Lenders discussed the terms at which they would finance hypothetical hotel projects in the Middle East during a panel at the Arabian Hotel Investment Conference.
DUBAI—Debt financing for hotels might be hard to come by for developers in the Middle East, but that does not mean bankers are ignoring the segment entirely. Indeed, lending still is available for the right hotels in the right locations at the right price.
To help lend some clarity to the hazy financing landscape, panelists during the Arabian Hotel Investment Conference discussed a number of proposed deals and the terms at which they would lend.
In general, the panelists said financing is more readily available for hotels in the budget and mid-scale segments. Luxury projects, on the other hand, are viewed as more risky.
200-key budget hotel
Oliver Ebner, senior manager, project and structured finance at the National Bank of Abu Dhabi, was interested in a proposal for a 200-key budget hotel development in central Abu Dhabi, with a suggested development cost per room of $150,000 and $30 million for the whole project.
The debt-to-service ratio would be 1.38 in the first year of operation, 1.76 in the second and 2.11 in the third year, complementing a steadily rising net operating profit of approximately $3 million in the first to just more than $4 million in the last. The term sheet also expected inflation/income growth to be 4% and an exit cap rate of 9%.
The cost of debt was to be 7% with an eight-year term and a loan-to-cost ratio of 45%, which Ebner believed was manageable.
“The package of this is not bad; refinancing has been factored in as well as the liquidity cost. The interbank rate stands at 2% here right now,” he said. “I would have a closer look at it.”
250-key upscale resort
Fergal Harris, head of real estate, Middle East, at Standard Chartered Bank, rejected an acquisition proposal for an upscale beach, 250-room resort in Dubai for $88 million, which already was making healthy profits.
“There needs to be room for growth here to buy at a premium rate,” he said. “The numbers are fine, but it’s not just about that. Why would an investor want to buy into this? There is little value he can add. The eight-year term is not long enough.”
250-key upscale hotel
Another proposal suggest building a 250-key upscale hotel in central Riyadh, with a total development cost of $75 million or $300,000 per room and the cost of debt of 7% with a term of six years.
Lo’ai B. Bataineh, deputy GM investment & development and head of the investment management group at Oman Arab Bank questioned the viability of a luxury property.
“Why spend so much? It is better to select a 3- or 4-star property to have capital left for operations. What if something happens? Hotels are cash-flow sensitive and many have issues. Also the maximum term of the loan should be two to five years.”
An informal survey of branded hotel projects under development reveals a focus on the mid-scale.
Accor has about 23 hotels under development in the region over the next three years, most of which are in the economy and mid-scale.
Marriott International, however, still is working on its wider presence in the region with its upscale brands. The company will add 36 hotels to its MENA portfolio by 2017, of which nine are economy.
Starwood Hotels & Resorts Worldwide announced a push in the upscale segment, joining forces with the United Arab Emirates Al Habtoor Group. Together, the companies will open three hotels: a St. Regis, Westin and ‘W’ in Dubai in 2017, replacing the Metropolitan Hotel along Sheikh Zayed Road with a huge complex.
It is also rumored that a new Paramount Pictures-branded hospitality concept will be brought to the Gulf in Oman, Qatar or the United Arab Emirates.