Room at the Top for All
European hotel assets are now the hottest in the world, with acquisitions and takeovers exceeding the vigor of the American market at its late-1990s peak. Experts say the biggest deals are yet to come.
By Tony Dela Cruz, Managing Editor -- HOTELS Magazine, 6/1/2000
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Virtually no one would deny how all hotel markets are subject to cyclical shifts. Because nothing good or bad stays that way forever, the challenge for economists and analysts is to determine when the changes will actually occur—just ask anyone trying to time the recovery in Asia.
The flip side of the coin is Europe and its related markets in the Middle East and Africa (see separate story). As recently as 1998, many were predicting hotels in the United Kingdom, the bellwether for all of Europe, would tumble into a recession because of currency crises in Russia, Asia and Latin America. “What happened was totally different,” says Nick van Marken, London-based partner in hospitality consulting for Arthur Andersen. Market fears receded and despite sociopolitical turmoil scattered through Russia, Turkey and Greece, hotel development flourished.
Just as importantly, the quarter-on-quarter change in yield growth remained positive for most of 1998 and 1999. “The yield numbers now show that we are in double-digit yield growth across most of Europe,” van Marken says.
Europe’s competitive playing field during this upturn, like that of the North American hotel boom of the late-’90s, features global players (Accor, Granada, Bass Hotels & Resorts) buying groups of hotels. But unlike the U.S., Europe has hotel companies at multiple tiers basking in success. “In the middle, you’ve got some regional, largely domestic companies that have now begun to go pan-European,” says Arthur de Haast, managing director, Jones Lang LaSalle Hotels, Europe.
Leading the way and perhaps worthy of their own trend line are Spanish companies such as NH Hoteles, Sol Meliá and Barcelo Empresas. Arthur Andersen’s van Marken says he has expected the outward growth of Spanish hotel capital for some time. This new Spanish conquest has been evidenced in some eye-catching deals and moves in the past year: Sol Meliá purchased its first London asset, the White House hotel; Barcelo, through Wyndham International, bought a 16-hotel portfolio of U.S. properties; while NH, which had already purchased a stake in Italy-based Jolly Hotels, is at presstime pursuing a takeover of Krasnapolsky HR NV, which operates the Golden Tulip chain.
Hunters Become Hunted
It is not shocking for potential buyers to become acquisition targets themselves. Such is the case with Krasnapolsky, which assumed the role of a regional consolidator in the Benelux, going from 10 properties in late-1998 to 62 hotels by March 2000 before being offered a buyout from NH Hoteles in April. “We are seeing a lot of jockeying for position in Europe,” says Jones Lang LaSalle’s de Haast, “and in Europe there is a lot more potential for consolidation.”
Some recent transactions, such as the purchase of regional chain Stakis plc by Hilton International, were the product of a broad cross-section of owners looking to maximize their return on investment. “But in continental Europe, the vast majority of regional players, like Mövenpick, like Dorint,” de Haast says, “are not publicly quoted and if they are, they are so tightly held, their desire to drive value is less.” He explains there are three levels of hotel player in Europe: the global giants such as Accor, Bass, Granada and Marriott; expanding regional powers like Sol Meliá who have expanded into neighboring countries and many nationally based, typically publicly held companies for whom the clock is ticking to either expand across Europe or become acquired. “Stakis was under that kind of pressure,” de Haast says.
What makes Europe attractive for all three types of players, as well as for low-tier budget and economy chains, is the unbranded (about 70%) nature of European hotels. “Companies like Bass, they still have significant gaps in their portfolio,” de Haast says. “Holiday Inn is still under-represented in Western Europe.” Below the global player level, partnerships are easily formed and borders easily crossed for expansion, he adds.
Of course, the enthusiasm for most of this activity is fed by the upturn in the continental hotel business. “The real issue is whether the cycle is flattening,” says van Marken. “The peak which leads into the downturn is being experienced for a number of cities—Paris, London, Madrid and others, and has been experienced for an extended period.” Van Marken says certain markets will be vulnerable to overbuilding as hotel performance reaches a plateau.
