Why the region’s hotel owners are under increasing pressure

Across many parts of the world the hotel market is booming, with strong growth in Europe and Asia and an expected slowdown in the US not having materialised.

In the GCC there are positives to look ahead to, with cultural tourism in Abu Dhabi, adventure tourism in Ras Al Khaimah, new leisure activities in Dubai, and the opening up of Saudi Arabia attracting new types of visitor.

However, despite the advantages for the region’s tourism market there are also potential difficulties due to geopolitical tensions, and a massive new development pipeline in Dubai and Saudi Arabia possibly leading to a softening of average rates and perhaps also in occupancies.

But there is a potentially bigger problem on the horizon for the various developers, listed companies, governments and funds that own the hotels’ underlying properties.

Many people may not be aware that the brands you see on hotels, such as Holiday Inn, Hyatt or Marriott, are not the owners of these properties. Instead, the actual owners end up paying a lot of fees to both the brands that manage or market these hotels, and the travel agents (increasingly online these days in the form of Priceline and Expedia) who distribute rooms to the public.

The problem for owners is that they are getting squeezed by these two groups which are highly consolidated – in contrast to the ownership of hotels and serviced apartments which is spread very widely.

As an example, there are really only two significant online travel agencies (OTAs) in the region and they are able to charge pretty high fees, from about 13 per cent to more than 20 per cent of a room booking. Of course, they are a great way to reach travellers, so hotels want to use them, but the costs are a worry to many hotel real estate investors.

Equally, the big brands are also able to charge high fees both for managing a hotel and for a franchise agreement, where they put up a brand name on the hotel and help to market it, but don’t actually run it.

Management fees average between 5 to 6 per cent of revenues, but other charges can add up to a similar amount. And as the big brand companies merge with each other – such as Accor buying Fairmont and Marriott buying Starwood – they have even more concentration and thus more negotiating power when dealing with owners.

The problem for owners is that they have to pay these two sets of fees before they can address their other operating costs – salaries, staff housing, local taxes (including the new VAT), utilities, food and any lenders or other debt providers they may have.

That doesn’t leave a lot of cashflow and in a downturn, while the OTAs, brands and banks still have to get paid, the owners get squeezed.

To add insult to injury, the big brands usually demand very long management agreements with vast amount of control over both the hotel’s operation and the owner’s purse. Indeed, a few of the largest brands have even started to argue that the owner shouldn’t have a right of approval over the annual budget. Meaning that over the course of a 20-year contract, you largely have to just shut your eyes and hope for the best.

More experienced investors naturally kick this kind of proposal into the long grass, but newer ones may not have the market savvy to resist.

This type of issue will be one of the key topics we will be discussing at this year’s Gulf and Indian Ocean Hotel Investors’ Summit (GIOHIS), which takes place at the Yas Viceroy in Abu Dhabi on January 29-30.

With so much pressure on hotel owners across the region, we wait with interest to hear potential solutions from all players across the hospitality industry.