Megadeals monopolize investment in Indian Ocean region
Megadeals monopolize investment in Indian Ocean region
15 FEBRUARY 2018 9:25 AM

Indian Ocean hotels are seeing larger but fewer deals. In the Middle East, stagnant oil prices are prompting more outbound capital investment.

ABU DHABI, United Arab Emirates—The Middle East and Indian Ocean are seeing healthy investment numbers overall, but a closer look at investment in the region reveals most of the money is finding its way to one or two large deals, according to speakers at the recent Gulf & Indian Ocean Hotel Investors’ Summit.

“In the Indian Ocean, we’ve seen $300 million worth of transactions in 2017, an increase of 65% over the previous year, but that is mostly down to the purchase of one resort in The Maldives,” said Nihat Ercan, managing director of investment sales, Asia, at JLL Hotels & Hospitality Group.

That impressive deal was the $200 million sale, to an undisclosed owner, of the Cheval Blanc Randheli, Ercan said. The price per key was approximately $5 million for that property, which has an average daily rate of approximately $1,700.

“Over the last six years, 34% of transactions (across the Indian Ocean) have been institutional in nature. This bodes well for liquidity,” Ercan said.

Ercan added The Maldives has become especially investor-friendly, but that is not necessarily the situation across the region.

Ercan’s colleague Marko Vucinic, SVP, Middle East & Africa, at JLL Hotels, said there is money moving in the Middle East, as well, but much of it is headed for other regions, including Europe. Vucinic noted 95% of Middle Eastern capital was outbound, and overall there was an 11.6% decrease in volume of all sales, domestic and international.

Investment within the Gulf region tended to be domestic over the last few years, Vucinic said.

“The bulk of deals outside off the Middle East (in 2017) have been with local partners, which was not the case so much in the past,” he said.

Vucinic pointed to two key deals that are emblematic of the new status quo: the €56 million ($69 million) sale of the 361-room Westin Warsaw in January 2017 by Qatari firm Al Sraiya Holding Group and Abu-Dhabi-based Twenty14 Holdings’ €85 million ($117 million) purchase of the 214-room Waldorf Astoria Edinburgh.

One stumbling block in the region, he added, is the ongoing boycott of Qatar and Qatari investment, which started in June amid Gulf Cooperation Council countries accusing Qatar of supporting terrorism.

Robin Rossmann, managing director of STR, parent company of Hotel News Now, said there is projected to be 105,616 hotel rooms across the Middle East by 2020.

Rossmann pointed to several factors in the region: supply ramping up in Saudi Arabia, whether demand growth can match supply in Dubai and whether investor sentiment will improve.

Performance in the area remains tied to the price of oil, he said.

“(Gross operating profit per available room) is closely aligned with the oil price, which continues to fall,” he said.

Overall, yields are declining in the Indian Ocean, Ercan said. “Cash-on-cash returns are tightening, with stabilized yields in the order of 8% to 9%,” he said.

Regional issues
Supply moratoriums have been impactful recently in Mauritius and The Seychelles, Ercan said.

“The Seychelles offers freehold land, but has a moratorium in supply. Mauritius ended its (two-year) moratorium late last year, which obviously has limited supply,” he said, adding that Mauritius is expanding its airport.

Sri Lanka, Ercan said, is putting into place legislation to support foreign investment.

Ercan said there are several individual challenges, including:

  • rate pressure and politics in the Maldives;
  • immaturity of The Seychelles’ resort market with limited debt finance and high operating costs;
  • high transaction costs and taxes in Mauritius with lower ADRs; and
  • infrastructure problems in Sri Lanka and the perception of it being a budget destination.

Vucinic said for Dubai and the United Arab Emirates, midscale properties will continue to be a target for investment.

“Between 2014 and 2017, we’ve seen a twofold increase in upscale properties but a five-time increase in midscale properties,” he said.

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