Middle East Hotels – Trends And Opportunities 2003 Edition by Elie Younes and Dominique Bourdais

According to HVS International’s 2003 survey, quality hotels in the Middle East showed no growth in revenue per available room (RevPAR) in 2002.

Based on a sample of 100 hotels, representing approximately 31,000 rooms, the regionwide average occupancy increased by two percentage points to 66%; but average rate decreased by approximately 4% to $81 (see Table 1). We note that all our average rate illustrations are expressed in US$.

Tourist arrivals in the region experienced an above-average recovery compared to other regions in the world, which somewhat reflects both the volatility and the strong resilience of the industry. Yet, due to the increased political tensions in the last quarter of 2002, signs of a slowdown were noticeable in some regions. This negative trend has continued in early 2003 due to the conflict in Iraq.

Despite the continuation of the political tension throughout the year, most governments remain committed to the diversification of their economies. Various touristic projects are planned in the region, notably in Dubai, Qatar and Bahrain.

Economic Overview
Many of the economies of the main countries in the Middle East, including those of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE), showed a decline in GDP growth in 2002, as illustrated in Table 3. Due to the continued global economic slowdown, demand for crude oil has declined, which has resulted in a considerable reduction in oil revenues for most of the oil-exporting countries in the region. The growing crisis in Iraq and the stoppage in the flow of oil from Venezuela have led to the average price for oil exceeding its anticipated projection. Yet, the increase in oil prices did not compensate for the decline in demand for crude oil.

In terms of economic prosperity, the current conflict in Iraq, combined with continuing Arab-Israeli tensions, will further restrict growth, causing foreign currency earnings to decline. However, the economies of most Middle East countries are primarily dependent on government expenditure, which is likely to increase (when possible) in the coming years in an attempt to boost economic activity.

The outlook for the Middle East as a whole is mixed and uncertain. Demand for crude oil is likely to decline somewhat in 2003, resulting in cuts in oil revenue for most countries in the region. In addition, the war against Iraq will most definitely have a negative short-term effect on consumer sentiments both in the region and elsewhere in the world.

Despite this negative economic outlook, the Middle East has been the fastest-growing region in the world, in terms of visitor arrivals, over the last six years.

Tourism Trends
According to the World Tourism Organisation (WTO), worldwide tourism experienced unexpected growth in 2002, and for the first time the number of tourist arrivals exceeded the 700 million mark, registering a growth rate of 3.1%. Furthermore, the WTO’s preliminary results indicate that there has been a considerable change in the world tourism map. While Europe remains firmly in first place, Asia and the Pacific region took over second place from the Americas.

While the events of 11 September and the global economic slowdown had a detrimental effect on the tourism industry in the Middle East in 2001, tourist arrivals in the region showed some growth in 2002, demonstrating once again the industry’s strong resilience to downturns. After experiencing a considerable decline in tourist arrivals of approximately 8% in 2001, tourism in the Middle East experienced a recovery in 2002 (despite the political turmoil), registering growth of approximately 7%. According to the WTO, in that year, the Middle East accounted for 3% of the total number of worldwide tourist arrivals, as shown in Table 4. Visitor demand for the Middle East has experienced peaks and troughs for the last decade, as can be seen in Table 5. In 1991, due to the first Gulf War, the region experienced a decline in arrivals of approximately 6.6%. However, tourism to the Middle East showed a strong recovery with approximately 30% growth. Since 1992, tourist visitation to the Middle East has steadily increased. In 2001, the contracting global economies, combined with the events of 11 September, caused tourism to the Middle East to experience a considerable decline, which was followed by a modest recovery in 2002.

Egypt remains the top-performing country in terms of tourist arrivals, with Saudi Arabia and the United Arab Emirates ranking equal second. Yet the nature and characteristics of tourism visitation to Egypt, combined with the terrorist activities of the past in the Red Sea area, means that the country remains more exposed to the political instabilities of the region compared to other countries.

Although data for visitor arrivals in 2001 and 2002 for some countries are not yet available, it seems that, in general, there has been a recovery in the number of arrivals for most of the countries included in our study. Once again, Egypt showed its resilience, registering a considerable growth of approximately 10% in 2002. The effects of the US-led war against Iraq, means the outlook for 2003 is uncertain. There is no doubt that tourist arrivals in the region will decline in the first 2 quarters of the year 2003, but, assuming that the conflict in Iraq is short-lived, then swift recovery can be expected in late 2003 or early 2004.

Key Hotel Operating Statistics
Using HVS International’s extensive database of hotel operating results for the Middle East, which has been developed with the continued support of all the major hotel companies in the region, we have analysed the performance of quality hotels in the region’s main destinations. We note that International hotel chains still operate approximately 90% of these hotels. Although the region’s recorded average occupancy in 2002 of 66% was up on 2001, it remained below the high of 68% recorded in 2000. The increase of two percentage points in the region’s occupancy can be attributed largely to the increased intra-Arab visitation noticeable during the year, as well as to the continued private and public investment in the tourism industry. Particularly noteworthy were destinations such as the Red Sea, Doha, Cairo Pyramids and Dubai, which all showed fairly strong growth in occupancy levels in 2002. In addition, it is worth mentioning that hotel supply continues to increase strongly in many of the cities surveyed, constraining further occupancy growth.

In 2002, overall average rates in the region decreased by approximately 4%, to $81. This decrease was attributable mainly to the global economic downturn, which had a negative impact on the spending power of business and leisure travellers. Furthermore, we note that the region is facing increased competition from destinations such as North Africa and Asia. In addition, the increased hotel supply in many markets in the region resulted in hoteliers adopting a more aggressive pricing policy to maintain occupancy levels. This has contributed to the decline in average room rate in most cities surveyed, as shown in Table 7. On the other hand, markets like Beirut experienced an increase in average rate, but this was fuelled principally by additions to supply of five-star quality hotels achieving relatively high average rates.



Average rates are likely to continue to decline in 2003 due to new supply entering the market and demand, which is unlikely to grow given the turmoil caused by the war. Possible demand growth from late 2003 or 2004, once the Iraq conflict finishes and global economies recover, could signal some rate growth from 2004.