“For Germany, I would put a warning out: Let’s not overbuild again, the market is picking up from a low point,” he says. German hoteliers, eager for distribution, might be tempted by the lack of barriers to entry in their homeland, while in Eastern Europe, much upside growth potential remains, van Marken adds. The Four Seasons flag, for example, has brought branded luxury into Prague for the first time.
Big Deals On The Way?
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Experts would agree that a handful of cash-rich European operators are all capable of buying other companies. NH Hoteles and Sol Meliá have been viewed as biding their time while looking for a major acquisition, with NH Hoteles being the first to make a major move with its bid for Krasnapolsky. Accor and Radisson SAS are also viewed as innovative financiers and deal makers.
And three global players could each shape Europe’s competitive landscape with a blockbuster deal. Granada Chairman Gerry Robinson is on record as desiring a major acquisition. Robinson’s successful grab of Forte in the mid-1990s actually pre-dated similar moves by Bass, Starwood Hotels and Resorts Worldwide and Hilton, so some say the executive is under-appreciated as a deal maker. In addition, the announced disposal of brewing interests by Bass plc will create a very cash-rich hotel company, and how it spends the estimated US$2 billion in proceeds could swing the balance of power in Europe’s hotel market. Finally, some analysts have praised Starwood for retooling Westin with a heavy European identity and see it as a vehicle for flagging first-class and luxury hotels on the continent.
As for the operators themselves, given the high performance of the gateway cities, hotel companies are as bullish as ever on Europe, treating it more like a new frontier than the world’s oldest hotel market. Washington-based Marriott International happens to be celebrating its 25th year of European operations this year and will punctuate the occasion by opening seven hotels on the continent by the end of 2000. Those hotels, some of which are already open, include a Marriott hotel in Bucharest, a Courtyard in Hannover, Germany, a Marriott Executive Apartment in Longin, Czech Republic, and three other properties in Graz, Austria, Mallorca and Frankfurt. Marriott will also be converting in either 2000 or 2001 30 quality-tier hotels that its U.K. licensee Whitbread plc bought in the acquisition of Swallow Hotel Group.
Global Strategy
The rapid European expansion is part and parcel of Marriott’s global strategy to manage or franchise a hotel in every gateway city in the world and to bring its portfolio to nearly 500,000 rooms by 2003, according to Ed Fuller, president and managing director, international lodging, Marriott International. “We now have more hotels in Europe than we had in our entire system during our first 25 years of lodging operations in the United States.”
Companies like Mallorca-based Sol Meliá, Adliswil, Switzerland-based Mövenpick Hotels & Resorts and Brussels-based Radisson SAS are privately held and less global in scale than the giants, but they are just as determined to grow aggressively on their home turf. In recent years, Sol Meliá expanded its portfolio to include—beyond its home base of Spain—France, the UK, Germany, Brussels, Italy, Portugal, Croatia and Turkey. The company says its next market penetrations will hopefully include the Benelux and Switzerland, as well as incorporating more city hotels in existing markets, as well as resorts in the Mediterranean. Sol Meliá also launched last year, in conjunction with new acquisitions in Paris, the Meliá Boutique Hotels brand.
Mövenpick is a small, privately held European hotel company that is the antithesis of the typical publicly owned American lodging company. Mövenpick has grown very slowly because it had been under no pressure to do otherwise, according to President and CEO Jean Gabriel Pérès. But as part of the rejuvenating effort brought on by the new stake of ownership led by Kingdom Holdings Co., Pérès observes “the company was a bit restricted to its Swiss and German markets, and has not realized its full potential so far.” Hence, the CEO is determined to add 10 hotels annually to the portfolio of a brand that since the late-1940s has totaled just 40 hotels in Europe and the Middle East.
Blooming In Brussels
Radisson SAS is a model of a regional operator that has broadened its base. President and CEO Kurt Ritter says the company ended 1999 with 128 properties in 37 countries, versus 28 hotels in 11 countries in 1994, the year before it partnered with Radisson. He says SAS has the capability to buy a small, local chain, but will probably continue to grow organically, by 25 to 30 hotels a year, with about one-third of those new-build properties.
Ritter is one of the few branded pioneers aiming toward Eastern Europe for expansion. “People ask why,” he says. “We feel comfortable there. We have always done business with Russia—long before the opening of the countries.”
