In the wake of the economic downturn, funding for hotel projects has grown scarce and hotel operators are finding themselves competing for fewer management contracts. Large international hotel management companies are in a better position to capitalise on these trends than smaller regional brands, but they also face challenges in the current environment, experts say.
In the years prior to the downturn developers were keen to invest in hotel projects in the UAE as revenues were high and financing was readily available. However, the investment climate in the country has changed in the wake of the financial crisis, with developers being more cautious about launching new projects and taking fewer risks when choosing operators.
Owners have always preferred to choose management brands with whom they felt comfortable, and frequently this led to a greater focus on the guest experience and the prestige of the management company rather than driving profits to the bottom line, says John Podaras. Now owners are increasingly asking operators to justify the value they can bring to the table in terms of revenue and return on investment, which tends to work to the advantage of big international management companies.
'While smaller brands may appear more attractive due to lower fees, knowledgeable owners will look at market awareness indexes, number of sales offices, strength of loyalty clubs, source of business, etc., which invariably tend to favour the larger operators, and swallow higher management fees,' Podaras told AMEinfo.com.
Teaming up with well-known brands can also help owners attract financing or leverage better terms as banks often prefer to put their money behind big names, especially in lean financial times. However, lenders are increasingly asking owners to obtain performance guarantees or indications from operators, which is something management firms are reluctant to do as they too exercise their own risk limitation, he notes.
Franchising agreements
Not only are more owners teaming up with big name brands to help secure financing for new projects, they are also more likely to convert their existing properties to well-known brands in order to maintain or boost their share of the market in challenging times.
'Often they prefer to seek a franchise arrangement, since they usually have the management team in place, but most operators are reluctant to give out franchises in this part of the world unless there are solid reasons behind the deal,' Podaras notes. 'Many operators do officially or unofficially have a particular brand in their stable that they will use for their converted properties.'
While international hotel management companies generally are keen to do business in the UAE, especially as hotels in Europe and the US continue to struggle, their enthusiasm has been tempered by the general risk aversion that has arisen throughout the industry. 'They now have to justify deals much better to their boards and to their shareholders, so although the emphasis in the region is still there, they are a bit more careful about whom they are considering getting into bed with,' he says.
Regional competition intensifies:
One fallout of the slowdown in hotel developments is that fewer management contracts will be awarded, which means greater competition amongst management companies, says Chiheb Ben Mahmoud. With fewer contracts up for grabs, owners might expect greater flexibility from management companies.
At stake for operators is the integrity of management agreements, which are 'highly complex and fragile structures', he says. 'It took international operators years to establish; - some would say to impose - management agreements to owners as industry standards. Any rushed move in the current circumstances might threaten the pillars and the solidity of the whole system.
'Are the operators willing to take the risk of offering their services to owners according to 'management agreements - light version?' he says. In the meantime, local and regional operators could take advantage of the available opportunities, he added.