RevPAR in the region remained stable at approximately $54. It is expected to decline slightly in 2003 but could recover strongly from 2004, assuming a more stable political climate.

Country Analysis
Bahrain
Bahrain is moving forward in its democratisation programme as the country's first parliamentary elections in more than 30 years were held during the year. In 2002, Bahrain's economy continued to experience one of the strongest growth rates among the Gulf Cooperation Council (GCC) countries, benefiting from the strength of oil prices during the year as well as increased government expenditure. According to the Economist Intelligence Unit (EIU), GDP growth registered 3.8% in 2002, compared with the strong growth of 5.0% in 2001. The slowdown in economic growth is mainly due to the slower economic growth in Saudi Arabia and other GCC nations, mainly driven by a fall in the demand for crude oil.

Efforts have been made to improve and diversify the economy, and various projects are planned within the country. In 2002, the government announced the development of the $1 billion Bahrain Financial Harbour in Manama, which is intended to become the leading financial city in the Middle East. It is anticipated that the project will start in 2003 and is due for completion by 2007. In terms of infrastructure, various projects are under construction, including water, energy, and sewerage systems. In addition, two new highways are being developed in the south of the city.

While the long-term economic outlook for Bahrain is strong and flourishing, the economy will be subject to the political and security risks related to the consequences of the war in Iraq. The EIU anticipates that economic growth in Bahrain will experience a slowdown in 2003, followed by a recovery in 2004. The tourism sector in Bahrain experienced moderate growth in 2002, which was mainly driven by increased intra-regional visitation. This trend is likely to continue in the short term and Bahrain is most likely to benefit from additional Arab visitors. Various public and private touristic projects are being developed in the country, and we briefly summarise some of these developments.

* The Bahrain International motor racing circuit: to be developed south of Manama. It is anticipated that Bahrain will host the 18th round of the Formula One Championship in 2004. In addition, we understand that a 200-room hotel will be developed near the circuit;

* Durrat al Bahrain Project: this $1.5 billion project is located in southeast Bahrain and will include residential apartments, serviced apartments, a marina and yacht club, two 400-room, five-star and five-star de luxe hotels, an exhibition and convention centre, a water park and an 18-hole golf course. The development is due for completion in 2005/06;

* Amwaj Island: this $1.0 billion Venice-style project is located in northeast Bahrain and will comprise private beaches and lagoons, residential apartments, private villas and a commercial component. The development will also comprise the touristic Fanar Beach resort, which will feature residential units, a marina, a shopping mall, recreational facilities and two or three hotels. We understand that this development is likely to be completed by 2005/06.

In 2002, the quality hotel market in Manama achieved occupancy of 64%, an increase of two percentage points on 2001. However, average rates in the city decreased by 5%, from $103 in 2001 to $98 in 2002. Consequently, RevPAR declined slightly, to $63, compared to $64 in 2001.

Proposed or new supply in the market includes the Al Dana Novotel Resort, which was due to have opened in late 2002, but has now been postponed to some time in 2003. A 250-room Movenpick hotel is also due for completion in late 2003. In addition, we understand that a 95-unit Marriott Executive Apartments is planned in Manama. At this stage, we are not aware of the branding status of the hotel developments that will form part of the various touristic projects in the area, but it is our opinion that international operators are already in discussions with the promoters of those properties. We note that hotel owners are putting increased pressure on operators to perform and are prepared to terminate management throughout if necessary.

The medium to long-term outlook for Bahrain remains promising and we anticipate that the country will experience a further increase in tourism activities in the next few years. Furthermore, it is our opinion that opportunities exist for the development of three-star branded hotels in the area as most of the developments to-date have been geared towards five-star hotels. In addition, as the level of business activity in the area is likely to improve further, we foresee potential investment opportunities in the development of branded serviced apartments.

Egypt
During the last two years, the Egyptian pound lost approximately 36% of its value in a series of devaluations made by the Central Bank of Egypt. In addition, in early 2003, the Egyptian government changed its exchange rate policy from a fixed regime (pegged to the US dollar) to a market-determined rate (floating rate). Consequently, the pound has devalued by an additional 16%, trading at LE5.30 to the dollar. While the devaluation of the pound is likely to increase the attractiveness of the country to exporters, it will fuel inflation, which may result in higher interest rates, thereby postponing economic recovery.

According to the EIU, GDP growth registered 3% in 2002, compared to 2.5% in 2001. However, due to the current conflict in Iraq, the economic wealth of Egypt is likely to contract in 2003, and be followed by a modest recovery in 2004. The government is increasingly committed to boosting foreign investment and generating employment. Some aspects of economic restructuring, particularly privatisation, trade liberalisation and continuing business deregulation, are now being implemented, despite a very slow start, at a pace which is receiving international praise. Build Operate Transfer deals appear to be the start of a new trend in privatisation (including the hotel sector).

In terms of infrastructure, there are plans to develop a Greater Cairo ring road around the capital (due for completion by 2006), and to construct a third terminal at Cairo International Airport.

Following a sharp decline in tourist arrivals in 2001, a decline which was driven mainly by the events of 11 September, Egypt experienced considerable recovery in 2002. Despite the increased political turmoil in the Middle East in the last quarter of 2002, tourism visitation to Egypt experienced growth of approximately 12%, registering 5.2 million visitors. We anticipate that the levels of visitation to Egypt will be negatively affected in 2003 due to the war in Iraq (unless the consequences of the war would have been overcome by summer 2003). This is mainly due to the nature and characteristics of the visitation to Egypt, as approximately 70% of visitors originate from European countries.

