MENA_Hotel_Market_-_Focus_On_Fundamentals[1]

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Pulse MENA House View May 2009 2

MENA comes of Age

Hotel markets across the Middle East have experienced a longperiod of strong RevPAR growth. Dubai typifies this trend,recording RevPAR growth of almost 15% pa over the past eight

years, cumulating in the regions highest average RevPAR of$244 in 2008.

Muscat and Abu Dhabi have enjoyed even stronger growth inperformance, averaging some 20% per annum over the pasteight years. Growth in the GCC markets has been fuelled by thedevelopment of the region as a business as well as leisuredestination, with supply additions failing to keep pace with thelevel of additional demand.

The growth in RevPAR in the North African and Levant marketshas been healthy but far more subdued than in the Middle East.Being heavily reliant on leisure demand, these markets havetraded at lower occupancy levels than in corporate locationswhich have limited their ability to grow ADR.

This extended period of strong growth has resulted in levels ofperformance that are unsustainable in the long term. Room ratesin some markets have reached levels that have becomeuncompetitive relative to more mature hotel markets overseas.

Compound Annual RevPar Change (2000 2008)

20.3%

19.7%

15.5%

14.5%

14.4%

11.5%

10.9%

10.9%

7.3%

7.3%

6.1%

2.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Muscat - Oman

Abu Dhabi - UAE

Doha - Qatar

Riyadh - KSA

Dubai - UAE

Amman - Jordan

Damascus - Syria

Manama - Bahrain

Kuwait City - Kuwait

Sharm El Sheikh - Egypt

Cairo - Egypt

Beirut - Lebanon

Source: STR Hotel Market Benchmark Data, Jones Lang LaSalle Hotels

2009 A Different Trading Landscape

Whilst all major markets in the MENA region recorded RevPARgrowth over 2008, the global slowdown in both business andleisure travel has combined with increasing levels of new supplyto change the landscape significantly over the past 6 months.

MENA markets have been particularly impacted by the decline in

visitor arrivals from Europe (the major source of demand formany markets). This downturn has been exacerbated by thestrengthening value of the USD against both the Euro and the UKPound, which has resulted in higher prices for European visitorsto the Middle East.

Some of the regions largest markets such as Dubai, Sharm ElSheikh and Cairo have reacted to lower demand by discountingroom rates to maintain occupancy levels. The impact of this pricediscounting is reflected in the extent of forecast falls in RevPARin many markets in 2009.

Markets that are absorbing high levels of new supply are

generally those with the greatest contraction in occupancy andADR. This is most prominently Dubai and to a lesser extent Dohawhich has seen high levels of development following sustainedhigh occupancy and ADR growth over recent years.

Although the pipeline of new supply has declined due to thecancellation and delay of projects at the early stage of theirplanning, there remains a significant level of committed supplywhich will enter the market across MENA within the next two tothree years. GCC countries will generally see the highest level of

new supply, with 14,000 new rooms completing in the UAE(representing a 28% increase in total stock) and the Doha marketincreasing by 30% in room supply in 2009, which will impactupon occupancy and ADRs.

While tourism growth across has been subdued, the lack ofsignificant supply additions in North Africa and Levant to date,has assisted in maintaining hotel occupancy levels and RevPAR.Supply is only expected to increase by 1,000 rooms in Tunisia in2009 and the 9,000 additional rooms expected in Egypt representjust 9% of the existing stock.

Beirut has shown the highest level of RevPAR growth in theregion over the past two years and this is forecast to continueinto 2009. It must, however, be recognized that this market iscoming off a relatively low base.


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Forecast 2009 Performance


MENA compares favourably with other regions

Despite the forecast correction in RevPAR in 2009, hotel markets

across MENA are still expected to achieve among the highestlevels of trading performance and gross operating profit of any

region.

Operating performance has declined in virtually all hotel markets

globally over recent months. The following graph shows that

these falls have generally been more subdued in MENA than in

Comparative RevPAR 2008

$226

$106

$92

$91

$153

$151

$133

$83

$209

$173

$149

$106

$90

$244

$242

$179

$96

$0 $50 $100 $150 $200 $250 $300

New York

Buenos Aires

Toronto

Los Angeles

Tokyo

Hongkong

Sydney

Beijing

Paris

London

Rome

Madrid

Berlin

Dubai

Abu Dhabi

Riyadh

Cairo

America Asia - Pacific Europe MENA


other regions. Abu Dhabi and Riyadh are among very few

markets to have witnessed an increase in average RevPAR over

the first 3 months of 2009.

Operating costs for hotels in the MENA region remain lower than

in most other parts of the world and this has been instrumental in

generating particularly high GOP ratios. Hotels in the region are

well placed to adjust their staffing levels and cost structures

relatively quickly in the light of changed market circumstances.

Comparative RevPAR 2009 YTD

$126

$92

$60

$74

$149

$121

$102

$39

$134

$108

$84

$70

$61

$203

$290

$194

$85

$0 $50 $100 $150 $200 $250 $300

New York

Buenos Aires

Toronto

Los Angeles

Tokyo

Hong kong

Sydney

Beijing

Paris

London

Rome

Madrid

Berlin

Dubai

Abu Dhabi

Riyadh

Cairo

Americas Asia - Pacific Europe MENA


YTD data for 2009 refers to months of January, February and March

Lebanon

KSAKuwait

Syria

Bahrain

Qatar

Morocco

Egypt

Oman

Jordan

Tunisia

UAE


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Funding Hotel Investment

Reduced levels of global liquidity are impacting hotel investment

in the Middle East, North Africa and Levant. With reduced

availability and higher cost of debt and concerns over short-termsupply increases in some markets, investors have become

increasingly cautious. Investors are typically waiting to buy

opportunistically and have been focusing on their local markets

although there has also been some selective interest by Middle

Eastern investors in Europe and USA for quality assets.

