By Sarah Townsend
It has been a trying year for Gulf businesses but Kuwait’s midmarket Action Hotels is welcoming once-luxury customers tightening their purse strings. Even so, chairman Sheikh Mubarak Al Abdullah Al Mubarak Al Sabah says he is adopting a frugal attitude to maintain growth
“I don’t want to blow a trumpet and say 2016 has been a good year; it’s been a challenging one. Low oil prices have hit the region, projects have been cut, companies have shrunk budgets. It’s been a tough year across the board.”
Sheikh Mubarak Al Abdullah Al Mubarak Al Sabah is fighting a cold when we meet in Dubai but he ploughs on, sipping a cup of steaming hot tea. He explains that this is exactly the attitude he has adopted in business, as the GCC strives to adapt to shrinking oil revenues and lingering economic uncertainty.
“We’re going back, taking a deep breath. I won’t say we’re battening down the hatches, but we’re looking at everything again and focussing on making sure our children are delivering the results.”
The “children” of which Sheikh Mubarak speaks are not biological, but his hotels. As chairman of Kuwait-based midscale hotelier Action Hotels, which he founded in 2005, Sheikh Mubarak claims to have pioneered the launch of branded three- and four-star hotels in the Middle East at a time when most of the market would have turned up its nose at anything less than five-star luxury.
But his foresight has paid off. Tapping into the rise of budget airlines and no-frills business travel, Action Hotels is today an established midmarket hotel developer and asset manager with an 11-strong portfolio and more in the pipeline. It has been listed on the London Stock Exchange’s (LSE) Alternative Investment Market since 2013 and had a market capitalisation of $93.89m as of October 21.
The company owns its hotels and enters into ownership or leasehold partnerships with global brands such as Ibis, Novotel, Holiday Inn and Premier Inn. It operates in all of the six GCC countries, except Qatar (where the cost of land is currently considered too high for midmarket hotels), as well as in Jordan and Australia, where it has a growing presence. This month, the company signed a deal to build its fourth hotel in Australia, at the new Melbourne Convention and Exhibition Centre.
It has six more in the pipeline — a mix of leased or owned properties in Bahrain, Oman, Saudi Arabia and the UAE — which will take its total number of rooms from 2,030 to at least 3,184 by 2018. It aims to have 5,000 rooms by 2020.
Sheikh Mubarak, a member of Kuwait’s royal family, studied international relations at the University of Cambridge, is a graduate of the UK’s Royal Military Academy of Sandhurst and served in the Kuwaiti Armed Forces.
He is on the boards of several companies in the Middle East and North Africa, including Egypt Kuwait Holdings, and is the founding chairman of the Kuwait-listed Qurain Petrochemical Industries Company. He is also vice-chairman of the family-run conglomerate, Action Group Holdings.
Despite his impressive credentials, he is modest. “I always like to be second, I don’t like to be prominent, in-your-face like that,” he says, when he learns of the possibility that he may appear on the cover of this magazine.
Still, he is confident in the strength of his business, telling Arabian Business that Action Hotels is weathering the economic storm. “It’s a paradox really, quite ironic, that this [global decline] has become an opportunity for us. People are choosing midscale hotels as opposed to high-end ones, which fits with our motto of good quality for lower prices.”
In targeting business travellers, Action Hotels is cushioned, to some extent, from any drop in tourism resulting from currency fluctuations, economic slowdown and political unrest.
While analysts have reported declining GCC hotel revenues in line with the oil price — consultants STR recorded a 10.3 percent year-on-year decline in revenue per available room (RevPAR) at the end of the first half of 2016 — Sheikh Mubarak says Action Hotels’ performance has been stable.
Its interim financial results for the six months to June 30, show that both the Middle East and Australian hotels saw average occupancy rates of 74.7 percent, with Kuwait hotels Ibis Sharq and Ibis Salmiya named as the top performers, with occupancy rates of 92 percent and 83 percent, respectively. Average RevPAR was $75.1.
The company’s revenues were up 18 percent from $21.67m last June to $25.6m this year, and net profit was up to $3.9m from $2.8m at the end of 2015. The company reported an 18 percent year-on-year increase in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to $7.2m in June, and a 7 percent drop in adjusted net asset value to $199m. Total hotel assets was valued at $428m, up $31m from the previous year.
Sheikh Mubarak says he is pleased with the results “but would have liked to have done better”. He says the next quarter is unlikely to be as strong because of a typical six-month lag between market circumstances and how these are reflected in company results.
Action Hotels’ two properties in Oman have been especially hard hit in the past quarter, he says, as has Bahrain, while the impact of the UK’s Brexit vote remains to be seen.
“To be honest there’s been a bit of a drop [since June]; it’s been a challenging quarter,” he says. “However, we shouldn’t look at things quarter to quarter, I think that’s too short. That’s the problem with big corporations, they look quarter to quarter and it doesn’t apply to us. It’s not our reality. We’re not an IT business selling big packages and products. We’re in the business of building things.
“Building assets takes a long time — from site selection, planning, design, construction, finance and operational risk. You have so many elements, you’re looking at a five-year view, at least.”
On the whole, the company has been able to offset wider market challenges. “Kuwait, our home market, is a good one for us and has been very stable, largely because of lack of supply and the government’s new economic development plan, which is spurring investment.”
Dubai also has been a relatively stable market, he says, with increased tourism from China helping to offset a decline in visitors from Europe, government investment to promote the emirate ahead of Dubai Expo 2020 and a general shortage of midscale hotels.
Sheikh Mubarak is sceptical of the opportunities in what was traditionally the most lucrative segment of Dubai’s hotels industry. “There are a lot of luxury developments coming on to the market and it will be interesting to see how these fare over the next two-three years. They will be under pressure, for sure.”