In 2002, Cairo City Centre hotels experienced a modest increase in occupancy of two percentage points, to 68% from 66% in 2001. Average rates declined by approximately 10% during 2002, to $77. However, the average rate analysis may be inaccurate, due to the continuing devaluation of the Egyptian pound. The occupancy levels of quality branded hotels located in Heliopolis remained stable in 2002, at 75%, while average rates declined by 9%, to $59. The resultant RevPAR of approximately $44 was down 10%. Occupancy of hotels near the Pyramids was 62%, a growth of one percentage point on 2001. However, average rates experienced a decline of 20%, to $53. We would comment that the events of 11 September have resulted in a market panic in the region, which has resulted in hoteliers offering aggressive discounts to help stimulate demand. Many hotel developments are planned in Cairo City Centre, Heliopolis and the Pyramids area. The 424-room JW Marriott Mirage City was due to have opened in August 2002, but the opening was postponed until March 2003. The Golden Pyramid Plaza project in Nasr City is currently under construction and will add approximately 1,200 rooms to the market in 2004, including a Holiday Inn, a Le Meridien Suite Hotel, and an InterContinental. Furthermore, construction of a mixed-use development is planned in close proximity to the airport and will include a 150-room, five-star de luxe, internationally branded hotel and approximately 150 serviced apartments. In addition, rumours suggest that Hilton Hotels and Resorts is likely to manage a new hotel development at the airport, and that a 100-room Movenpick hotel is likely to be developed in the vicinity of Heliopolis; this hotel will form part of a mixed-use development including residential and recreation components as well as a golf course. Construction work on the 300-room expansion of the Sheraton Heliopolis was delayed until early 2003 and is now due for completion in 2005/06. Once this new supply comes on stream, the operating performance of hotels in Heliopolis is likely to be considerably affected, and investors are being cautious now when considering building in this area.

In the city centre, the 390-room Nile Plaza Cairo Four Seasons, the second Four Seasons hotel in the city, is expected to open in 2004. In addition, we understand that Hyatt International plans to manage a 500- room hotel in Cairo close to the World Twin Towers, and that the 400-room Kempinski hotel near the citadel is still on hold. Hotel operators are facing increased pressure from their owners as mentioned previously. New additions to supply in the 6th of October area include the 214- room Movenpick hotel, which opened in Media City in mid-2002. A rumoured 182-room Sheraton Dreamland and a Steigenberger hotel are also planned in the vicinity. Other potential or rumoured hotel developments in the area include a Novotel and a 120-room Rosewood Spa hotel.

Elsewhere in other major Egyptian cities, Six Continents Hotels was due to have taken over the management of three hotels in Alexandria (two InterContinental hotels and a Holiday Inn) in 2003. However, we understand that, in early 2003, the deal between Six Continents Hotels and Resorts and the owners of those properties has been terminated. New hotel developments include a 256-room Movenpick in Alamein, which is due to open in 2003.

In 2002, marketwide occupancy for quality hotels in Hurghada increased by four percentage points to 69%, an increase which was due to the increased public and private marketing initiatives that led in turn to a considerable increase in European and Russian visitation to the Red Sea area. However, average rates decreased by 15%, from $35 in 2001 to $30 in 2002. The resultant RevPAR therefore decreased to $21, the lowest in our survey. Yet, despite the poor operating performance of the hotel market in Hurgahda, most hotel operations in the area remain profitable due to low operating expenses, especially labour costs.

In terms of hotel developments in Hurghada, the 405-room Steigenberger Fanadir Resort was due to have opened in 2002, but the opening has been delayed until 2004, as has the opening of the 304-room Radisson SAS Dana Beach. Furthermore, a 514-room hotel is currently under development to the south of Hurghada and is due to be completed in 2005. One of the major developments in Hurghada is Sahl Hashish. We understand that the project is likely to feature two golf courses, a marina, water sports, an entertainment centre, and six or seven hotels totalling 750-1,000 rooms. The project is currently under construction and is due for completion by 2005.

Once the new supply comes on stream, the operating performance of hotels in Hurghada is likely to be considerably affected for some time. Yet, as new international brands enter the market and more tourist attractions are being developed, we anticipate that a considerable amount of demand will be induced into the market, which is likely to facilitate the absorption of the new supply.

In 2002, occupancy levels in Sharm el Sheikh experienced an increase of five percentage points to 66%, a clear reflection of the recovery and resilience of the Red Sea markets. However, average rates declined by 6%, to $48. Thus, RevPAR remained stable at $32 in 2002.

Proposed or recently opened hotels include the 141-room Four Seasons hotel and the 422-room InterContinental Garden Reef. Rumours suggest that a 360-room Rotana hotel is planned. A 250-room Sheraton is due for completion in 2003 in Taba, as are a 200-room Four Points by Sheraton (2004) and a 400- room Movenpick (2003). A 450-room InterContinental was due for completion in Soma Bay in 2002, but its opening has been postponed to some time in 2003.

The government is continuing to encourage hotel investments on the eastern coast of Egypt, and various projects, such as the Makadi Bay Centre, the Abou Soma Centre, the Safaga Elqusier Centre, the Marsa Alam Centre, Port Ghalib and many others, are being developed. These projects primarily feature theme parks, leisure attractions, golf courses, hotels, time-share, residential apartments and other related facilities.

While we anticipate a slowdown in tourist arrivals in the country in 2003, recovery can hopefully be envisaged in 2004. We foresee potential opportunities for the development of three-star branded hotels in the major cities (mainly in Cairo City Centre).

Jordan
Jordan's economy experienced a slight improvement in 2002, which was driven mainly by the improved export sector, by increased demand from the USA for textiles and from India for phosphates. According to the EIU, the country experienced GDP growth of 3.6% in 2002, compared with 2.8% in 2001. The government continues to plan ways to improve its economy and various socio-economic projects have been undertaken.

Due to the political tensions in the region, the EIU forecasts an economic slowdown in Jordan in 2003, followed by a considerable recovery in 2004, as export opportunities to Iraq are likely to materialise.

Tourism remains one of the largest foreign-exchange earners in Jordan. In 2002, the considerable growth in intraregional visitation offset the decline in international and European visitation. Tourism visitation increased by approximately 6% above 2001.

