There is an overall agreement that recovery will take time even though some of the operational hotels have enjoyed relatively better performance and in certain instances exceptional performance due to the following:

• Converted to quarantine;
• Been utilized by guests for self quarantine; mostly resorts;
• Occupied by guests that were stranded and awaiting to return back to their home country.

78% of respondents consider that it will take more than 12 months for EBITDA to recover to pre-pandemic levels while 18% consider it likely to be between 6 and 12 months.

We take the view that while these hotels may experience high demand in the next couple of months on the back of revenge hotel bookings or taking advantage of the summer break, hotels’ EBITDA will require at least 24 months to stabilize at pre-pandemic levels or potentially longer depending on the recovery of the source markets, type of visitation and air travel regulations and  policies.

Question 6: What is the current drop in hotel values?

Source: HVS

Approximately 43% of respondents consider that since the start of the pandemic, hotel values have declined between 20% and 40% while 25% believe this drop exceeds 40%.

14% consider there to be no change to hotel values and on the other end of the spectrum 18% consider that hotel values have dropped by more than 50%.

Between 2008 and 2018, we have observed approximately 30% decline in the hotel values in the key GCC markets and anticipated a further decline in 2020 due to lower Gross Operating Profit margins (GOP) and additional new supply, which in the last few years was not sufficiently offset by demand growth.

With the current pandemic forcing hotels to close and travel to stop, we take the view that if travel and tourism resume before end of the year, current hotel values will remain approximately 25%-30% lower than 2019 until a recovery is established. Any further worsening of the situation will impact further hotel values.
 

Question 7: Are you planning to do refinancing?

Source: HVS
 

Question 8: If you already opted for refinancing, were you able to get a refinancing offer?

Source: HVS

Approximately 29% of the respondents are looking to obtain refinancing. 54% of those planning to do refinancing have received an offer.

When considering the hotel owning structure in graph 2, 14% of respondents were individual hotel owners which may represent the majority of those that have considered refinancing in order to meet their obligations.

71% of respondents do not intend to do refinancing, which could be explained by the ownership structure of these hotels which benefit from owning multiple assets.

This may likely change if the situation persists and the cash reserves are exhausted. On the other hand, it is also likely that some owners may not have large debts on their assets or are holding back until there is more clarity on the complexity and longevity of the current events.

Hotel Investor

Question 10: Please rank the following factors in order of concern relating to future hotel investments? (1=Most concerned 5=Least concerned)

Source: HVS

 

The findings suggest the following factors ranking in terms of most concerned to least concerned: Global Economic Shock, Local Economic Shock, Hotel Industry Uncertainty, Overbuilding and Change in Government Policies.

39% of respondents have ranked the global economic shock undermining roomnight demand to be the most concerning factor pertaining to future hotel investments and an additional 43% of respondents have weighed the local economic shock undermining room-night hotel to be the second most concerning factor.

Also, 39% of respondents consider a change in government policies to be the least concerning factor in future.

25% consider the hotel industry uncertainty to be a concerning factor and 29% of respondents consider overbuilding leading to excess supply to be also a concern for future hotel investments, though to a lower extent. 
 

Question 11: What is your hotel investment strategy over the next 12 months?

Source: HVS

 

While 11% of investors will continue to develop hotels, 7% of investors are currently looking to buy hotels. It is our view that the next 12 to 18 months will present opportunities for acquisitions as some hotel owners will look to exit their investments and minimize their losses.

Owing to the current ownership structure, the number of distressed assets may not be excessive as only 4% of the investors are considering to sell and 68% are looking to hold their assets.

There will be however a few opportunities for those that are eyeing further developments in the GCC region, and possibly Saudi Arabia in particular.

As these times are unprecedented, it is reasonable to assume that a more cautious approach will be taken by hotel owners and investors in evaluating their investment strategy.
 

Question 12: What is your main motivation for investing in hotels in the future?

Source: HVS
 

39% of respondents expressed no immediate interest in investing in hotels. This cautious approach will allow existing hotels to recover as supply and demand imbalances are experienced in a number of key markets resulting in less attractive returns than typically observed in the past.

29% of respondents considered that hotel assets value appreciate better than other assets, especially as both the retail and office developments have recently become less attractive and many of those new developments struggled to find tenants and attract the necessary footfall to secure attractive returns.

In line with the capital growth being a key motivation for investment, 21% of investors considered that hotel developments yield better returns than other real estate assets.
 

Question 13: Which market(s) are you most likely to invest in?

* Totals do not add up to 100% as asset classes were selected.
Source: HVS

 

64% of investors have specified three attractive investment markets in Saudi Arabia: Riyadh, Jeddah and Makkah. All three markets have achieved a higher than average performance in 2019 notably in terms of RevPAR. This was supported by the roll out of Saudi Vision 2030 and the support of the government in transforming and developing the hospitality offering in Saudi. A number of other initiatives were implemented such as the e-visa.

14% of investors continue to eye Dubai for attractive opportunities while only 4% of investors will consider Bahrain, Abu Dhabi and Doha for future investments.

In Egypt, Cairo is becoming more attractive for new investments and/or acquisition and 11% of the investors will look to invest in Cairo. Similarly, Ras AL Khaimah, Madina and Muscat remain on the investment horizon of our respondents.

In addition to the cities in the graph, 32% of investors are looking to invest outside of the GCC, notably in Europe (Italy, France, Greece), USA, Turkey. A few investors mentioned Kuwait and Sharjah in their investment plans.

Question 14: Which asset class(es) are you likely to buy or develop?

* Totals do not add up to 100% as asset classes were selected.
Source: HVS
 

The last few years has seen a rise in the number of budget and limited service hotels. International operators have been successful in introducing and rolling out brands that could well serve the growing price sensitive guests and extended stay demand.

We have also observed over the years that serviced apartments, budget and midscale hotels perform better than other hotel assets during a downturn/recession as well as during major growth and transformation in the tourism landscape.

39% of investors are likely to invest in budget and limited service hotels (68% combined) and 36% will invest into serviced apartments.

Few investors are looking to invest in five-star hotels while 36% will continue to develop resorts. With the expected shift in consumer preferences and travel purposes we consider these findings to be inline with the potential growth in demand and future returns.

Question 15: What is your overall outlook for hotel investments?

Source: HVS

While 32% of respondents are neutral in terms of the outlook for the industry, 43% of hotel owners/investors remain positive.  Combined, 25% of respondents have a negative outlook.
 

Question 16: Please share any additional thoughts/challenges/opportunities that you deem relevant and will ultimately impact the hospitality industry since the occurrence of COVID-19.

Source: HVS

Concluding Thoughts: 

These are undoubtedly very unusual times that are coupled with oversupply situation in certain markets, a negative political outlook, and a global and regional economic slow down. But we equally know, that despite those challenges and the overall uncertainty that is troubling us on both personal and business levels; there will be better times and that the hospitality and travel market will eventually come out stronger and continue to grow.

The future winners are those that will create an ecosystem that is built on ethical principles and  promotes a behavior that reflects a good corporate citizenship.  Finally, a strong risk mitigation approach, flexibility and innovation will remain key traits of successful organization.

Disclaimer:
HVS does not provide legal or other regulated advice or guarantee results. The survey findings reflect general insight based on information available to us by the participants. These findings should be viewed as indicative only and not relied upon for future course of action. These findings may be subject to change and therefore HVS has no obligation to update these findings and makes no representation or warranty and expressly disclaims any liability with respect thereto.