The Future Hospitality Summit is under way in Abu Dhabi, with three days of dealmaking, strong debate and more among the top players in the Middle East’s tourism and hospitality sectors.
With huge investment in the hospitality sector in the UAE, KSA and other parts of the region, rising construction costs, funding delays and higher interest rates for development projects are among the key topics under discussion at the event.

Here, industry experts taking part in FHS share their opinions on building hotels in a challenging environment.

Read on for insights and thoughts from Camil Yazbeck, Global Chief Development Officer – Premium, Midscale & Economy, Accor; Hala Matar Choufany,  President - Middle East, Africa and South Asia, HVS; Filippo Sona, Co-Chairman, Wood Couture and Michael McGovern, Director at Compass Project Consulting.

With massive investment in new hotel projects in KSA, the UAE and elsewhere in the region, how realistic is it going to be to meet tourism targets, given rising construction costs? 

Camil Yazbeck, Global Chief Development Officer – Premium, Midscale & Economy, Accor:  The ME region, namely KSA and UAE, is showing resilience in the face of rising construction costs for a combination of reasons, including investor profiles in the region, a robust economy and governmental policies and the rise of oil prices. 

Governments, especially in KSA, have a target to achieve based on the country’s vision. We are seeing determination in meeting this target, with close collaboration between the public and private sectors to ensure project delivery on schedule. In addition, international consultants are being appointed to accomplish multi projects across either one or numerous markets. 

We are confident the region has favourable tailwinds, ensuring projects will continue despite the rise in construction costs. There is high level of spending power in the region to fund domestic travel and we see great potential in tier 2 and 3 cities with undiscovered natural beauty, evidenced by Accor’s May 2023 signing of a master development agreement with Amsa Hospitality to develop 18 premium, midscale and economy hotels across second-tier cities in Saudi Arabia over the next 10 years. In addition, a rise in religious tourism in Makkah, where Accor is already a key player with 10 hotels totalling 9,250 rooms, and Madinah, has created demand for further internationally branded supply. 

The support of Accor is very compelling to hotel owners to counteract rising costs through increased efficiencies in areas such as design and technical services, purchasing and operations support. Our worldwide Design & Technical services team strives to provide the best profitable design for our partners, performant product for our hotels and unique memorable experiences for our guests. Owners can also take advantage of our Group’s environmental, social, and governance (ESG) capabilities, which can help hoteliers meet today’s expectations for more responsible operations and eco-friendly guest experiences, as well as complying with new regulations.

Hala Matar Choufany, President- Middle East, Africa and South Asia, HVS:  While rising construction costs and higher interest rate can pose challenges to meeting tourism targets, the region, and particularly UAE and KSA, has demonstrated a strong commitment to tourism as a driver of economic growth which may provide the incentive needed to overcome cost challenges.

Moreover, when considering the government role in hotel and destination development, many projects in the pipeline are less dependent on debt financing and arguably have lower return expectations when compared to the private sector and investment funds.
 
The United Arab Emirates has seen a 5 per cent growth on international arrivals in 2022 compared to 2019 and a 20 per YTD June 2023 over same period in 2022. H1 airport arrivals in 2023 reached 41.6 million passengers, over 100 per cent when compared to 2019. Today the UAE has circa 208,000 hotel rooms operating at an occupancy of around 70 per cent. It is estimated that an additional 45,000 hotel rooms are planned to open, which at a similar occupancy rate suggests an increase of 10 million accommodated room nights. Factoring in project delays, limited financing as well as increasing travel costs, we are of the view that arrivals will continue to grow albeit at a lower pace when compared to 2022 and 2023 and the current inventory will absorb demand increases. 
 
With Saudi Arabia’s considerable investment in tourism, strong growth was observed in 2022 vs 2021 – albeit from a lower base. Year to date June 2023 figures suggest solid growth in both supply and demand with occupancies in major cities recovering beyond 2019 levels. Undoubtedly, KSA hotel development pipeline, projected at around 275 hotels (80,000 rooms) is likely to be more impacted by rising construction costs and increased lending rates which may result in years of delays. Consequently, the number of visitors may be adjusted to 35 million by 2030 which remains a significant growth when compared to 2022.

Filippo Sona, Co-Chairman, Wood Couture:  Targets can be achieved if companies tackle hotel constructions in a more creative and strategic way. By entertaining more lean processes and targets to shorten the overall timeframe, there will be savings on bank finance charges. Also, projects need to compass smaller development phases as opposed to having huge constructions sites on the first phase, in order to spread the risk over time. 

Michael McGovern, Director, Compass Project Consulting: In the face of rising construction costs, meeting tourism targets in the Middle East remains a practical aspiration, but it hinges on meticulous strategic planning, close collaboration among stakeholders, and the embrace of innovative construction techniques.

What kind of impact can funding delays have on overall project timelines, and how can developers mitigate the situation? 

Camil Yazbeck: On a global level we are seeing tighter lending conditions resulting in project delays, however of course this is dependent on the region and investor profile.

In regions that are experiencing funding challenges, we are seeing greater demand than ever for conversion opportunities, which accounted for around half of Accor’s openings in 2022. Accor is positioned as the partner of choice among hotel owners who are attracted to our flexibility, ease of transition, and unmatched spectrum of brands. 

Converting a hotel to one of our brands can be as simple as selecting ready-to-go design concepts or pursuing a completely bespoke design path. The strong brand experiences we provide will always shine through in service, quality, and programming. At Accor, we have been on the owning side of the table too, so we understand the mindset of an owner and are able to creatively find the solutions that work best for their specific property and investment objectives.