Although the sentiments of international investors have deteriorated, a $300 million project (Bettina Project) is being developed in the southern districts of Amman. The development will include residential, entertainment and retail complexes. While there are no confirmed plans to develop a hotel property on the site, it is likely that one or more hotels will be included.

New supply in Amman includes the 174-room Four Seasons Hotel and the 281-room Le Royal Hotel (an affiliate of Leading Hotels of the World). The 279-room Forum Hotel has been rebranded as a Crowne Plaza.

Despite the additional supply in Amman, occupancy levels for quality branded hotels increased by one percentage point in 2002, to 45%. On the other hand, average rates declined by 5%, to $65. Consequently, RevPAR declined by approximately 3%, to $29.

Proposed hotels elsewhere in Jordan include the 170-room InterContinental near the Dead Sea, the 300-room Marriott due to open in Aqaba in 2004, and the 216-room Marriott Jordan Valley (which opened in early 2003). In addition, we understand that Syrian-based hotel company Cham Hotels is likely to manage two hotels in Jordan: the 144- room Cham Palace hotel (five-star) in Amman, and a 142-room, three-star resort on the Dead Sea.

Due to the increased political turmoil in the Middle East in the last three years, the tourism industry in Jordan has not reached its full potential and still suffers from the Arab-Israeli conflict. Yet, once the consequences of the Iraq war have been overcome, we anticipate a considerable growth in tourism in Jordan.

Kuwait
Despite the efforts of the Kuwaiti government to revive the economy, Kuwait experienced economic contraction in 2002, which was driven mainly by the weakening political situation in the region.

According to the EIU, the economy in Kuwait experienced a recession in 2002, registering a negative GDP growth of 2%. In 2003, however, GDP is anticipated to experience a growth of 2.5%, driven mainly by a slight increase in oil exports and increased levels of government spending.

Kuwait attracts few leisure visitors because of its complicated visa regulations, its lack of major attractions and its relatively conservative culture. Historically, the country has attracted only a limited number of such visitors, although plans exist to develop the tourism sector, an example of such plans being the commercial, touristic and hotel components on Falaika Island, east of Kuwait City.

According to our research, we understand that visitation to the country increased by approximately 9% in 2002. In our view, Kuwaiti nationals and business travellers were behind this growth. Due to the conflict in Iraq, we anticipate a decline in international visitation to Kuwait in the immediate future. Yet, this decline is likely to be offset by an increase in post-war related visitation to the country.

According to our survey, occupancy levels in Kuwait's (Kuwait City) branded properties increased by four percentage points, to 53%. However, average rates experienced a drop of 1%, to $180, the highest in our survey. Therefore, RevPAR in 2002 was $95, up from $89 in 2001. We would highlight that the hotel occupancy levels of some GCC markets, including Kuwait, have benefited from the military build-up in the region during the last quarter of the year.

New supply includes the opening of the 150-room Hilton hotel on Mangaf Beach in late 2002. Furthermore, Movenpick Hotels and Resorts took over the management of an unbranded hotel in the Free Trade Zone area of Kuwait.

Proposed hotel developments in Kuwait include the 310-room Courtyard by Marriott hotel (2003), the 170-room Four Points (2004), and the 141-room Kempinski Julei¡¯a resort (2003). Rumours suggest that India's Taj Hotel Group and the UAE based hotel operator Rotana plan to enter the market in the near future.

As the new supply comes on stream, most hotels are likely to experience reduced occupancy levels, due to the limited demand in the area. Yet an improved business environment in the region, combined with a more stable regional political situation, will mean that new supply is likely to be gradually absorbed by additional demand. The high average rates achieved by most branded hotels in the area are a sign of strong profitability in Kuwait City; consequently, many operators are likely to be looking for opportunities to develop their brands in Kuwait.

Lebanon
Lebanon's economic outlook rests heavily on the ability of the prime minister to impose his government's plans on the state's fractious elite and on parliament. The public debt burden (approximately $30 billion) remains a major threat to the economic outlook and to the fiscal deficit. Lebanon's economy improved slightly in 2002. According to the EIU, GDP growth of 0.9% was recorded in 2002, compared to 0.8% in 2001.

Lebanon's outlook has somewhat improved following a meeting of foreign financial donors in late 2002, which resulted in financial guarantees supporting the financial restructuring of the public debt. In addition, the government made plans to restructure and privatise some of its assets, such as telecommunications, the water and energy sectors, and the airports. These plans will further improve the fiscal deficit of the country.

The EIU estimates that GDP growth will increase to 1.9% in 2003 and to 2.4% in 2004. This is mainly due to the positive effects of the Paris 2 conference and an anticipated improvement in domestic and foreign confidence.

New attractions are likely to be developed in Beirut, and plans exist to develop a Formula One racing circuit encircling the downtown area. We understand that government officials had meetings with the Federation International Automobile and that the plan is currently awaiting a governmental decree to be officially approved. Tourism in Lebanon registered continued growth in 2002. According to the Lebanese Ministry of Tourism, visitor arrivals increased by 14% in 2002, to 956,000. This increase was due mainly to increased intraregional visitation in the Middle East, combined with both public and private efforts to boost the tourism industry. We should highlight that a considerable increase in Asian visitation was noticeable in 2002. For the first time in almost a decade, the Bhamdoun and Aley areas of Lebanon experienced a comparative boom in tourist visitation during summer 2002, which was driven mainly by increased Saudi and Kuwaiti visitation to the country. Despite the new supply which entered the market in 2002, occupancy levels in quality Beirut hotels increased by two percentage points, to 57%, due largely to increased levels of visitation to the region. Furthermore, average rates increased by 9% to $110, largely due to the increase in lucrative Arab markets as well as the opening of an additional two five-star hotels in the area which achieved higher average rates and therefore boosted overall performance. Consequently, RevPAR of $63 was 13% higher than its 2001 levels. New hotel openings included the 293-room Movenpick hotel, in close proximity to the Raouche area, and the 199-room Crowne Plaza. In terms of management contracts, we note that the Holiday Inn Martinez Beirut is no longer managed by Six Continents Hotels and Resorts, and the property is now managed by Rezidor SAS.

