Bank lending still tight in Middle East
Bank lending still tight in Middle East
02 MAY 2012 8:55 AM

Hotel performance might be recovering in the Middle East, but debt financing is still difficult to come by, according to panelists at the Arabian Hotel Investment Conference.


DUBAI, United Arab Emirates—Even improved performance in the hospitality sector isn’t convincing finicky banks still reeling from the real-estate downturn to lend, regional investors and financiers confirmed this week during the Arabian Hotel Investment Conference.

The landscape has improved in the last six to eight months but not to the desired lending level, said Anil Bhardwaj, director of A.A. Al Moosa Enterprises LLC.

“There is a total disconnect between the optimism of investors, who want to get on with building, and international and local banks here facing their own challenges,” he said. “They had too much exposure to the real-estate market, so their balance sheets ended up lopsided.”

European banks largely have tightened their purse strings in an attempt to bolster balance sheets back home. Locally, however, liquidity has increased, said Oliver Ebner, senior manager, global project and structured finance at the National Bank of Abu Dhabi.

“This leaves more business opportunities for local banks,” he said.

Banks more stringent
Ebner warned that accessing local debt financing is not as easy as it was during the pre-crisis days.

“If anything gets financed today, whoever develops it is expected to have deep pockets in case it is needed,” he said. “The leverage has come down, pricing has gone up and the cycle tenure is shorter.”

Banks also are placing a greater emphasis on a strong, existing client relationship, Ebner added. They want to have the guarantee of quality management, which is viewed as more important than market conditions. However, project profitability is still a crucial factor, he said.

“The criteria for banks to consider a hotel project, involves a quality study carried out by someone with a trusted signature. Everyone is scared of risk. To secure a decision on lending, a prime site and a committed respected operator is also essential,” said Gabriel Matar, head of hotels Middle East and Africa for Jones Lang LaSalle Hotels.

Regardless of meeting the above conditions, Matar said there is little that gets financed in the first place.

“If banks are lending, and it is quite impossible to get financing, their (loan to value) is in excess of 60%—50% is only available in Qatar and Saudi Arabia, and there is some lending in Lebanon—that’s it,” he said.

Getting projects off the ground
Approximately 70% of the Middle East hotel development pipeline won’t see the light of day, Matar said.

“We won’t see too many projects opening. Yes, they were signed, but (they) don’t get to open,” he said.

Projects signed today in the region typically are self financed, he added.

“It is more complicated now to develop new hotels as banks want more security. Here, usually business is family-owned and these are the main investors. They are not AAA-rated but have always enjoyed respect through their reputation. So how do they satisfy banks’ higher security needs, by keeping gold bullions in a safe?” Bhardwaj said.

Bashar Al Natoor, director at Fitch Ratings corporates team in Dubai, said hotel development in the Middle East is primarily cash driven and not financed by debt. Islamic financial institutions might finance a few projects, but petrodollars still rule.

Gulf capital finances development everywhere from Saudi Arabia to Oman to Lebanon, as well as Qatar, Dubai and Abu Dhabi, according to Matar.

Fergal Harris, head of real estate Middle East at Standard Chartered Bank, said banks shy away from hotels as they cannot be easily shifted, like residential or offices, into something else.

“A lot are competing for scarce capital as the risk in this specialized industry is high, hotel funding is more complicated, and we’ve never seen performance-related lending,” he said.

Building a better portfolio
Banks do not necessarily frown on the purchase of existing properties, the panelists agreed. However, banks typically associate more risk with luxury assets than 3- or 4-star hotels.

Lenders also have shifted their view on mixed-use assets. Whereas in the past the development focus was on residential-hotel projects with the sales of the former funding the latter, now banks want hotels to be self sufficient, said Salman A. Haider, executive managing director, hotels for Majid Al Futtaim Properties.

“Now we have come to a stage where we need hotels to be self-sustainable as developers and owners,” he said.

The cash flow these properties generate is now seen as more reliable than the value of the actual real estate, said Samih Sawiris, chairman of Orascom Development Holding.

“Even in the worst of times hotels still churn out cash to finance real estate,” he said. “The actual hotel operation is the reliable part and real estate the risky fun part. The best is to have a mix of both.”

Thus, hotels’ ability to weather bad economic storms has made them expensive to buy.

“Nobody would consider buying anything below a return on investment of 12%. In many cases, offers made on hotel properties won’t be enough, as owners in the region are not interested in selling distressed assets. They’ll rather sit bad times out,” Matar said.

Cap rates typically hover around 10% to 12% but could go down to 9% in the future, he added.

“You don’t see distressed assets traded in Dubai. If it is done, it is dealt with family to family. In Lebanon, yes, you could see them, but usually they weren’t traded as the distress was seen as a short-term issue. In Syria, it is the opposite; some would like to sell, but they can’t at the prices they want to because of the issues there,” said Joe Sita, president of IFA Hotel Investments.

He said there still is a need to increase transparency in terms of documenting past transactions.

“Without the investor community being able to track them, cap rates will remain at levels which are not in commensuration with the risk that’s inherent in (Dubai) at the moment,” he said.

Investment is still embryonic in the region and doesn’t function like other global markets where transfer of ownership is normal, said Stewart Coggans, executive VP, Middle East and Africa for Jones Lang LaSalle Hotels.

“Having said that, Dubai is seeing interest from Asia and Europe. There are deals happening but small and not that regular,” he added.

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