All Accor brands in the premium, midscale & economy division are designed to be conversion friendly. Yet we do have a few ‘superstar’ brands that owners and investors are particularly keen on when it comes to conversion opportunities, and I believe that is down to the highly unique characteristics each brand embodies. Mercure is one of Accor’s top conversion-ready brands, providing a welcoming culture that celebrates authenticity, diversity and entrepreneurialism. Mövenpick actively cultivates social connections through its food and beverage offerings, and it also uses food as a platform for social change, to shape and contribute to a better community and planet.  Handwritten Collection, our recently launched midscale collection brand,  offers standards that are flexible and respectful of each hotels’ unique identity. The brand brings together charming bespoke hotels with individual personalities, intimately reflecting the character and warmth of their owners.

Hala Matar Choufany: Considering the historical development trend in UAE and despite significant growth observed in the last 15 years, it is reasonable to assume that only 60 to 70 per cent of planned projects materialise and with a typical delay of 18 to 24 months. The historical hospitality and economical market fluctuations, impacted by global events, enabled the hospitality market, notably in Dubai, to absorb well the additions to hotel supply over the last decade. Such delays however have a more significant impact on supply and demand dynamics in key cities with strong seasonality such as Riyadh and Makkah. It is also not uncommon for smaller and midscale hotels with limited investment budgets to be less impacted when compared to large and luxury assets which typically experience longer financing and completion timeline. Ultimately, flexibility in project planning and design can be a valuable asset. Developers may choose to build modular or adaptable structures that can be expanded or scaled down as needed. 

Filippo Sona: In recent years, planning has been very superficial and incomplete and projects are entertained with a lack of understanding on the best way to develop it or for better say how to execute it creatively. Procurement processes are becoming obsolete and bureaucratic and, in some cases, this also causes delays. For example the FF&E constitutes one of the major causes of project delays, after FLS (Fire, Life, Safety requirements) . With a reverse engineering process by engaging suppliers at design stage, the employer can shorten the timeframe from 3 to 4 months on the overall program.   It takes very forward thinking companies that have a higher investment drive as opposed to very traditional development mind sets. 

Michael McGovern: Funding delays can significantly disrupt project timelines, and the repercussions are not for the faint hearted.  Developers must have robust financial contingency plans and diversified funding sources to buffer against delays.  Collaborating with experienced project management consultancies, like us, can provide proactive risk mitigation strategies and effective communication with financial partners is crucial.

Higher interest rates will mean higher costs for hotel development projects.  How will these costs be recovered?  Will they be passed on to consumers, or will developers and operators have to cut back on other expenditure to allow for this? 

Camil Yazbeck: Matching the right brand to the right project is essential, and gives us the clearest route to meeting our owner’s cost of capital and return on equity (ROE) expectations.

First, backed by the strength of Accor, our well-established brands can give a hotel a swift revenue boost – with immediate access to powerful sales, distribution and loyalty platforms, as well as best-in-class revenue management expertise and tools.

In addition, our unique Augmented Hospitality offering – with multi-faceted and mixed-use development projects - allows Owners’ to counteract rising costs through optimizing their revenue across a development. As traditional asset classes continue to be challenged by shifting consumer behaviours, Accor is reimagining how the population can live, work, and play, all within the same building or location. Our projects often include a mixture of elements that drive revenue 24/7; such as one or two hotel brands, an extended stay offering, Branded Residential, lively F&B, coworking, and wellness facilities; as well as allowing our owners to equally have retail offering and other facilities within this same mixed used project. Hotel owners and investors appreciate Accor’s approach to augmented hospitality as an essential way to unlock value, diversify risk and compress their cap rate when they join the Accor network. 

Hala Matar Choufany: In reality, the approach taken to recover the higher costs will depend on a combination of factors and the specific circumstances of the hotel project. While it is not uncommon to increase room rates and F&B prices and/or implement operational efficiencies; other measures for new projects typically would include one or more of the following: delay or project scale down; diversifying income streams through re-engineering areas and offering, and sourcing different funding including but not limited to equity investors, government incentives/funding, or partnership opportunities.  Historically, interest rates are prone to fluctuations, governed by macro environment and therefore it is likely that construction loans will be refinanced with lower interest rates when the market conditions normalise.

Filippo Sona:  Will they be passed on to consumers, or will developers and operators have to cut back on other expenditure to allow for this? Engineering value as opposed to value engineering is the name of the game: anticipating versus curing. Rethinking and going back to the drawing board where possible is the solution. Where developments are advanced, there is the need to relook at costs or bring in innovative solutions to recuperate equity invested.

Michael McGovern: Higher interest rates do pose a challenge, but they needn’t compromise project success.  Developers often explore a combination of strategies, including adjusting pricing models and optimizing operational efficiency.  While some costs may be passed on to consumers, our approach emphasizes maintaining the quality and guest experience.  Developers can also explore partnerships, cost-effective technologies, and value engineering to manage heightened expenses while maintaining their projects’ competitiveness and profitability.

Camil Yazbeck, Hala Matar Choufany, Filippo Sona and Michael McGovern are speaking on various panels at FHS, including: 

• Day 1 – Cost Engineering: Detailed Development Costs Analysis and Segment-Specific Expenditure Strategies
• Day 2 – Strategic Financing of Hospitality Assets: Navigating Uncertainty and Rising Interest Rates for Optimal Funding Solutions
• Day 3 – Building Hotels in a Challenging Environment: Navigating Rising Construction Costs, Funding Delays, and Higher Interest Rates for Hotel Development Projects