Movenpick Hotel, Beirut Further supply includes the 145- room Safir Heliopolitan hotel in Beirut (2003). Construction of the 257- room Four Seasons opposite St George's Marina has started, and the hotel is expected to open in 2005/06. In addition, a four-star Four Points by Sheraton is rumoured in Verdun and is scheduled for completion in 2004/05. Other additions to supply in Beirut include the 460-room former Hilton development (which is likely to be managed by an international hotel operator), an 83-room Hilton Hotel (2004), a 170-room Hilton in Mina el Hosn (2005/06), two five-star hotels in the Solidere city centre area, and a rumoured Le Meridien Hotel in the Raouche area. Furthermore, the Metropolitan Palace is undergoing a programme of expansion that will feature a residential/serviced apartment component as well one of the largest conference halls in the city (which will eventually help to boost meeting and conference demand in Beirut).

Outside Beirut, plans exist to renovate the Rachid Karami International Exhibition Centre in Tripoli and develop two hotels on the site (one five-star, one three-star); at this stage, there is no precise timeframe for this development. A Lebanese-UAE joint venture intends to develop a 350-room resort hotel in Khalde, on the southern coastline of Lebanon. Furthermore, we understand that plans exist to develop a Sheraton Hotel in Broumana, in Mount Lebanon. As the new supply comes on stream, operating performances are likely to be constrained. Yet as new international brands enter the market, leisure, meeting and incentive demand is likely to be induced.

The five-star hotel supply in Beirut continues to increase and, as the new supply enters the market, a short-term panic is likely to slightly depress overall hotel performance for a short period of time. As opportunities to develop five-star hotels in Beirut become scarcer, opportunities will emerge to develop branded three-star hotels in Beirut and, more specifically, in the Solidere area. In addition, there are opportunities to develop serviced apartments and internationally branded resort hotels in Lebanon. As intra-regional tourism is likely to continue to grow in the short term, we anticipate that Lebanon will continue to benefit from this trend.

Oman
Despite increased oil prices, Oman experienced a decline in GDP growth in 2002, which was mainly driven by a fall in demand for crude oil. According to the EIU, GDP growth decreased from 5.0% in 2001 to 2.2% in 2002. The government continues to pursue its economic development programme, stressing the development of gas-based industries and the expansion of its liquefied natural gas capacity.

Due to the conflict in Iraq, the EIU anticipates economic contraction in 2003, followed by recovery in 2004. Yet, economic recovery is likely to be subject to the duration of the war in Iraq and its effect on world economies.

In terms of infrastructure, various projects are being developed. Amajor 55 km bypass is being constructed between Qurum and Al-Nasseem. In addition, the Quraiat-Sur road project will be developed by the government and is likely to increase tourist movements, as it passes several archeological and tourism sites. Furthermore, we understand that plans exist to expand the Seeb and Salalah airports, as well as Khasab Port.

Tourism to Muscat has in the past been characterised by both business and leisure visitation, with business predominant. The slowdown in business activities in the area, combined with the current turmoil in the Middle East, meant that the region experienced a slight decline in tourist visitation in 2002. Official figures for tourist visitation to the area have not yet been published, but we anticipate that the decline will range between 4% and 6%.

Our research indicates that occupancy levels for quality hotels in Muscat in 2002 decreased by approximately three percentage points, to 59%. Hoteliers have pursued an aggressive pricing policy in an attempt to stimulate demand, which has led to a drop in average rates of 8%, from $80 in 2001 to $74 in 2002. Consequently, RevPAR declined by 12%, from $50 in 2001 to $44 in 2002.

The government of Oman is increasingly focusing on developing the tourism sector, and various incentives are being offered to boost local and international inward investment. Some of the major investments in the area include the following.
* Al-Sawadi Resort: being developed north of Muscat and will feature two golf courses, three to four hotels, totalling approximately 1,100 rooms, a large convention centre, a spa, residential units, 10 Middle East Hotels ¡© Trends and Opportunities 2003 HVS International water parks and other attractions. We understand that plans exist for the development of more hotels and recreational facilities;

* Bar al-Jissah Resort: located south of Muscat and will feature a golf course, a shopping mall, recreational facilities and one or more hotels;

* Ras Al Hadd project: a self-contained ecotourism development that will have its own airport and be located around 300 km east of Muscat.

New hotel supply includes a rumoured 300-room Hilton and a 250-room Le Meridien. A 714-room Shangri-La hotel is due for completion in 2004. In addition, a 100-room Shedi and a 60-room Serai (both GHM hotels) are planned between the airport and Muscat, and are due for completion in 2003/04. Furthermore, we understand that a new convention centre is rumoured in Muscat, and is likely to be developed within close proximity of the InterContinental hotel.

Tourism to Oman is likely to decline in the first two quarters of 2003 with a potential improvement in the last two quarters of the year. Furthermore, due to the increased number of touristic projects in the region, we anticipate some increase in leisure visitation, mainly from the GCC countries.

Qatar
Qatar remains one of the largest gas exporters in the world. According to the EIU, GDP growth experienced a slowdown, from 5.7% in 2001 to 4.6% in 2002. This was attributable mainly to the decline in oil revenues resulting from a drop in demand for crude oil from the major western economies. Yet Qatar's rapid expansion in the gas sector is likely to result in significant economic acceleration in 2003, assuming that the consequences of the war in Iraq will be overcome in the short term. The Qatari government has aggressive plans to diversify its economy and is determined to improve its tourism sector substantially. In 2002, the government decided to ease visa restrictions and there are now 33 nationalities that can receive visas upon arrival in the country. In addition, the government has established the Qatar General Tourism Authority to help boost the country's tourism industry.

Furthermore, plans exist to develop a new airport at Doha and expand the arrivals terminal. In addition, a new Olympic Village is being built ten kilometres north of Doha to host the 2006 Asian Games. A68 km causeway is under development and will be known as the friendly bridge between Qatar and Bahrain (due for completion in 2006).