Starwood, meanwhile, has varying development strategies for each of its brands, according to Roland Voss, president of the company’s Europe division. “We have different targets for different brands,” he says. “We try to achieve the most aggressive growth pattern we possibly can.”
Not unlike Marriott over the past two decades, Westin was under-represented in Europe, with just five hotels by the end of the 1990s. But through conversions of certain Luxury Collection hotels and new portfolio additions in Dublin, Rotterdam and Marbella, Westin will hit 17 hotels in Europe by the end of 2000 and, Voss projects, 30 by year-end 2001, with openings in Barcelona, Budapest, Paris, Prague, London, Frankfurt and Munich.
Westin’s sister brand, Sheraton, on the other hand, is well-established in Europe’s major cities, “in all the places you would like to have your hotels first,” Voss says. St. Regis recently debuted in Rome with the St. Regis Grand. Four Points Hotels, the Sheraton brand extension, has limited exposure in Europe, but Voss sees a generous upside potential.
“If you look at the engine that drives Four Points Hotels—Sheraton—it is a vehicle that is clearly requested in Europe,” says Voss. He says Four Points will fill a need for small groups of hotels in Europe looking for a sales and marketing engine. Starwood is partnering with owners of hotels such as Spain’s Arabella group who may choose Four Points for that purpose.
Starwood is an illustration of how even a well-seeded hotel operator in Europe can have almost boundless growth potential. Voss says the company is looking to retrench its market strength in Italy, “but from a development perspective the places to look at are Dublin, Prague, Istanbul, Barcelona and Amsterdam.”
Representation The Key
And why is Starwood so bullish on Dublin, one of the few major European markets not to enjoy double-digit growth last year? “When you get decent representation, you will see double-digit growth back,” he says. “We feel that market is going to do extremely well, specifically if the political situation in Ireland continues to improve.” So bullish is Starwood on Europe that it has launched a new concept, Smart Meetings By Sheraton, in 15 Europe locations. Paul Tribolet, senior vice president of marketing in Europe for Starwood, says that is because 45% of Starwood’s revenue in Europe comes form the business traveler segment.
In the end, one central fact uniting all types of developers, operators and brand owners is that only 30% of Europe’s hotels are branded, leaving the vast majority of hotel rooms as targets for affiliation if not acquisition. “It is a very encouraging situation,” says Voss, adding the figure is only an average. “In Italy, only 3% is branded.” Traditionalists may argue landmark hotels have more identity than a brand could bring, but the counter-arguments are compelling, too.
“The Dorchester in London will never need a brand,” says Radisson SAS’s Ritter, “but how many Dorchesters are there? The grand hotels, they also need to be part of a system, because people, nowadays, they buy brands.” Roy Murray, vice president, international, Choice Hotels International, says the need for either a brand or a GDS connectivity has been amplified in Europe in recent years, with only the highest-tier hotels insulated from the market shift.
Bill Hanley, senior vice president worldwide sales for Cendant’s hotel division, ties the shift toward branding to the opening of Europe’s trade through its common currency. “The route salesman in Bavaria now finds himself covering four countries,” he says. “With that comes a change in how people are buying hotel rooms.” The reluctance to go to a branded hotel is diminishing, Hanley says. “In Eastern Europe, not only are banks requiring brands, I am not aware of a situation there where [developers] would not want a brand.”
Markets to Watch
The Amsterdam lodging market has enjoyed significant occupancy and rate gains since the early part of the decade. A buoyant local economy and tight supply conditions have enabled city-wide occupancy to rise above 80%, an approximate 20% gain from the average level in 1993 (60%). Amsterdam’s occupancy trends peaked in 1998, bolstered by the city’s success in attracting large events such as the Gay Olympic Games. Beginning in 1999, supply additions softened occupancy slightly, although ADR and RevPAR growth remained strong. As of year-end 1999, 10 hotels in Amsterdam representing 2,482 rooms experienced aggregate occupancy decline of 70 basis points, closing the year at 82.4%. ADR climbed 8.7% to US$149.54 during the year. RevPAR increased by 7.8%, closing 1999 at US$123.22.
