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Issue Driven - by Tony Allen

The hospitality sector looks tremendously exciting and profitable for investor owners but, warns Tony Allen, Design Development Director of leading hospitality consultancy Ròya, choosing the right model of operation is critical.

The Ròya team has over 200 years combined regional and international hands-on hospitality experience and direct access to the industry’s leading consultants, providing total hospitality advisory, total management and development solutions, concept inspiration and the skills that every developer and owner requires to realize their vision.

For over a decade, Ròya has established a client list that includes some of the region’s leading private investors, governments and private and public sector organizations. During this time, it has also developed close working relationships with some of the world’s finest architects, engineers, contractors, international hotel operators and hospitality consultants to create some truly iconic properties.

What would you say is the biggest issue facing the market at present?
Well, here in Dubai, one of the issues for hotel operators is that their business model is firmly built on the full service hotel, with extensive F&B provision which, historically, has been seen as a significant part of revenue. Despite a desire from DTCM, some owners and the increasing demands of the regional market, they’re reluctant to open a dry hotel. There’s a kind of resistance here in Dubai where market is open to full service operators - it would confuse people if a brand had a full service hotel and a dry hotel in the same city.

Well, it’s a different operational model than the one the large operators are used to in their major domestic markets, is it? What are the other differences in models?
If we look at the US, which is the most developed market, we see a number of different operational models. Firstly, the owner/operator. Next, we see the owner working with a major brand as the operator, with a standard management fee based on income and operational profits with probably an incentive fee for increased profits because both parties clearly have an interest in increased profits, plus a percentage of revenue being applied to CapEx. Thirdly, we have the case which is still pretty rare in this part of the world: the owner taking a franchise. Our market is not that mature though clearly we’re seeing this model in retail or F&B. A clear thing about the franchise model is that it’s not normally upscale brands being involved and, for small hotels, there really isn’t a franchising business case. 

Are brands not then interested in owners taking franchises here?
I think they are but there’s a general lack of experienced operating people in this space - that is, ones with experience in running franchised properties. It’s a good way for a brand to get market reach but it probably takes a more entrepreneurial market than we’ve been used to. Of course, we’ve seen large companies develop here from the local market - Jumeirah and Rotana are prime examples - who are now mature enough to open globally. So the model is changing and, whilst they can compete against companies like Starwood or Hilton, it’s still a discussion about how much their local brand equity is currently worth outside the region, just as is the value of other local brands from other regions are in the UAE. Yes, of course that will change.

So who is holding back the market, owners or operators?
I think some owners lack a wide enough experience of the hospitality sector - it may not be their core business. Look, if I pay an international brand to put their name over the door and then pull in a white label company to operate it for me, it’s really the same model and me paying twice except that there may be lower fees and probably a ‘better deal’ from the white label company. Fixed guarantees, debt servicing, budgets - there are a number of negotiating points.

So owners are caught in some tough decisions?
Absolutely. Numbers versus location. Quantity versus quality. Finding the right partner and location at the same time with a long-term deal. These are all serious issues and will get more important as the market matures. Remember, it’s still relatively young here.

Do you think owners are unsophisticated?
No, it’s not that. They certainly think that hospitality is a big profit area and many of the regional professional hotel investors are not emotionally driven. However some may think more like this: “I have a great piece of land in Al Quoz, find me Four Seasons or Louis Vuitton!” So, yes, I do think that expectations have to be more aligned with market reality. Hospitality is an absorbing business and certainly some owners tend to be a little proprietorial and see the property as an extension of their social or business life. This is a serious industry sector and they should focus their level of involvement on the financials.

What is the main driver in the market?
A lot derives from the mega master planned developments which help dictate overall stock levels. Where hotels will be built? What will they be? What is the capacity? I think we’ll see more incentives for the mid-range, the 3- and 4-star stock, as the market matures. The reality is, however, that land prices make it prohibitive for very low-cost properties. What I think we’ll now see coming on-line pretty quickly are developments around the new airport, together with wider consolidation and in-fill development.

What would you like to see in the regional market?
I think we need an appetite for new operators as the established ones are in need of a bit of a shake-up. The stock is also quite unbalanced - for instance, I believe only New York has more Starwood brands than Dubai! This is why it’s important for owners to select locations and partners carefully. One other area not fully considered is the relationship between the GM and the owner, since he’s the local guy with local knowledge running a multi-million dirham business, rather than some remote executive back in corporate.

And the problems of dealing with owners?
They need to be flexible and they really need to understand how much happens between development and opening in terms of legal stuff. A property is a long-term commitment. In many cases, owners can be too emotional: “I’m employing you so make the most of this asset!” or “I like Arabian food so I want that kind of restaurant in my property!” These relationships can be quite intimate, so it’s important to get it right. Sometimes we step in as the surrogate operator, although we always work for the owner but sometimes generic operator input is useful. One final area that some owners also struggle with is the issue of staff accommodation - do you build or rent?

“I think we need an appetite for new operators and brands as the established ones are in need of some fresh competition. The stock is also quite unbalanced - for instance, I believe only New York has more Starwood brands than Dubai!”

A version of this article appeared in the June 2015 print edition of Hospitality Business Middle East : http://www.hospitalitybusinessme.com/