Quality hotels in Doha experienced an increase in occupancy levels in 2002 of four percentage points, to 60%. However, average rates decreased by 5%, to $100. Consequently, RevPAR experienced only a modest increase, to $60. Increased intraregional visitation in 2002 enabled the Doha market to absorb the new supply that entered the market in late 2001 (the 374-room Ritz-Carlton and the 154-room Movenpick). Furthermore, Doha hotels benefited from the increased military buildup in the Gulf in the last quarter of 2002.

The 136-room Rydges hotel was due to have opened in 2002, but the official opening was delayed to 2003; the opening of the 136-room Holiday Inn has been similarly delayed. Other new supply includes the 250-room Four Seasons (2003/04), a 300-room Rotana (2004), and a 318-room Hilton hotel.

Due to the increased governmental efforts and involvement to help boost the tourism industry, we anticipate that increased levels of demand will be induced in the market in order to gradually absorb the increased supply.

Saudi Arabia
Saudi Arabia has initiated a number of economic and bureaucratic reforms that will improve the country's business climate in the medium term. Oil has been, and will continue to be in the foreseeable future, the most important industry in Saudi Arabia, contributing approximately 80% of the country's exports. According to the EIU, GDP growth in 2002 dropped to 0.6%, from 1.7% in 2001. This was mainly attributed to the decline in demand for crude oil, driven by the sluggish global economies. GDP is expected to experience moderate growth in 2003, due to the anticipated increase in oil production needed to offset the potentially considerable decline in Iraqi oil production during 2003. Due to the political and religious sensitivities in the country, we do not anticipate any significant improvement in the levels of foreign investment in the country. Domestic unease about Saudi Arabia's position in relation to the current US-led war against Iraq is likely to remain in the short term.

Visitation to Saudi Arabia falls into one of three categories: the Hajj (pilgrimage), commercial visitors, and leisure tourists from other Gulf Cooperation Council states and from inside the Kingdom. The government is making increased efforts to boost regional and, more specifically, internal tourism by encouraging Saudis to take holidays in the country. Consequently, we anticipate that leisure tourism to Saudi Arabia is likely to increase somewhat in the short to medium term (especially in the short term due to the Iraq war). Occupancy levels in Riyadh's quality hotels experienced an increase of four percentage points in 2002, to 65%. This growth was attributable primarily to increased intra-regional visitation, combined with a noticeable increase in local tourism. Average rates in Riyadh decreased to $107 from $110 in 2001. The increase in occupancy offset the decline in average rate and the resultant RevPAR increased by approximately 4%, to $70. In 2002 Jeddah hotels showed a slight decline in occupancy of two percentage points, to 59%. Similarly, average rates decreased by 5% to $104. Consequently, RevPAR declined by 9%, to $61.

Proposed hotels in Riyadh include the 249-room Four Seasons, which opened in early 2003. Furthermore, rumours suggest that a five-star hotel is to be developed in close proximity to King Faiysal specialist hospital but there is currently no clear time-frame for this project. Another major development proposed in Riyadh will feature residential units, a zoo, public parks and one or two hotels.

New hotel supply in Jeddah includes the 93-room Movenpick hotel, which opened in mid-2002. Additions to the supply in Jeddah are set to continue over the next few years with the opening of a 102-room Le Royal Meridien (2003) and two further planned hotel developments in the area. This increase in supply is likely to have an adverse effect on the overall operating performances of hotels in the future, in the absence of significant sources of new demand. Changes of management include Hyatt hotels in Jeddah and Riyadh, the owners of which have engaged Rezidor SAS, the owner of the Radisson SAS brand, to operate the two properties.

Syria
Syria's economy experienced a slight improvement in 2002, which was driven mainly by increased exports and the importation of cheap oil from neighbouring Iraq. According to the EIU, GDP growth registered 2.2% in 2002, compared to 1.6% in 2001. However, due to the war against Iraq, which will hamper the export and exploitation of cheap Iraqi oil, the economic growth of the country is likely to slowdown in 2003, followed by a modest recovery in 2004.

There is significant potential to develop the country as a tourist destination, and the government is increasingly encouraging the development of touristic projects. One of the main tourism projects is the $120 million seafront development at Tartous, which involves the restoration of several buildings and the development of two hotels.

According to Syrian officials, tourism to the country experienced strong growth in 2002, which was driven mainly by fresh intra-regional visitation during 2002. As a consequence of the war in Iraq, we anticipate some decline in arrivals in Syria in 2003, followed, hopefully, by a modest recovery in 2004.

Occupancy levels in quality Damascus hotels experienced a slight increase of two percentage points in 2002, from 65% in 2001 to 67% in 2002. Average rates remained stable, at $94, and RevPAR increased by 3% to $63. Proposed hotels in the city include the development of the 297-room Damascus Four Seasons, which is due for completion in 2004. Furthermore, a $100 million Hilton is under development in Damascus and is due for completion in 2004. We also understand that a Rotana hotel is expected to open in Damascus in the next year or so.

Elsewhere in Syria, a 198-room Sheraton is due to open in the city of Aleppo in 2004 and a 107-room Sheraton in Saydaniya is scheduled to open in late 2003. Furthermore, we understand that an Arab investment holding company has plans to invest $40 million in a hotel project on the Mediterranean coast near Lattakia. Given the limited levels of hotel supply in Damascus, and in Syria in general, and the anticipated governmental plans to improve the tourism industry significantly, there are various opportunities to develop branded hotels in Syria; this will help to boost levels of visitation to the country.

United Arab Emirates
Like most oil-exporting countries, the United Arab Emirates (UAE) suffered from a drop in revenues from oil exports in 2002, despite an increase in prices. However, the country experienced an improvement in its non-oil sectors, which somewhat offset the decline in oil revenues. According to the EIU, GDP growth for the UAE experienced a slight decline in 2002, from 2.9% in 2001 to 2.4% in 2002. Economic diversification remains the priority of the government. While there are modest levels of international investment in the country, the government plans to attract significant numbers of regional and international investors. The technology, media, financial and tourism sectors are at the forefront of economic reform and Dubai remains the economic capital of the emirates, and attracts most of the investment and economic activity.

