The challenges of building hotels in ‘frontier’ markets
The challenges of building hotels in ‘frontier’ markets
08 FEBRUARY 2018 8:53 AM

Hoteliers who have opened properties in developing markets—like Sudan, Iraq or Bangladesh—discussed the first-mover advantage and the need for strong partnerships to overcome development barriers.

ABU DHABI, United Arab Emirates—In the developing world, there are still hotel companies willing to take risks and reap the rewards, according to sources.

Speaking at last week’s Gulf & Indian Ocean Hotel Investors’ Summit, Aboudi Asali, CEO of Hospitality Management Holding, said developing a hotel in Sudan at first seemed challenging, but the work has paid off.

“We’re now developing hotels in (Sudan’s capital) Khartoum,” Asali said. “Many operations could not or would not touch it. We will take a risk and try it out, and in some destinations we were successful. We are now coming to our fourth hotel in Khartoum. (Such developments have) challenges. There were economic sanctions when we went there in 2010. For example, it was very challenging to get spare parts, many of which were American-made.”

Panel moderator Trevor Ward, managing director at W Hospitality Group, said the U.S. eased sanctions on Sudan last October.

Ward estimated there are approximately 100 markets worldwide that can be considered “frontiers.”

For CityBlue Hotels, a local African chain with funding from the United Arab Emirates, that applies to Kigali, Rwanda, said the company’s founder and CEO Jameel Verjee.

“Our first foray was into Kigali, Rwanda … considered to be the least-corrupt country in sub-Saharan Africa, but there are those who remain wary of even this country,” Verjee said. “To create a pan-African hospitality brand, we saw Rwanda as a perfect place to start. Ease of business is good, and we invested by taking out leases, as opposed to management contracts.”

Also on the panel, Patrick Smith, COO of IFA Real Estate Services, and Musleh Ahmed, chairman at Dhaka Regency Hotel & Resort, recently invested in Zanzibar and Bangladesh, respectively.

“First-mover advantage is key,” Smith said. “We were early into Dubai, too, and it derives from gut instinct from the top.”

Development risks often yield mistakes, he said.

“We have been on the other side, too, as well as on the right side and with phenomenal rewards,” Smith said. “As the saying goes, ‘Time spent on reconnaissance is seldom wasted,’ especially in understanding local characteristics, demand and players.”

Ahmed, a British-Bangladeshi, saw development opportunities in Bangladesh, which only had three 5-star hotels, all government owned, when his company moved in.

“Bangladesh is a new market, but since our arrival, Westin, (InterContinental Hotels Group) and Méridien have all come in,” he said. “That’s changed the market, as government hotels had no focus on profit. Together, the market is on the map, and visitors now come with expectations.”

Asali said one property in Iraq didn’t pan out like his company hoped it would.

“We had a property in Baghdad, which we operated for two years, but it became too risky, and we could not see ourselves adding value,” he said. “Unfortunately, we had to pull out.”

Convincing investors
Hoteliers might believe that markets will work, but unless they are fortunate to have their own capital, they need to persuade investors of their instincts, panelists said.

“That comes down to: How can we show that we are competitive so that we can offer advantages to our owners?” Asali said, adding that his firm’s holding company owns five of its 13 hotels. “Yes, there is the appetite to invest in frontier markets, but, again, know and understand those markets, and then the holding company can come and invest if that is desired.”

Smith said his investments were always with joint-venture partnerships, which he added are “especially important in frontier markets.”

CityBlue’s Verjee said going forward he plans to look at similar arrangements.

“So far we have done the reconnaissance and taken the risk, but as we enter three or four new markets in Africa, JVs will become more important,” he said. “Where we are now, our three countries (in Africa) all border one another.”

Red tape
Smith said joint-venture partnerships are also critical in slicing through red tape, since governments often do not understand what investors require.

“It is critical to know what (government) thinking is, as ultimately it is their land,” he said. “You have to know what are the political processes and agenda, so it is absolutely necessary to work with strong partners who have clout.”

The panelists said hotels in many frontier markets are very visible and thus easy targets for governmental and legal meddling.

“One of our Khartoum assets is government-owned, and we have a strong relationship with the government,” Asali said. “Sudan does have good investment initiatives. It is positive, but our one challenge is keeping assets up to standard, and training.”

Smith said his company has found land regulations challenging to development.

“Land regulation can be very immature,” he said. “One site in Mauritius, one of the most beautiful I have ever seen, is comprised of 140 parcels of land that needed to be assembled.”

Other concerns surround land purchases and titles, repatriation of capital and currency fluctuations and exchange rates, panelists said.

“We did not buy land. Rather we invested in long-lease assets, so there was no significant (foreign exchange) risk,” Verjee said. “Yes, there have been currency fluctuations, but (investment) is weighted on (U.S.) dollar investment and return, so there are no repatriation restrictions.”

He added some frontier markets, such as Ethiopia and Nigeria, still warrant caution on leases.

Asali mentioned his Sudanese assets had their profit-and-loss accounts in Sudanese pounds.

“There is a huge loss in exchange with the official (Sudanese pound) exchange rate, as opposed to the black-market rate, and currently we are discussing a possible middle ground around that exchange-rate risk,” he said.

Smith said the biggest hurdle is often overcoming government and investor short-sightedness.

“Some would rather take a dollar today than $10 in the future,” he said. “You have to take the long-term view, and that requires having government support and legislation. Often that is lacking, or it is naïve. But I will say we’ve also benefited by there being a lack of legislation, too.”

Ahmed added proactive approaches include educating investor communities on issues and opportunities. Such initiatives already appear to be working, Verjee said.

“We’re trying to build a portfolio that can attract capital markets,” Verjee said. “My family have been in East Africa for 150 years, but it is only in the last five years that there has been the realization that international brands can make a difference. Indeed all brands can.”

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