More hotels are expected to change hands in Dubai in 2010 following a sharp slowdown in hotel investment last year, as economic conditions improve and demand rises for cheap assets. However, experts say that investment activity in Dubai's hotel sector is still likely to be relatively low due to the profile of owners in the emirate and rigidity of the market.
Hotel investment volume (transactions on operating hotels) in Europe, the Middle East and Africa (EMEA) fell to â,¬2.9bn in 2009, reflecting the lowest volume of transactions since the late 1990s and a drop of 63% compared to 2008, according to the latest report.
Although many hotel owners faced refinancing challenges in 2009, distressed hotel sales were not widespread, as financial institutions generally decided to work with owners to avoid selling in the current market, the report added.
In the Middle East, distressed sales tend to be particularly rare and mostly occur off market. 'The attitude towards property transactions in the region is rather special in the sense that there is still a cultural, and to some extent, emotional component associated with the investment,' Chiheb Ben Mahmoud told AMEInfo.com.
Market perceptions
'The sale of an asset is considered a traumatic event, which is why there are so few properties on the market. In the West, a serious seller would put something on the market, follow a certain process and whatever the market decides, that is it. Here, we know there are potential sellers, but they do not put their properties on the market because they do not want to be perceived as distressed sellers.'
Another factor unique to the Middle East hotel market is that real estate assets are relatively new to this region compared to the West, where there are many institutional players that buy and develop assets. 'We have not reached that stage yet,' he said.
Arnaud Andrieu agrees that there are several factors that are preventing Dubai from becoming a more mature environment for hotel investment. 'You cannot compare the Dubai market in terms of transaction to the US, Europe, or Asia where markets are more established. In Dubai, we are still in the embryonic phase in terms of development of the market,' he said.
Historically, investors in Dubai's hotel market typically have seen no value in using brokers and listing properties in the open market, but now things are changing. 'Investors are getting more sophisticated. It's getting better. We need to improve conditions, but it's normal because the market is still in its early stages,' he said.
One sign that the market is maturing is that investors are realizing that they have to diversify their portfolio, whereas before the crisis they were only interested in luxury properties, he said.
Investment to rise
With signs that the worst of the financial downturn is over, the hotel investment market is forecast to rise in 2010. It is predicted that investment in hotels in this region will climb by almost 40% this year to â,¬4.1bn, driven by improving economic conditions, gradually strengthening investor confidence and greater supply in the market.
Andrieu says that the gap between what the market expects to pay and the price that owners are expecting to get for their property is getting tighter. 'That means we can predict that by the end of 2010 and the beginning of 2011 there will be more transactions happening on the market where hotels will change from one hand to another,' he said.
'In Dubai, most owners are willing to sell their properties, depending on the price they can get and who the buyer is,' Andrieu added. 'It's not like it was in 2005 when no one was selling because they all knew prices would increase, and even when they were not selling they were generating very high cash flows.'
However, both experts say key stakeholders need to do more to help foster a more mature market. Mahmoud believes there is 'pent up' demand for hotel investment in the Middle East, but the growth of the sector is constrained by the fact that too many transactions take place on a one-to-one basis, thus preventing the market from building benchmarks and fundamentals.
He says that all players need to do their part to bring about more transparency and fostering the emergence of an efficient structure for the hotel investment market. In particular, he believes banks can play a critical role by enforcing transaction transparency requirements.
Still, he knows building the foundations of the market will take time. 'You cannot create a mature market overnight,' he said.
