Activity in the hotel sector in the Middle East and
India is currently hot and getting hotter. International tourism expenditure in
India is anticipated to hit $10bn (£5bn) this year and in the Middle East it is predicted that $3trn (£1.5trn) will be invested in the tourism and infrastructure sectors during the next 20 years. On the ground this translates into massive levels of hotel development and international hotel brands that are very keen to get a piece of the action. Outward investment from these regions into foreign hotel real estate and foreign hotel chains is also very high.
Dubai World recently brought its hotel businesses under one banner, through merging the real estate businesses of Nakheel and Istithmar World Real Estate into a single entity. The group has hotel investments in excess of $3bn (£1.5bn) under management and current projects include The Trump International Hotel and Tower under development on The Palm Jumeirah.
In addition, investors from the Middle East have been involved in the acquisition of hotel assets overseas. Dubai World again illustrates this well, having recently agreed to acquire the Metropole Building in London’s West End. It also has plans to expand its Jumeirah hotel brand even more internationally to include 57 hotels by 2011, and currently has hotels under development in Mallorca, London, Phuket, Shanghai and Bermuda. External investment from Dubai has also included the acquisition of hotel chains, with Dubai Investment Group acquiring fast-growing budget chain Travelodge and Prince Alwaleed bin Talal (together with Bill Gates) acquiring the Four Seasons Hotel chain.
A similar pattern can be seen in India and is shown well by the recent activities of DLF, India’s largest listed property group. DLF is currently engaged in a joint venture with Hilton Hotels to develop Hilton’s hotels and extended stay products at 75 locations in India by 2012. DLF is also developing a luxury resort in Gurgaon which will include a 230-room hotel operated by Four Seasons. Having acquired a taste for deals with luxury international hotel chains, DLF has now bought itself one, acquiring 50% of Aman Resorts in a deal worth $400m (£201m).
India’s home-grown brands are also looking to expand aggressively. Last year, the Indian Hotel Company Limited (IHCL), part of the Tata Group and owner of Taj Hotels Resorts and Palaces, pursued a closer relationship with Orient Express Hotels (OEH). IHCL built its stake in OEH to 11.5% and proposed a strategic alliance between the two companies. IHCL was rebuffed in a highly-publicised and public row, which involved several published letters, with OEH saying it had no interest in a closer relationship with “a predominantly Indian hotel chain” and IHCL accusing OEH of being “highly misinformed” and “unduly aggressive”.
There are some interesting differences between acting for a developer in these regions and acting for one in Western markets.
Arranging the requisite planning and other permissions in European and US markets can be a difficult and time-consuming process. However, developers in the Middle East and India are often dealing with counter-parties who are undertaking massive development projects and may well be closely connected to governments that are committed to the rapid development of hotel projects. Such levels of commitment to development often mean that the hotels are already half-built before the relevant operator is signed up to run the hotel.
There are also stark differences on the funding side. Leverage is not as high as it would be on a typical deal in Europe and many of the big investment and development companies do not use any debt at all, particularly at the development stage. This takes one potential brake off the speed of development and removes the risk of over-leverage, which is one of the major concerns that international hotel brands (such as Accor, Intercontinental, Hilton, Marriott and Starwood) have when they look at new-build projects.
The level of activity in these regions has been a serious attraction to the international hotel brands which are constantly looking to increase the number of managed and franchised hotels they own. However, their approaches to doing deals in developing regions has varied. Some operators have been quick to grasp that they are not working in regions that have high levels of experience in relation to the ownership and operation structures, including management contracts and franchises, that are so common now in Europe and the US. However, others have taken the view, at least initially, that the hotel business is a global one and there is really no difference between a hotel in Dubai or Delhi and one in Dallas or Delaware. These operators have tried to impose documents designed for US and European markets without giving much consideration to the reality of local circumstances. From our experience this can often lead to friction and make it difficult, or impossible, to conclude deals.
The most successful of the international hotel brands, to date, seem to be those that have embraced local practice and forged partnerships with strong regional players. The more historic of these include the partnership between India’s ITC Hotels and Starwood which dates back to 1975 and, after initially covering only the Sheraton brand, now involves a partnership that brought Starwood’s Luxury Collection brand to India. The most recent of these partnerships is the joint venture announced this year between Emaar MGF (a joint venture between Dubai’s Emaar Properties and WGF, West Asia’s largest property developer by market value) and Hyatt, to develop 20 Hyatt Place hotels in India.
RK Krishna Kumar, chairman of Indian Hotel Company, made a good point, though we do not comment on its applicability to Orient Express Hotels, in his public letter to Paul White, the president of Orient Express Hotels, when he said in relation to companies in developing markets like India that they “will continue to play a meaningful role in the ongoing global economic integration… Enterprises and individuals must recognise and adapt to these fundamental economic changes. We believe that those with a fossilised frame of mind risk being marginalised."
Nick Skea-Strachan is an associate and John Sipling a partner at Berwin Leighton Paisner.