He is excited about his two planned hotels in the emirate — a 220-room Novotel at Dubai Creek and an as yet unbranded property in Dubai Media City. The company is also opening a 112-room Staybridge Suites in Abu Dhabi in 2018.
However, Action Hotels is adapting to suit a less buoyant environment. The target of 5,000 rooms by 2020 is “ambitious” though achievable, Sheikh Mubarak says, adding that the company is opting for long-term lease deals over acquisitions to keep its overheads tight.
“We’ve started to look at third party opportunities. Rather than owning assets, we’re leasing the asset on a long-term basis, for 20 years or so, as a way of diversification.
“In essence we’re like a retail landlord, managing the operational risk without managing the brand, to mitigate our own risk. We’re going from being an asset-heavy business to an asset-light one; an operations company instead of a developer.”
Another reason behind the strategy is location. “We would like to have better locations but this would be difficult, even if you had all the money in the world, because there aren’t many assets for sale in our region. [Leasing assets] is one way of getting hold of them without having to buy or build them.”
Six hotels in the current and pipeline portfolio are leased while the rest are owned or, in the case of two newer hotels, operated via a joint venture. The company intends to lease between 25-30 percent of its portfolio by 2020.
Action Hotels is also attempting to mitigate risk by ramping up internet marketing, increasing partnerships with tour operators and reviewing financing arrangements. Further international expansion is off the table for now, Sheikh Mubarak says.
“We’ve gone back to our banks to make sure we have longer-term funding and we’ve revisited all of our projects to make sure our budgeting and project management is realistic,” he says.
“We don’t have a lot of choice, to be honest. We think twice about expanding in the current market circumstances; there is a general tightness in liquidity. I don’t want to paint a very dark picture, but we are very much focussed on what we have in our current pipeline. We are not adding much in the short-to-medium term.”
That said, Australia is proving a lucrative market and Action Hotels is keen to swell its pipeline there. It is considering a listing on the Australian Stock Exchange within the next three years.
“It’s a triple A-rated economy and looking at the current problems we have in the region it’s a good idea to enhance our capabilities in Australia. But we need to be bigger before we do that,” Sheikh Mubarak says.
He is also targeting a full listing on the LSE within the same time period, but says the company needs to hunker down in the meantime.
“We need to get through the next three years aggressively, get our numbers up and then look to the next phase. Overall, we are doing relatively well in an environment with difficulties. With austerity measures, even governments are using our hotels more.”
Of course, there will be more competition in the coming years, he says. “The bigger, five-star hotels will start dropping their rates, but at the end of the day our margins are better, our overheads lower, and I think we can compete and maintain our market share.”
For a midmarket player in a region where the sector is new, such hotels face challenges in meeting guests’ expectations. It is a constant balancing act between improvising to meet customers’ needs and keeping costs down, Sheikh Mubarak laments.
“When I told people our hotels in Kuwait did not have room service they were shocked. They are also used to a porter taking their luggage. But at the end of the day these are all costs and services. If you have a hotel with 200 rooms and 150 of them want breakfast in their rooms, you need people to take the food up, you need more elevators and more cooks. It’s not really an economy hotel then, is it? It’s a full-service hotel.
“I think human beings ultimately adapt to whatever environment they’re in. You are a victim of your own habits, and if you change your habits you get used to it.”
One service he insists on is free internet: “A lot of five-star hotels charge a dollar for wifi. That’s pathetic! We are not a pay-as-you-go model.”
Sheikh Mubarak tries not to involve himself in the operational decisions of each hotel, beyond hiring the right management. However, he admits he worries about the big stuff — political instability, general unrest.
“You must admit, we are in a region that… you know, [has] terrorism… It worries everybody and has a negative impact everywhere, not just the Middle East. Look at France recently. I do get stressed.”
Terrorism aside, it is no surprise he gets stressed given how many hats he wears. In his capacity as vice-chairman of Action Group Holdings, Sheikh Mubarak is increasingly busy as the group looks for new areas in which to invest.
He cannot disclose financial figures, but says the group is seeking to diversify its petrochemicals operations away from upstream production, towards downstream ‘converter’ services. It is also exploring opportunities in the food manufacturing industry (“a countercyclical industry that always does pretty well in the right market”, he says), while the group’s real estate division is focussing on development opportunities in UK cities outside London, such as Birmingham.
Back in Kuwait, there is plenty to rile the sheikh. He declines to comment in detail on the government’s five-year economic development plan unveiled in recent months, but says he is disappointed with the lack of progress made on upgrading infrastructure and creating private sector jobs.
In particular, he says, Kuwait’s national airport, the oldest in the GCC and once the most advanced, is now crumbling and outdated yet the government has been slow to tender for a redevelopment project. The country is also well behind other GCC countries in terms of creating free zones, and its foreign ownership laws need urgent revision if the private sector economy is to get the kick start it needs to offer employment opportunities to Kuwaitis in the future.
“One of the biggest problems and challenges we have in this region is [youth] unemployment and Kuwait is no different,” he says.
“Based on our constitution and system of government, we have become a renter state where a lot of the workforce is employed by the government. We can still afford it because we are a small country, but it is a growing problem.”
Yet, Sheikh Mubarak finds much satisfaction in the many roles he fulfils.
“I enjoy developing. You touch so many people’s lives by building things and sustaining them, and you are creating economic activity and a community at the end of the day. Sometimes it’s a residential building, sometimes it’s something else — but each project is different. It’s like chess, no two games are ever the same.”For all the latest travel news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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