Alternative financing requires top-tier homework
 
Alternative financing requires top-tier homework
15 MAY 2017 7:38 AM

Hoteliers must do significant research on markets and potential returns before partially financing projects by attaching things like condos and vacation ownership, according to sources at the Arabian Hotel Investment Conference.

DUBAI, United Arab Emirates—Financing hotel assets in full or in part with alternative room financing models such as condo hotels, fractional ownership and vacation ownership requires substantial homework during the pre-planning stage and a financing and operational structure that is faultlessly executed.

And even if that’s the case, there is still a chance things can go sideways.

Securing success in fast-moving Middle Eastern destinations such as Dubai, Abu Dhabi and Qatar also requires innovative hotel financing models and speed to market, panelists said at a session titled “Hotel room investments: The alternative model” during the recent Arabian Hotel Investment Conference.

“Time spent on reconnaissance is rarely wasted,” said Patrick Smith, SVP of asset management for IFA Hotel Investments.

Hala Matar Choufany, president of the Middle East and Africa at business consultancy HVS, said a good starting point is to analyze what type of investment model will add return on investment and also does not pile pressure on developers. Smith agreed.

“Everyone tries to nail it first time, but it takes time to review the market and what works best for returns,” Smith said. “Condos are more of a yield play, and you certainly have to have a vibrant market to make this work, which Dubai evidently is.”

One critical aspect to consider, panelists agreed, was every time revenue flows in from such financing models, the operator, brand and principal owner loses a little more influence.

“If you finance a hotel via selling of its rooms, you do give up asset control,” Smith said.

He added IFA did execute such a move with a Mövenpick asset in Dubai and was the first to offer a Dubai condo hotel product as part of a mixed-use development.

Despite the potential issues, Jeff Tisdall, VP of international residential development for AccorHotels, noted that often such structures are unavoidable in Middle Eastern markets.

“It’s a complex landscape, but often to get a foothold in the market participation in the rental pool is mandatory,” he said. “Value has to be created, and the addition of a brand can drive premiums, approximately 30% more, or in excess of that.”

Panelists gave the following advice as to how alternative room financing models can help the overall asset:

  • Operators must have experience in orchestrating success in these fields;
  • the right discipline, structure and owners are needed;
  • good distribution is critical, as is confidence in the brand if working with one;
  • success depends on how much homework has been done on what returns are commensurable with the investment; and
  • it is important get in early and be very engaged from the pre-planning stage.

Extra profits form extra headaches
Panelists said some structures inevitably are more complicated, which is to be expected with an increased number of owners.

Developers and principal owners will have a different set of success criteria than fractional and condo owners, sources said.

“We want real estate to be more than an investment model. One thing that has to be kept in mind is owners need to know their usage is limited to 14 to 28 days per year,” Smith said, who added any resultant pain was soothed with owners receiving VIP status across IFA’s entire portfolio.

Choufany said one common mistake is thinking strong return on investment would come in all cases.

“It is always easier with a 5-star location, so in most cases ROI has to come from operators,” she said.

Choufany said the right elements need to be in place to drive returns.

“You cannot get good ROI if you do not get the mix and structure right,” she said. “It has to be thoroughly thought out. We have seen examples of those who have done it well, and those who have not.”

Smith said condo hotels are purely a shareholder proposition.

“There is the problem of having multiple owners, so you also have to have the legal structures correct, even during development, and to get the condo part right, you need to work well as a hotel first,” Smith said. “What you put in is what you get out. And be early in the game.”

As for having a vacation ownership structure, Smith said that was still a tough proposition but the concept had grown, thanks in part to increased marketing across many channels.

“It’s a high-volume numbers game that can be highly profitable if you get it right,” he said. “Marriott and Accor have done it well. But if at any time you sell just one room, you’ve broken the loop and might as well go into it fully, as it will be harder to sell remaining assets further down the line.”

Choufany said Dubai and other Middle Eastern markets have not seen anything of the scale in terms of alternative room-funding models that exist in Orlando, Florida, and Hawaii.

“The segment is not for the faint of heart,” Choufany said.

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