Since the unification of Germany, the Berlin lodging market has mirrored the city’s massive regeneration into a national and regional capital. Market occupancy peaked in the early 1990’s following the influx of visitors to celebrate the collapse of communism and the opening of East Berlin. Market occupancy dropped to just over 40% by the mid-1990’s. In more recent years, as components of the city’s rebuilding effort have reached completion, visitation trends have recovered boosting market-wide occupancy by approximately 20%. As of year-end 1999, 15 hotels in Berlin totalling 5,219 rooms experienced an aggregate occupancy increase of 560 basis points over 1998, closing the year at 67.7%. ADR dropped 1% to US$87.99 in 1999. However, RevPAR growth remained strong, rising 7.9% to $59.57 in 1999.
The lodging market in Brussels experienced a surge of new supply during the late 1980’s in anticipation of a central role in the integration of Europe. During that time, the city’s supply more than doubled, creating a severe supply and demand imbalance. Brussels’ room supply has contracted since the country’s recession during the early 1990’s, allowing city-wide occupancy levels to recover. Since 1998, modest supply additions have returned, although rates have continued to grow. As of year-end 1999, 17 hotels in Brussels representing 3,822 rooms experienced an aggregate occupancy decline of 290 basis points, closing the year at 68.7%. ADR grew 6.0% to US$106.23 during the year, resulting in RevPAR growth of 1.7%. 1999 RevPAR was US$72.98.
The financial center of Germany is considered the most stable lodging market in the country. As of year-end 1999, 20 hotels in Frankfurt totalling 7,385 rooms experienced an aggregate occupancy increase of 190 basis points, closing the year at 70.4%. ADR growth was essentially flat, rising 0.8% to US$102.61 in 1999 and RevPAR grew 3.6% to $72.74 in 1999.
According to the World Tourism Organization’s latest estimates, the U.K., led by London, ranked fifth in international tourism receipts during 1999, earning an estimated US$21 billion. But in 1998, the British pound’s strength against other currencies and poor summer weather conditions led to decreased visitations to the city and encouraged U.K. citizens to travel abroad. According to the International Passenger and U.K. Tourism Surveys, London’s overall arrivals dropped 10.7% in 1998, driven by a 20.5% decline in domestic arrivals (and 0.7% gain in international arrivals). This had a less severe impact on overnight stays, which declined 3.1% during the period, while expenditures grew 4%. Although final statistics are still unavailable, expectations for year-end 1999 are positive. The British Tourist Authority and English Tourist Board estimate 1999 arrivals and expenditures for London will be up 13.9% and 7.3%, respectively.
Although the number of hotels in Madrid is believed to have doubled between 1993 and 1998, demand growth has kept pace with supply. Madrid maintains one of the highest occupancy levels in Europe, however ADR levels are significantly lower than London or Paris. Supply additions in 1998 and 1999 appear to have outpaced demand growth, hindering occupancy and rate growth. As of year-end 1999, 11 hotels in Madrid representing 3,210 rooms experienced a slight occupancy decline of 50 basis points, closing the year at 79.3%. ADR remained flat during the year, rising only 0.2% to US$110.14, resulting in a RevPAR decline of 0.4%. Year-end 1999 RevPAR in Madrid was US$87.34.
Despite relatively lower occupancy levels than Rome, Milan has benefited from significant growth in ADR and RevPAR. As of year-end 1999, 16 hotels in Milan representing 2,847 rooms experienced an aggregate occupancy increase of 260 basis points, closing the year at 68.1%. Despite the lira’s 5.7% devaluation against the U.S. dollar from 1998 to 1999, ADR grew 3.4% to US$155.04 in 1999. Year-end 1999 RevPAR grew 7.5% to US$105.58.
Munich is a major economic center for southern Germany, as well as a popular tourist destination. Munich benefits from a better mix of business and leisure demand than other German cities, resulting in a higher occupancy than in more business-oriented cities. As of year-end 1999, 16 hotels in Munich totalling 4,811 rooms experienced an aggregate occupancy decline of 10 basis points over 1998, closing the year at 72.9%. ADR dropped 2.5% during the same period to US$92.44 in 1999, while RevPAR declined 2.6% to $67.39.
