News for the Hospitality Executive |
By Tim P.
Smith
May 2011 This article highlights the impact that the pro-democracy uprisings in countries such as Tunisia, Egypt and Libya have had on the region’s hotels, including dramatic changes in values. Recent History
The Arab world has been
growing in importance and influence in recent years, which has resulted
in increased interest from hotel operators and investors. From an
operational perspective, both leisure and commercial trade have grown
exponentially throughout the region, although Egypt has long been
highly dependent on tourism, which accounts for 11.5% of GDP. Libya, on
the other hand, has benefitted from the relatively recent release of
sanctions and, until recently, the acceptance of her leaders by the
Western world. The number of quality hotels in and around Tripoli was
expected to increase at a CAGR (compound annual growth rate) of 17.8%
from 2010 to 2014*. Libya is now the twelfth largest oil exporter in
the world and is such an important supplier that the price of Brent
Crude oil increased as a result of the country’s recent anti-government
protests, with talk and rumour of the price reaching US$200 per barrel.
It was below US$85 in late 2010. This increase in oil prices affects
consumer confidence and also the cost of travel, potentially reducing
the number of guests at a hotel. It can also increase the cost of
supplies to a hotel.
Marrakech has increased in
popularity and is now seen as both a short and longer-break
destination. In fact, much of this region is now widely accepted as a
winter sun destination for the mass markets in northern Europe. On the
back of this increased acceptance and interest in Morocco as a holiday
destination, many hotels have recently opened or are due to open in the
country. Nervousness from travellers may impact the number of tourists
to the region as a whole, whether or not that country is suffering from
unrest. Morocco and Tunisia are not the only high profile destinations
to be affected; Bahrain was becoming increasingly popular and even
Yemen had started to enjoy increased tourism. All are already
experiencing a significant dip in demand in 2011.
The Unrest – the Impact on
Trading Performance
Whether or not a hotel
property has been physically damaged during the protests, the
short-term impact on those hotels caught up in the midst of the unrest
has generally been dramatic, particularly in Egypt and Libya where both
employees and guests have been unwilling to travel (or leave) the
hotel. There were reports from the coastal resorts of Tunisia of
holidaymakers being trapped inside their accommodation. These
situations are short-term and are only relevant during the protests.
But, what happens once the protests are over?
Commercial Trade Oil companies in Libya are
reported to be running at a fraction of capacity, or have shut down
altogether. Whilst this is perhaps only a short-term reaction, with all
or most of the foreign workers having left the country, there will be a
delay before production is running at high levels again. The return of
foreign workers will help to the boost hotel occupancy; a potential
positive short-term reaction may be foreign workers choosing the
security of hotels rather than apartments when they return. Previously
many will have had apartments, but they may now not want to commit to a
long-term contract and also favour the safety of a hotel. However,
workers on long-term assignments may opt to use apartments rather than
hotel rooms for additional space and comfort. Visitors to the various
industries are likely to take longer to return and it is these workers
that many hotels depend on. It is likely that companies will be
cautious about flying anything more than the minimum of staff into
presently unstable locations once the situation improves. However,
there may be opportunities for hotel demand from consultants reviewing
the region’s business and any damage, which could replace some of the
longer-term losses. Travel insurance may also be a problem, with
companies unlikely to issue cover, or at least reasonably priced cover,
until governments remove any travel restrictions.
Tourism
The short-term impact of the
protests on tourism is clearly dramatic: no holidaymaker is interested
in visiting a war zone. However, hopefully the violence is short-term
and, once the country is considered to be safer, hotel owners,
operators and governments will be keen to welcome back tourists as soon
as possible. It is unlikely that travellers will return in the same
numbers immediately, however cheap the holiday, so the region should
experience a slow return of confidence, which may take years rather
than months, depending on the outcome of the troubles. It is
encouraging to note that previous major disruptions to travel and
tourism in the region have resulted in a relatively quick recovery –
people’s memories appear to be quite short in this regard.
In the longer-term, however,
this could prove to be good news as travel and visa restrictions may be
eased; this would make visiting these countries simpler and promote
tourism, and in particular short breaks.
Damage to Infrastructure
Once the conflicts are over
the speed of the region’s recovery will also be determined by the
amount of damage inflicted to buildings and the infrastructure. If, for
example, airports or roads require repair or rebuilding, access to
hotels and resorts will be limited and may deter travellers. Similarly,
if hotels require repair to become habitable or have a reduced rooms
stock, the available income will be decreased. Hoteliers will also have
to check that their suppliers are still able to deliver, and in
sufficient quantities, before they re-open their doors for business.
