As the United Arab Emirates matures as a hotel market and more segments invade what was once the haven of upscale and luxury, investors are seeking innovative ways of getting assets to market while also ensuring payment and cash flow.
RAS AL KHAIMAH, United Arab Emirates—This year is on track to be record-breaking for signings and deals in the United Arab Emirates, and that will require a lot of finance, according to sources.
Speaking during a panel titled “Finding finance” at last month’s Arabian Hotel Investment Conference, Andrew Lindley, finance director at Action Hotels, said he is seeing good support from national and regional banks.
“We’ve opened seven hotels in the last three years, and all have needed financing. We’re seeing different financing products and structures,” some of which are slowly creeping in from more mature markers, Lindley said. “In more developed countries, options include interest-only or 100% bullet payments, and that is hopefully where the market is going. As owners, we are pushing for that.”
Shane Moore, executive director of investment banking and real estate for the Middle East and Africa at Standard Chartered, said different financing structures are applicable across different regions.
“The bullet-type structure is very much in our remit and generally how real estate is financed, subject to leverage and other terms and conditions, but this is all very micro,” he said. “On a wider basis, it is not just about you but about the right package and being able to come up with a workable solution in the geography you’re in. That can be easier where you have fewer banks. We are seeing a little movement with our peers, a little more openness with this type of structure.”
Lindley said hotel maturity must be taken into account.
“Hotels take three or four years to mature,” he said. “Yes, you can get occupancy of 80% immediately, but cash flow will take a little longer, and that is what the banks want. Our first demand is for this to be where banking is going, or do we need to push more?”
Action Hotels, Lindley said, has 3- and 4-star hotels in six markets, with Saudi Arabia soon to be its seventh.
Alejandro Martin, senior investment banker at Abu Dhabi Commercial Bank, said the local view is that this type of finance is more challenging.
“For a fully amortizing facility, perhaps now 50% bullet is available. It allows more cash to flow out,” he said.
Martin added that the introduction of this type of deal more widely and regularly would take a little more time.
“It is about having more control of where the cash flows out,” he said. “If the banks are not being paid, I do not real see them being flexible.”
Cyril Piaia, associate partner at real estate financing and consultancy Stratford & Russell, said location is key.
“So much is directly related to the location of the hotel,” he said. “Maybe with midscale, you get to (gross operating profit) much quicker, but then worries start when contractors delay delivery; and even when the hotel is open, it’s not a quiet life for the first two years.”
Piaia suggested having banks involved right from the beginning or even being a part of the design process.
“Get banks involved as early as possible,” he said. “We look for total transparency and a permanent contact, for the disconnect happens most often when construction is delayed and when operations start.”
Moore agreed. “We need to know how the hotel will penetrate and perform, and how the finance performs with the life cycle of the hotel,” he said.
“It is no longer ‘build it, they will come,’” Lindley added. “Now it is ‘build what the guest wants.’”
Scale and brand
Financing in the United Arab Emirates is moving with shifts in regional brands and segments, according to the panelists.
“We’ve mostly seen 5-star, but slowly 3- and 4-star is coming,” Martin said. “That is where the market is going, and we believe that this is the market that will kick in and generate cash flow more strongly. We concentrate 97% on cash-flow generation as that is what pays us back.”
Moore said banks are conscious of pipeline, but ultimately deals come back to clients and structure.
“Pipeline is where the demand is coming from,” Moore said. “Brands can dictate terms and negotiate cash flow terms, but if you are an independent, you must come in making it easy for banks. Have a complete package and be open to conversation.”
As the UAE expands in markets, segments and offerings, it is no longer, as Lindley said, a case of “build it and they will come,” a truism that also covers Dubai.
“Our covenants are set around cash equity,” Moore said. “We will not just look at land banks, and although that always will be part of the discussion, the preference is always to have the client have more skin in the game.”
Lindley said Action Hotels has five or six different land banks each with its own criteria.
“We have a fair balance as to what banks expect, and that gives us leverage with further banks we’d like to work with,” he said. “It depends where you are in the land-development cycle. Cash flow is needed from owners and from the banks.”
Piaia said banks often do not include land in the package.
“Land can be quite a burden in the process,” Piaia said, adding that regional players are looking more at export finance, such as from China. “In that way, we can reach 85% equity and bear the burden of land.”
Martin said international capital can be a good buffer.
“Some projects are huge, with a lot of greenfield sites, so we’ll definitely require international finance,” he said. “Sometimes we are delaying equity coming in to provide for debt support at the beginning.”
At the end of the day, development “has to make sense,” Moore said.
“If more operators bring in clear strategies, along with some equity, more capital will be drawn here more often,” he added.
So what is the best deal structure in the United Arab Emirates?
“A 3- or 4-star deal for a product that attracts recurring visits and this cash-flow generation,” Martin said. “That can be a difficult one to judge, but it comes with hard equity, not just land, and of course some brands provide extra value.”
Lindley said a hotel that has staying power is always a good investment.
“Develop hotels to have them stay standing,” he said. “Hotels depreciate over 50 years. Bullet deals are the recognition the property can stay there. Match the client and their reputation with the development and the period of time it will be standing.”
The shorter the loan period, the better, Moore said.
“Shorter loan periods are best for commercial banks,” he said. “Longer, that’s (corporate mortgage-backed securities) and pension and insurance. The longer the term, the less cash flow and more risk. Overall, though, the UAE is a pretty liquid market.”
The right portfolio and track record can go a long way, too, according to Martin.
“There are a number of different products to tap into, including (real estate investment trusts),” he said. “If you ask me, deals in the region, if (the client has) the right track record, are moving from five years to 10, 15 and 30, with 50% bullet structures, but not 100%.”