The Parisian lodging market has enjoyed favorable occupancy and rate gains since 1996/1997, following a cycle of slow growth and various local crises, including terrorist attacks in 1994 and labor strikes in 1995. The market peaked in 1998 when the city hosted the final matches of the World Cup soccer tournament and has leveled off since. As of year-end 1999, 47 hotels in Paris representing 9,529 rooms experienced an aggregate occupancy gain of 140 basis points, closing the year at 75%. ADR declined 1.5% to US$147.96 during the year, resulting in flat RevPAR growth of 0.4%, closing 1999 at US$110.97.
Rome has achieved steady occupancy growth throughout the decade, but since 1998, occupancy has softened and ADR in local currency has increased approximately 1.8% only. When converted into U.S. dollars, ADR and RevPAR trends were negative due to the lira’s 5.7% devaluation against the dollar from 1998 to 1999. As of year-end 1999, 13 hotels in Rome representing 3,894 rooms experienced an aggregate occupancy decline of 270 basis points, closing the year at 75.4%. ADR declined 4.5% to US$149.25 and RevPAR declined 7.8% to US$112.53 in 1999.
Dorint Strives For Simplicity
Germany’s largest
hotel company is compelled to simplify its brand focus
after rapid expansion muddled its international identity.
With growth as rapid as any hospitality company in Germany, Dorint Hotels & Resorts, based in Mönchengladbach, near Cologne, is not only the country’s largest hotel chain, but also one most willing to experiment. Since the ascent of CEO Alfred Weiss in 1998, the company has announced one expansion plan after another, but today, after dabbling in multi-branding and alliances with other companies, Dorint is pursuing a simpler, core-brand strategy.
The company operates 83 hotels with 14,000 rooms in 10 European countries along with one luxury resort in Agadir/Morocco. According to Weiss, 10 hotels are under construction, including 5-star properties in the Mediterranean on the Spanish island of Mallorca, in Hamburg and in Baden-Baden in the Black Forest. Fourteen more hotels are planned, among them are business hotels in international metropolitan cities like London, Paris, Brussels, Amsterdam, Frankfurt and Düsseldorf.
It was Dorint’s jump into the luxury segment in early 1999 that took the chain from 73 hotels to its current size. Weiss’ prior growth strategy is credited for taking the chain into Southern and Eastern Europe, partially through an alliance with Rogner Hotels in Austria.
“Today we are already able to state that we have reached our company’s aims only after three years,” Weiss says. “Originally we had hoped to achieve these goals by 2002.” Dorint’s turnover in the last fiscal year was US$353.8 million, compared to US$269.9 million the previous year. The average room rate moved up by 6.8% to US$66. Despite hotel openings, occupancy declined only slightly, from 60.2% to 59.5%. This year, Dorint is expecting to achieve a turnover of US$409.8 million. The critical border of one billion German marks (US$455.3 million) should be reached in 2001, according to Weiss.
Broad-Based Partnerships
Historically, much of Dorint’s growth has been driven by majority stockholder Dr. Herbert Ebertz from Cologne. Insiders say he can call two partners and gain access to 50 million marks to finance a hotel project. Ebertz invests not only in hotels, but also department stores, golf clubs, apartments, office centers and real estate.
When Dorint fell into financial straits several years ago, Ebertz decided to buy the company with co-investors. Today, he owns 43% of Dorint Hotels & Resorts. The other shares are held by Dorint Real Estate owners, encompassing 20 managing directors and business partners. Ebertz personally developed more than 50 Dorints through these partnerships.
Except for the expansion with 5-star properties in Europe’s metropolitan cities, resort areas in the Mediterranean remain Dorint’s favorites, with the Algarve in Portugal, Ibiza and Tenerife all targeted for development. At the other end of the scale, Dorint will move forward with its Dorint Budget Hotels. The expansion in former Eastern Germany is on hold now; like most companies Dorint lost a lot of money there, especially in new-build properties.
Brand Awareness Key
Brand awareness, however, remains Dorint’s chief concern. Marketing Director Steffen Weidemann, brought on-board by Weiss in the fall of 1999, has just introduced a corporate rating system. Previously, Dorint’s varying segments were labeled by product names. Each Dorint hotel will be differentiated by stars and logo color: Silver for 5-star hotels, blue for 4-star and gray for mid-market hotels.