This same argument applies to
the labour of a hotel and its suppliers. Many employees may have been
injured, or worse, during the violence. Finding a suitable workforce
and potentially training new employees may reduce the capacity of
hotels further in the short-term.
However, in the longer-term,
once these immediate issues are resolved, the market may find itself
able to deliver recently refurbished hotels with improved
infrastructure to the international market, and thus enjoy a more rapid
increase in trade, perhaps to levels not previously enjoyed.
Additionally, with a potentially freer movement of the labour force and
a growing economy the local employees should become more skilled and
experienced. Whilst this may lead to a higher labour cost in the
country of operation, it could also reduce the need for foreign workers
and thus reduce overall labour costs.
New Supply
Concerns over the oil price
coupled with the general unease in the region have slowed the
decision-making process for many developers considering whether to
invest in the market. Whilst this is frustrating, it may also help the
recovery. For example, if hotel market supply remains static or has
even reduced as a result of damaged properties there are fewer rooms to
be filled. This could lead to a stronger percentage occupancy, which
will boost confidence and should therefore speed up the recovery of the
market. The delay of some of the many proposed hotels should also aid
the recovery and allow the existing hotels to restore demand levels.
This will provide a strong base and foundations for the overall
development of the region’s hotel industry.
The Impact of the Recent
Worldwide Downturn
Many of the Arab world’s
cities and countries have been developing a short-break market, so they
suffered when an air of caution over household spending crossed over
Europe. However, this came after several years of significant growth
and was seen as a blip on an otherwise upward trend. Unfortunately,
even those countries that are considered stable will now suffer from
the volatile perception of the region and also the impact of increased
oil prices, with the cost of travel and supplies both likely to
increase, reducing occupancy and profits. The short-break market for
the Arab world is likely to be affected for several years. Hotels
therefore have to reconsider their target markets and perhaps look
closer to home and concentrate on attracting tourism from other parts
of the region and especially from within their own country.
In the West, there remains a
keenness to travel to and a desire to explore this exciting and
historic part of the world, although we suspect it may take a number of
years for the region to fully recover. Other markets that visitors have
shied away from in recent years, such as Greece and Spain, may now
become the main beneficiaries of any tourism downturn in the Arab world.
Conclusion
The value of hotels in the
short-term has clearly been impacted by the conflicts, but depending
upon the final outcome the uprisings may prove to be beneficial and
result in record values in the longer-term as the market recovers.
From an investor’s
perspective, if the changes in the region are permanent and lead to a
style of government which is acceptable to the Western world, each
country will benefit from almost unlimited assistance to create a
stable economy and democracy. This in turn should lead to improved
trade and a steady but growing economy, and, given the natural
resources in the Arab world, this should then encourage investors to
consider the region once again.
Regarding hotel performance,
commercial trade is likely to return before tourism. Although companies
may be willing to ask employees to explore the ‘new world order’,
families may not be as quick to choose the region as a holiday
destination. A boost in hotel trade from the returning commercial
segment should lead to an increase in values prior to any improvement
in valuation parameters. The parameters will only improve once investor
sentiment and appetite for the region returns. And with both an
increase in trade and improved sentiment hotel values could eventually
reach record highs. Our research suggests that values may have fallen
by more than 50% in the short-term but based on the positive
assumptions mentioned above could increase by circa 35% above previous
levels once a stable environment is established.
On a similar note, if the
uprisings are followed by a temporary period of disquiet, once order
has been restored and economic and political stability demonstrated,
the appetite to visit the region should return. A lingering potential
problem could occur if there is no definitive result from the protests,
for example if Libya remains divided with an unpopular leader and
economic sanctions. If the existing governments remain in power but
promise to make changes to their countries, this could have a big
impact on hotel values. That level of instability could undermine all
of the hard work recently undertaken and neither visitors nor investors
will be encouraged by a ‘wait and see’ result.
The overall impact on the
region’s trade will not be clear for a number of months or years, but
one thing is certain – it will be an interesting ride ahead for hotel
operators and owners.
*CW Hotel Beat May 2010
For more information, please do
not hesitate to contact Tim
Smith on +44 (20) 7878 7729.
About Tim P. Smith Tim Smith MRICS is Director of Valuations
in the London office of HVS. Tim graduated from De Montfort University
with a degree in Estate Management and has worked for firms of
chartered surveyors in London since 1995, specialising in the valuation
and sale of hotels and all forms of leisure properties. Tim has valued
properties in more than 30 countries across the EMEA region and has
been involved with the valuation of some of the most important
individual assets and portfolio transactions across the region. |
Contact: HVS Tim Smith www.hvs.com |