.

Without a compliant developer pipeline the opportunity to grow their brand is severely restricted and there are a number of smaller operating companies on the block prepared to offer interesting terms, who are snapping at their heels.

Nigel Teasdale is regional director for Vision Hospitality Asset Management. Contact: This email address is being protected from spam bots, you need Javascript enabled to view it .

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