Weidemann says the new strategy breeds identity. “The Dorint name will continue to exist,” he says. “The stars will help us to give the name a better international reputation.” Dorint is still looking for an international cooperative partner, as negotiations with Inter-Continental broke down about two years ago. Similarly, the dual branding with Rogner will be dropped except for a few properties in Austria.
A global partner seems to be absolutely necessary. The foundation of a new department for electronic distribution, announced in March, is said to be the first step.
Is The Time Right For Europe?
Powerhouse American hotel
companies such as Marriott are now officially bullish on Europe.
Have you tried getting a first-class hotel room on short notice in a major European capital lately? It can be a pretty frustrating experience. As the 2000 tourist season approaches, markets like Amsterdam, London, Paris, Madrid, and even historically weaker sister cities like Brussels and Berlin, are becoming tight. Strong markets, combined with various factors, suggest that the time is right for hotel developers to increase their activities in the European marketplace.
Factor 1: The European economy is recovering. As always, lodging demand grows with Gross Domestic Product (GDP).
After some fits, starts, stops, and slow-down scares from 1998 and 1999, the consensus is that economies are in clear recovery across most of Europe. Most economists expect GDP growth in Western Europe of between 3% and 4% during fiscal year 2000. The improvement in these economies seems to stem from real, if slow-moving, structural reforms and the advent of the euro, eliminating currency risk throughout the 11 Euroland countries. More importantly, forecasters believe that Europe is headed for five or more years of meaningful economic expansion, in effect playing “catch up” to the U.S. economy.
Much has been made of the euro’s recent weakening, but from the hotel developer’s perspective, there are two real benefits: European goods are cheaper in markets like the U.S., stimulating production and growth in Europe; and Europe as a destination (except for the UK) is now approximately 25% less expensive in dollar terms compared to only 18 months ago when the euro was launched. (Look for a good summer season on the Continent this year).
Looking further east, the Russian economy grew an estimated 7% in the first quarter of this year, bringing along economies among its border states and trading partners.
Factor 2: Hotel debt financing terms are attractive. In our experience, we have seen traditional hotel lenders offering extremely attractive terms for projects in Western Europe. In one recent case, we have seen German banks offering 40- and 50-year amortization schedules, with balloon payments after 20 years. Notably, this project was outside Germany, indicative of the fact that debt providers are increasingly moving outside their home markets following the elimination of currency risk.
Loan-to-value ratios are now frequently approaching 70% (depending on asset quality and the amount and type of credit enhancement). And spreads are currently razor-thin, often less than 200 basis points over LIBOR. These debt market conditions benefit hotel developers since the returns to the ultimate buyer of the asset is enhanced.
Factor 3: Many buyers and a limited supply of hotels. Most European hotels remain in family hands or in closely controlled private groups. However, at Marriott, we are seeing increasing activity among both U.S.- and European-based private companies with interest in purchasing completed, operating hotel real estate. Typically, there are several of these buyers pursuing the few major properties that are on the market at any given time. Not surprisingly, prices are rising. Some of this buying community is now beginning to look at hotels under construction to fully deploy their capital.
However, there are several difficulties and risks that remain.
Risk 1: Availability of projects. There are virtually no green field sites available in the centers of the major markets. And the redevelopment of a well-located ancient building is fraught with cost overrun risk.
Risk 2: Securing planning approval for hotel projects. This is frequently a drawn-out process with no assurance of success. Some countries and municipalities require up to four different planning bodies to approve all projects.
Risk 3: Interest rate increases. Increases by the U.S. Federal Reserve and the European Central Bank may rapidly dry up the attractive debt markets.
Real as these risks may be, it seems that the time is right for hotel developers to ply their trade around Europe. Marriott’s European development team is currently working with development entities across the region on numerous projects.
Scouting The Middle East And Africa
Although most hotel companies group the markets of Europe, the Middle East and Africa into the same business unit, the latter two regions have unique attributes that justify stand-alone analysis.
With political stability and another year of Holy Year-based tourism forecast for the Middle East, experts say this year should be most bountiful for hoteliers. The World Tourism Organization reports visitor arrivals of 18 million for the Middle East in 1999, considered to be a low base from which double-digit increases are already evident. Beyond the Middle East lies Northern Africa, and beyond that, the Southern tip of the dark continent, and both areas are attracting development interest.