Debt providers have reduced debt ratios on new loans, requiring

investors to commit higher levels of equity for acquisitions and

developments. Interest and other financial charges have also

increased across MENA reflecting the shortage of available funds

for real estate investment. Both of these factors have resulted in

investors requiring higher cash yields from property to maintain

equity return levels. The results of Jones Lang LaSalles secondInvestor Sentiment Survey (undertaken in March 2009), shows all

investors are now looking for net initial yields for hospitality

assets in advance of 10%, with the level of yield expectations

having risen by between 100 and 150 basis points over the past

6 months.

Investors who acquired or developed hotel assets in recent years

are likely to have seen a reduction in their equity and hence will

act with increased caution going forward. Those who still have

funds available now intend to wait until the markets worsen both

on and off-shore to search for lower priced opportunities from

distressed vendors.

While there has been few transactions of existing hotel assets in

MENA in recent years, the hotel sector has witnessed

considerable capital investment in the construction of new

product as part of integrated tourism development plans

undertaken to expand local economies. This has led to many

assets being held under government or semi-government

ownership or control. Given that these groups tend to have long

term investment goals, we are unlikely to see a major increase in

stock being offered to the market in the short term.

and the Future?

As the global economy slows further and investor sentiment

remains poor or cautious, it is expected that 2009 will be achallenging year for hotel markets across MENA. Investment

activity is likely to remain subdued over the first half of the year,

with activity increasing slightly towards the end of the year,

providing the availability of debt comes back into the market.

A greater consensus on pricing is likely to emerge during 2009,

as owners reluctantly recognise that the last two years

represented exceptional conditions. More historic pricing metrics

will need to be applied to enable transactions to occur.

Hotel owners will need to focus heavily on value recovery

strategies, reviewing operating structures / practices and other

asset management issues, to ensure that properties arepositioned and operated effectively. There is also likely to be

greater attention on ensuring that capex is appropriate to trade

through the down cycle.

Debt funding for hotel investment and development is likely to

remain limited as banks seek to reduce their loan to value ratios.

It will take some time for liquidity to return to previous levels dueto the high level of volatility associated with hotel assets in the

short term.

As owners see the need to refinance and banks start to take

action on non-performing loans, it is likely that more distressed

assets will be offered to the market during 2009. As noted earlier

we do not however expect to see a significant volume of

distressed hospitality sales across the region.

Buyers will be led by lower leveraged, long term players looking

for opportunistic acquisitions which would not be available in

more buoyant market conditions. As investors continue to focus

on local markets to decrease risk and given the increased

importance of relationship lending, domestic investment will

remain the dominant source of capital.

While yields have been moving out for all commercial property,

hotels in poor condition, weaker locations and encumbered by

unfavourable management agreements are seeing the largest

movement.


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Leading Indicators

The following table summarises changes in a series of leading indicators of real estate market conditions in Dubai. This data will be updated

on a monthly basis and will be reported in future editions of the JLL Mena House View. For more detail on these indicators please contact

our research team.

INDICATORCURRENT

MONTH

PREVIOUS

MONTHCHANGE

ECONOMIC INDICATORS

Oil Price (Brent Crude) - 26/04/09

EIBOR (%) 26/04/09

EUR : USD (26/04/09)

$51.55

3.16

1.32

$50.82

3.53

1.36

REAL ESTATE MARKET INDICATORS

DFM Real Estate Index

Value of registered property transactions (M-o-M Change)

Number of registered property transactions (M-o-M Change)

Value of construction tenders (existing and new) (millions)

Value of projects cancelled / on hold (millions)

Construction cost index (Jan 08 = 100)

2,723

-52%

-43%

$27,000

$26,000

119

2,124

-26%

-15%

$57,000

$166,000

124

HOTEL & TOURISM INDICATORS

Occupancy (Dubai All Hotels)

Revenue per available room (Dubai All Hotels)

77%

$217

71%

$224

Source: Various


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Jones Lang LaSalle MENA offices:

Dubai

Emaar Square

Building 1, Office 403

Sheikh Zayed Road

PO Box 214029

Dubai, UAE

t +971 4 426 6999

f +971 4 365 3260

Abu Dhabi

Al Niyadi Building

10th Floor, Offices 1003/4

Airport Road

PO Box 36788

Abu Dhabi, UAE

t +971 2 443 7772

f +971 2 443 7762

Riyadh

Al Hoshan BuildingLevel 3, Western TowerAl Ehasa Street

PO Box 9629Riyadh, Saudi Arabiat +966 1 472 8309

f +966 1 472 9478

Jeddah

Enso OfficesSaudi Business CentreOffice 122

PO Box 13711Jeddah, Saudi Arabiat +966 1 472 8309

f +966 1 472 9478

For more information on how Jones Lang LaSalle can assist you, please contact:

Graham Coutts

Advisory Services

[email protected]

Andrew Charlesworth

Corporate Finance Advisory

[email protected]

Ian Ohan

Investment Transactions

[email protected]

Matt Hammond

Agency Services

[email protected]

Jalil Mekouar

Hotels

[email protected]

Blair Hagkull

Managing Director

[email protected]

Craig Plumb

Research

[email protected]

Natasha Ladha

Corporate Strategy

[email protected]

MENA House View May 2009

Pulse reports from Jones Lang LaSalle are frequent updates on real estate market dynamics.

Visit our new website at: www.joneslanglasalle-mena.com

This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based

on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in

the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future

realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No

investment or other business decisions should be made based solely on the views expressed in this report.

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MENA_Hotel_Market_-_Focus_On_Fundamentals[1]