According to the EIU, the country's economy is likely to experience economic growth of 3.1% 2003, which will be driven mainly by the increase in oil output, combined with firm prices. Construction and development is rapidly taking place in Dubai, and some of the major developments include the following.

* Palm Island: this project includes two of the world's largest manmade islands that are being built off the Jumeirah and Jebel Ali coast, adding 120 km of coastline and two new communities. The first island is currently under construction and is scheduled for completion in 2005. The second island will be approximately the same size as the first and is scheduled for completion in 2006;

* Dubai International Financial Centre is a global jurisdiction of choice for financial institutions and brings world-class regulatory processes and market mechanisms to the region; the region comprises the GCC, the Indian subcontinent, the northern Gulf, the Caspian states, the Levant, and North and East Africa. The centre will be located in close proximity to the Dubai World Trade Centre (WTC);

* Dubai Festival City: a multi-phase project which, it is envisaged, will transform the creek waterfront in Al Garhoud into a world-class destination for dining, shopping, family entertainment and conventions. The estimated cost of this project is around $1.6 billion. The development of this project is likely to start in 2003 and is due for completion in 2006;

* Dubai Marina: expected to be a city within a city accommodating more than 150,000 people. The mini city will be located in Jumeirah and the marina is likely to stretch from the Dubai International Marine Club to Sheikh Zayed Road. The project is due for completion in 2008;

* Dubai Convention Centre: the Dubai WTC is currently building a large convention centre, which will add approximately 4,500 m2 of meeting space. This development is due for completion in mid-2003 and is expected to attract large regional and international conventions and conferences.

According to our survey, room occupancy of hotels in Dubai experienced a growth of five percentage points in 2002 to 76%. Average rates decreased by 3%, to $100. Consequently, RevPAR grew from $73 in 2001 to $76 in 2002. New supply in Dubai includes the renovation and expansion of the 460- room Sheraton Jumeirah Beach (formerly operated by Radisson SAS), the 393-room Fairmont Hotel on Sheikh Zayed Road, a 160-room Safir Hotel, and the recently opened 674- room Grand Hyatt.

Some of the additions to supply forecast for the next few years include the 96-room Howard Johnson (2003), a 210-room Ibis Hotel adjacent to the new convention and exhibition centre (2003), a 450-room Movenpick hotel in Media City (2005), a 410-room Novotel adjacent to the new convention and exhibition centre (2003), a 302-room Shangri-La hotel on Sheikh Zayed Road (2003), and a 250-room Traders by Shangri-La Hotel in the city (2003). There are additional projects at various stages of progress, some rumoured to include Hilton and Kempinski. A major hotel development in Jumeirah is Madinat Jumeirah; this development by Jumeirah International is in close proximity to the Jumeirah Beach Hotel and will include two 300-room, five-star hotels, Port Al Salam and Al Qasr, and clusters of 340 rooms and suites in courtyard villas, all featuring authentic architecture reflecting the heritage and culture of Dubai and the Arabic region. The first hotel, Port Al Salam, is to be completed in the first phase of the resort in 2003; the remainder of the resort is expected to be completed by the end of 2004. The resort will also include one of the largest spas in the Middle East, offering European and Oriental-style relaxation therapies and treatments as well as traditional-style steam rooms, baths and other facilities.

Once all these projects come on stream, we anticipate that the hotels will experience a short-term downward trend in their operating performances. Hotel supply is expected to double over the next five to ten years. However, Dubai has demonstrated a remarkable ability to induce new sources of demand in the past and this growth is expected to continue, which will soften the impact of such a phenomenal growth in supply.

The occupancy levels of quality hotels in Abu Dhabi experienced a modest growth of one percentage point in 2002 to 68%. Average rate in 2002 experienced no overall growth and remained at $89, while RevPAR increased by $1 to $61. In 2002, the owners of the 187- room Grand Hotel Abu Dhabi signed a management contract with Le Meridien Hotels and Resorts. Proposed new supply in Abu Dhabi includes the 300-room Conference Palace Hotel which will be managed by the Kempinski Group, a 300-room Al Maha Rotana Suites, a 292-room Marriott, a 250-room Hilton and a 300-room Sheraton. We understand that Rotana is also planning to expand two of its properties, adding a further 270 rooms to the market. While the UAE might experience some short-term decline in demand, due to the political instability in the region, the medium to long-term outlook for the country remains positive. There are significant touristic investments in the area, which will help to ensure the continued expansion of the sector. The increased efforts by the government to promote Dubai as the regional hub for commerce and tourism, combined with the development of Palm Island, the Dubai International Financial Centre, and all the other local developments, are expected to result in a considerable increase in demand for hotel accommodation in the area.

Hotel Developments
Over the last decade, most governments in the Middle East (and especially in the Gulf region) experienced a period of strong oil prices, which provided sufficient revenues to underwrite the capital necessary for investment programmes. While we anticipate that the sentiments of private investors will be somewhat damaged in the immediate future, most countries seem determined to continue diversifying their economies, and tourism expansion plans remain a priority in the medium to long term. Therefore, the current and anticipated developments are not likely to be delayed significantly by the conflict in Iraq.

As illustrated in Table 10, we have identified 72 internationally branded quality hotel developments which are scheduled to open in the next four to five years in the Middle East. Our previous reports included both the rumoured and the relatively confirmed projects; we have excluded the rumoured projects from this year's publication.


Hotel developments in the region continue to be geared towards fivestar and four-star properties, with only 10% of the planned new branded hotel supply representing three-star and budget hotels (see Table 11). Due to the insignificant amount of mid-market and budgetbranded hotels currently available, combined with the potential demand to absorb this type of development, we consider there are opportunities to develop branded budget and limited service properties in some cities in the region.

The UAE continues to show strong growth in hotel supply, mainly in Dubai. We have identified around 20 internationally branded hotels that are likely to enter the market in the near future (and this is without the additional hotels being proposed on Palm Island). As mentioned in last year's report, hotel room supply is likely to increase by around 60% in the next four to five years. We anticipate that demand will continue to grow, albeit at a slower pace than supply growth, but will eventually absorb this new supply.