“Jordan, Israel, Lebanon and the Palestinian Authority are having a record year in terms of tourist arrivals,” says Yossi Fischer, managing director of Marketing Vision, a Tel Aviv-based consultancy. Fischer, who is also the Israel representative for TRI Hospitality Consulting, says Egypt, with half of all Mideastern arrivals, is expected to maintain its pace of 4.5 million visitors, which last year represented a 40% increase. Similarly, this year Israel is expected to break the arrival record from 1995 (2.5 million) by attracting 2.8 million visitors.
Fischer also cites low air fares as a factor in increased Middle East tourism. “The Middle East in general and the Red Sea in particular is becoming a favorite winter holiday destination for European holiday makers,” he says. “The increased additional supply of hotel rooms along the Egyptian and Israeli shores of the Red Sea kept room rates low and increased numbers of Europeans, mainly from Germany, Italy, France, the U.K., Switzerland, Holland and the Scandinavian countries are making use of the low fares for flights and accommodation.”
The tourism infrastructure in the Middle East also has grown in impressive fashion in recent years due to operators like Mövenpick Hotels & Resorts, which has moved swiftly into Jordanian markets such as Petra, the Dead Sea and Aqaba. But the company is a bit more cautious about Africa. “We’re ready to take limited financial risk in Southern Africa,” says President and CEO Jean Gabriel Pérès. “It’s possible to take over some hotels, put in some equity, find an investor, build extensions and refurbish when the land and location are right.”
But development costs are non-commensurate for the return on investment on African hotel assets, he says. “That’s been the problem, so we are cautious.” Pérès says he prefers Northern Africa because of its more traditional Mediterranean surroundings. And he says the “high quality, low yield” nature of hotels there is gradually being corrected. “Algeria, closer to the Middle East, that’s where we want to be,” he says. And in fact, Mövenpick is targeting a hotel opening in Tunisia by the end of the year.
Back in the core Middle East markets, Fischer is predicting a handful of trends: Boutique hotels could find a home in hub cities like Tel-Aviv or Beirut. Secondary markets could emerge, such as Alexandria, Tripoli, Gaza or Haifa. And new holiday beach destinations could emerge in Taba, Aqaba, Junia (Lebanon) and Ashkelon (Israel).
Fortuitous Connections
How long does it take a family-owned hotel management company from the American Midwest to penetrate the Middle East? Forever might be a safe bet. But Schaumburg, Illinois-based Hostmark Hospitality Group, through an unlikely sequence of events in the mid-1990s, beat the odds. Hostmark, a 31-year-old company headed by Chairman C.A. “Bud” Cataldo and his brother, President Robert Cataldo, today has 14 Middle East hotels under contract, with eight under construction and two open.
The networking begins with an Egyptian general manager who worked at Hostmark in the U.S. for 12 years. He had a family friend who was also hired by Hostmark as an ex-patriate and who happened to have as a mentor Sheik Fahd A. Al-Sulaiman, whose family developed the Inter-Continental brand in both Egypt and Saudi Arabia. When Sheik Fahd sought to build hotels in the mid-1990s and flag them with American brands, his first move was to contact Hostmark. The end result was a 50-50 joint venture called Hostmark Middle East.
“We picked Egypt because it is the most Mediterranean of the Middle Eastern countries,” says Biff Hawkey, senior vice president of development for Hostmark. Common ground was also found between Sheik Fahd’s family business and the closely knit Hostmark.
Sheik Fahd passed away in November 1999, but his sons are said to be upholding his vision of a four-brand hotel company, Hawkey says.
Hawkey started out as general counsel for Hostmark, but now spends about 18 weeks a year in the Middle East—time he finds necessary to cover the company’s growing scope there. “We have in Egypt nine different places you would want to be involved in management,” he says. “We have the capacity to have three different names in each of those nine locations.”
Of the 14 Hostmark Middle East properties open or in development, seven will be flagged as Hostmark Hotels, along with three Ramada hotels and four Howard Johnson properties. “We want to get to 25 hotels total,” Hawkey says. “Get to Fahd’s dream of four brand names.” Outside Egypt, Hostmark Middle East is scouting hotel sites in the United Arab Emirates, Lebanon, Oman and Saudi Arabia.
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