DUBAI, United Arab Emirates — During the pandemic, hardly any foreign direct investment has entered the Middle East, and the usual truism remains: When foreign private equity does appear, it is because the market has bottomed out or distress has entered the landscape.
Heightened competition for assets probably is what keeps the wolves from the door, and that is as true in the Middle East as it is in other global markets, according to investors on the panel titled “The Investors’ Perspective” at the Arabian & African Hospitality Investment Conference.
Amr El Nady, head of hotels and hospitality, Middle East and Africa, and executive vice president, global hotel desk, at business advisory JLL, said that while capital is interested in leisure product such as resorts, the hospitality industry in the regions is still led by developers.
“The Middle East has always been a net exporter of capital, although the last big deal was the Ritz London. Overall, Middle East capital sees itself competing in a very competitive market,” he said, referring to the approximately 800 million pounds sterling ($1.1 billion) Ritz London deal by an unnamed Qatari buyer in March 2020.
Philipp Klohr, vice president, United Arab Emirates diversified assets for Abu Dhabi-based sovereign wealth investor Mubadala, said owners are purposely being diversified in their real estate holdings, with Mubadala itself holding $240 billion under management.
“Diversification is crucial. We are seeing high returns in other platforms, so sometimes hotels take a back seat, certainly when deals are slow to move. We’re not being able to see people, which kills deals, and it all [is] very competitive,” he said.
Panelists said the higher cost of debt has driven yields, which comes with more risk. The region still has too much opacity and requires more transaction data.
Karim Abdel-Latif, investment professional for London-based financial services firm Actis, said investors should continue to expect waters to be choppy.
“Both deals we did during the pandemic have been opportunistic," he said. "Pre-COVID, everyone was asking when the next downturn would be, and no one expected this crisis.
“I use the analogy of car ownership. In bad times, I’ll stay with the same car, but I know parts and maintenance will be more expensive. What is important is to get into the head of the seller,” he added.
Fardan Al Fardan, senior executive officer of asset-management firm Embassy Capital, which invests in Europe and Dubai, said even though there might be too many hotels in Dubai, there are pockets that are missing rooms.
“I’d say it is positive more than negative, but assets need to be treated individually, and revenue management is key,” he added.
Destination Distress
Who will blink first? That might be the question both sellers and buyers are asking themselves throughout the world.
“One huge problem in the Middle East is that debt has always been expensive," Nady said. "Yes, hotels are profitable, but at the same time, international capital is used to something different. Now the biggest frustration in this part of the world is where is the [international] distress?”
Klohr added he sees no distress in good urban Middle Eastern markets, although there maybe is a little in resorts.
Al Fardan said capital aimed at distress was present before anyone had heard of COVID-19 as it was awaiting the inevitable declines that are seen at the end of any hotel cycle.
“We had a lot of capital in January 2020 waiting for this, so we made sure the value remains in the assets we have. Now we have passed the worst. We’re not looking for distress but at opportunities,” he said.
Hotel owners have the ability to renegotiate debt across the region or to reposition assets, which can help to hold off distress, if not stress, Nady said.
“If you see private equity investing, the market might have bottomed out,” he said.
Abdel-Latif said that help probably will not come from traditional banks unless good relationships are in place.
“In Africa less so, especially where there is no government support, and vaccination rates are very low,” he added.
In the Middle East and Africa region, it is Africa that likely will suffer more, panelists said.
“We’ve tried to look at Africa. We’re interested in a couple of countries, but funding is much more expensive, and data is not available. The financial landscape is just not clear enough,” Al Fardan said.
Nady said he expects to see more deals in Africa, and that Saudi Arabia might be the brightest spot in this huge region.
“Saudi is development, construction, and not just in key cities. Private capital will follow, but one of the key elements in Saudi is that there already is product that needs redevelopment, more infrastructure, so there is a good base,” he said.