Bahrain and Oman have announced aggressive plans to develop their tourism sectors further. Due to the substantial hotel projects in those countries, we anticipate that a considerable amount of demand for hotel accommodation will be induced, which will undoubtedly result in a further increase in hotel development. The pool of hotel investors in the Middle East is characterised by local/Middle Eastern investors, with little or no financial contribution (equity investment) required or sought from the hotel operators. We do not foresee a major shift in this trend in the immediate future; however, we consider that Dubai is likely to be the first market to experience international hotel funding from either hotel operators or private investors/funds.

Hotel Development by Chain
As can be seen from Table 10, international brands such as those of Six Continents, Starwood, Le Meridien and Marriott still account for most of the new quality hotel developments in the region. Due to the current situation in the Middle East, we foresee a slight change in the development strategies of many regional or international chains. International companies are likely to start giving increased attention to the ¡°acquisition¡± of the management contracts on existing hotel properties rather than looking for new developments.

Hotel owners are increasingly putting pressure on operators, especially in markets where many broadly similar brands exist. Last year saw the transfer of various management contracts, especially in Lebanon, Egypt and Saudi Arabia, where some internationally branded hotels have been re-flagged. Rezidor SAS, which has benefited from this, improved its market presence and took over the management contracts on some hotel properties in Beirut and Saudi Arabia.

As mentioned earlier, most international hotel chains decline to make a financial contribution to hotel investments in the region, and most international brands are being developed through management contracts or franchise agreements with the hotel owners. On the other hand, some chains, such as Movenpick, Four Seasons and Fairmont, are under the partial ownership of Middle Eastern private hotel investment groups. Consequently, this creative way of merging international operators with local investment funds is likely to improve the pace of growth of the development of those international brands in the region. We foresee additional Middle Eastern funds going through this type of merger/investment in order to help diversify the geographical risks of the investments, and gain greater control of their assets.

Operators originating in the Middle East are continuing to expand in the region. Brands such as Rotana, Metropolitan, Safir and Jumeirah International have aggressive plans to develop in the area. We anticipate that these brands will, in some instances, gain a competitive advantage over international hotel operators. This is due to their greater willingness to bear the financial risk with the owners by making an equity contribution in some projects.

Conclusion
The economic climate in the Middle East experienced a slowdown in 2002, due mainly to the drop in demand for crude oil. Due to the war in Iraq and its consequences, the region is likely to experience a further economic contraction in 2003 followed, hopefully, by modest recovery in 2004. The forecasts indicate that economic activity in the region is likely to recover in 2004. Despite the threat of war in Iraq, much of the Middle East witnessed a modest upturn in development activities in 2002, which clearly reflects the risk perception differential between Middle Eastern and European investors. In the past, major conflicts in the Middle East have had a significant effect on regional economic and development activities. It took almost 18 months before the markets started to recover from the first Gulf War, although the tourism industry was the first to recover (notwithstanding it was also the first industry to be hit).

Economic reform and diversification remain the main priorities of some governments and various incentives have been provided to the private sector in order to enhance the economic programmes. An increase in BOT financing deals has been noticed around the region; these are designed to boost revenue and encourage investment.

Generally, we expect a decline in tourist visitation to the region in the first two quarters of 2003, followed by a subsequent recovery in late 2003 or in 2004. However, we anticipate that trends in tourist visitation are likely to vary across the region. Countries such as Egypt, which depend heavily on European and other international visitation, are likely to suffer the most. However, some destinations such as Lebanon and Dubai, which benefit from strong Arab or intra-regional visitation, could experience a smaller decline. The good news is that history tells us the tourism industry in the region has demonstrated strong resilience to economic downturns whatever the outcome and duration of the conflict. Once the effects of the war in Iraq have been overcome, we anticipate a swift recovery in the tourism industry.

Hotel developments in the region are still geared towards the construction of full service properties in the capital cities and main tourist areas (which somewhat reflects the characteristics of demand for hotel accommodation in the region). Opportunities exist for the development of branded limited service hotels and serviced apartments in certain destinations, such as Dubai, Beirut and Cairo.

Although the general outlook for tourism for 2003 is uncertain, Middle East countries are making increased efforts to develop the tourist sector. While our short-term outlook for the region reflects a decline (or may be a flat trend) in the tourist sector, we anticipate a recovery in the medium term. Hotel acquisitions are likely to become more lucrative for long-term investors. While our medium-term (two to five years) projections of the Middle East remain promising, we would comment that, the hotel industry is full of followers, so now might be the time to prudently build.

About The Authors
eyounes@hvsintnernational.com
Elie Younes is an Associate with HVS International’s London Office specialising in hotel valuation and consultancy. He joined HVS International in August 2001 after completing his MBA at IMHI, a joint programme coadministered by Cornell University (USA) and the Essec Graduate Business School in Paris. Elie had four years’ operational experience in the Middle East, and benefits from a diverse multicultural background as he is fluent in Arabic, English and French. Since joining HVS International, he has worked on several valuations and consultancy assignments in Europe, the Middle East and Africa. Elie is responsible for conducting most of our assignments in the Middle East.

dbourdais@hvsinternational.com
Dominique Bourdais is a Director of the London Office of HVS International. Dominique has more than 15 years’ specialist hotel consultancy experience. Before entering consultancy, he worked for Forte Hotels in the UK and Sheraton in West Africa. During his years as a management consultant he has gained substantial international experience, having completed a wide range of tourism-related assignments, whilst diversifying into other fields such as extended stay hotels, serviced apartments, other areas of real estate, golf and leisure, and mergers and acquisitions. His work within HVS International generally focuses on the provision of specialist hotel valuation, property and consultancy services, throughout Europe, the Middle East, Africa and Asia. Dominique has extensive experience of the Middle East and is responsible for the development of HVS International’s business in the region.

Date Listed: May 20, 2003

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