MENA House View - May 2009

MENA Hotel Market – Focus on Fundamentals

The business and investment drivers of hotel markets across the Middle East and North Africa (MENA) region are diverse, reflecting the
divergence of cultural and economic backgrounds as well as differing stages of market maturity. Despite these differences, a common theme
that is emerging is a renewed focus on market fundamentals.

As with other asset classes, hotel owners and developers are adopting a ‘back to basics’ approach with more attention being focused on
things that may have been forgotten in the boom of the last few years. This includes a concentration of management energy on items such
as value recovery, the maximisation of cash flows and ensuring loan to value ratios are kept at conservative levels.

The global economic crises has impacted on both leisure and business travel across the region. While its impact has not been uniform
between all markets, some common threads can be identified:

Achieving sustainable levels of performance. Hotels in the Middle East have enjoyed a spike in performance over recent years.
These trading levels were not sustainable over the longer term, with prices becoming uncompetitive relative to more mature global
destinations. 2009 is likely to see a contraction of hotel cash flows in most MENA markets, with performance returning to long-term
sustainable levels.

MENA markets remain relatively healthy compared with other regions. While most markets across MENA have experienced a
contraction in hotel cash flows and asset pricing over the past 6 months, performance has held up relatively well compared with other
global regions.

New supply levels are declining. Planned developments are being reviewed across the MENA region, with many being either
cancelled or delayed. Many projects are likely to be refocused from their current high end positioning, to incorporate a broader
tourism offering in line with other established tourism destinations. Lower cost hotels are likely to comprise the majority of newly
planned projects.

Refinancing but few firesales. While increased financial pressure will lead to the refinancing of recently completed projects
undertaken at high capital cost, we do not anticipate a large volume of distressed asset transactions. The regular cashflow provided
from hotel investments will continue to attract available equity. Investment interest will be more locally focussed, with restructuring of
assets occurring at a corporate level.
 Pulse • MENA House View • May 2009 2

MENA comes of Age

The growth in RevPAR in the North African and Levant markets
Hotel markets across the Middle East have experienced a long
has been healthy but far more subdued than in the Middle East.
period of strong RevPAR growth. Dubai typifies this trend,
Being heavily reliant on leisure demand, these markets have
recording RevPAR growth of almost 15% pa over the past eight
traded at lower occupancy levels than in corporate locations
years, cumulating in the regions highest average RevPAR of
which have limited their ability to grow ADR.
$244 in 2008.
This extended period of strong growth has resulted in levels of
Muscat and Abu Dhabi have enjoyed even stronger growth in
performance that are unsustainable in the long term. Room rates
performance, averaging some 20% per annum over the past
in some markets have reached levels that have become
eight years. Growth in the GCC markets has been fuelled by the
uncompetitive relative to more mature hotel markets overseas.
development of the region as a business as well as leisure
destination, with supply additions failing to keep pace with the
level of additional demand.

Compound Annual RevPar Change (2000 – 2008)

Beirut - Lebanon 2.5%

Cairo - Egypt 6.1%

Sharm El Sheikh - Egypt 7.3%

Kuw ait City - Kuw ait 7.3%

Manama - Bahrain 10.9%

Damascus - Syria 10.9%

Amman - Jordan 11.5%

Dubai - UAE 14.4%

Riyadh - KSA 14.5%

Doha - Qatar 15.5%

Abu Dhabi - UAE 19.7%

Muscat - Oman 20.3%

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

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

2009 – A Different Trading Landscape

Whilst all major markets in the MENA region recorded RevPAR Although the pipeline of new supply has declined due to the
growth over 2008, the global slowdown in both business and cancellation and delay of projects at the early stage of their
leisure travel has combined with increasing levels of new supply planning, there remains a significant level of committed supply
to change the landscape significantly over the past 6 months. which will enter the market across MENA within the next two to
three years. GCC countries will generally see the highest level of
MENA markets have been particularly impacted by the decline in
new supply, with 14,000 new rooms completing in the UAE
visitor arrivals from Europe (the major source of demand for
(representing a 28% increase in total stock) and the Doha market
many markets). This downturn has been exacerbated by the
increasing by 30% in room supply in 2009, which will impact
strengthening value of the USD against both the Euro and the UK
upon occupancy and ADR’s.
Pound, which has resulted in higher prices for European visitors
to the Middle East. While tourism growth across has been subdued, the lack of
significant supply additions in North Africa and Levant to date,
Some of the region’s largest markets such as Dubai, Sharm El
has assisted in maintaining hotel occupancy levels and RevPAR.
Sheikh and Cairo have reacted to lower demand by discounting
Supply is only expected to increase by 1,000 rooms in Tunisia in
room rates to maintain occupancy levels. The impact of this price
2009 and the 9,000 additional rooms expected in Egypt represent
discounting is reflected in the extent of forecast falls in RevPAR
just 9% of the existing stock.
in many markets in 2009.
Beirut has shown the highest level of RevPAR growth in the
Markets that are absorbing high levels of new supply are
region over the past two years and this is forecast to continue
generally those with the greatest contraction in occupancy and
into 2009. It must, however, be recognized that this market is
ADR. This is most prominently Dubai and to a lesser extent Doha
coming off a relatively low base.
which has seen high levels of development following sustained
high occupancy and ADR growth over recent years.
 Pulse • MENA House View • May 2009 3

Forecast 2009 Performance

Lebanon
KSA
Kuwait
Syria
Bahrain
Qatar
Morocco
Egypt
Oman
Jordan
Tunisia
UAE

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

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 highest
levels 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
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 2008 Comparative RevPAR 2009 YTD

Cairo $96 Cairo $85

Riyadh $179 Riyadh $194

Abu Dhabi $242 Abu Dhabi $290

Dubai $203
Dubai $244
Berlin $61
Berlin $90
Madrid $70
Madrid $106
Rome $84
Rome $149
London $108
London $173
Paris $134
Paris $209
Beijing $39
Beijing $83
Sydney $102
Sydney $133
Hong kong $121
Hongkong $151
Tokyo $149
Tokyo $153 Los Angeles $74
Los Angeles $91 Toronto $60

Toronto $92 Buenos Aires $92

Buenos Aires $106 New York $126

New York $226 $0 $50 $100 $150 $200 $250 $300

$0 $50 $100 $150 $200 $250 $300 Americas Asia - Pacific Europe MENA

America Asia - Pacific Europe MENA

Source: STR – Hotel Market Benchmark Data, Jones Lang LaSalle Hotels
Source: STR – Hotel Market Benchmark Data, Jones Lang LaSalle Hotels YTD data for 2009 refers to months of January, February and March
 Pulse • MENA House View • May 2009 4

Funding Hotel Investment

Reduced levels of global liquidity are impacting hotel investment Debt funding for hotel investment and development is likely to
in the Middle East, North Africa and Levant. With reduced remain limited as banks seek to reduce their loan to value ratios.
availability and higher cost of debt and concerns over short-term It will take some time for liquidity to return to previous levels due
supply increases in some markets, investors have become to the high level of volatility associated with hotel assets in the
increasingly cautious. Investors are typically waiting to buy short term.
opportunistically and have been focusing on their local markets
As owners see the need to refinance and banks start to take
although there has also been some selective interest by Middle
action on non-performing loans, it is likely that more distressed
Eastern investors in Europe and USA for quality assets.
assets will be offered to the market during 2009. As noted earlier
Debt providers have reduced debt ratios on new loans, requiring we do not however expect to see a significant volume of
investors to commit higher levels of equity for acquisitions and distressed hospitality sales across the region.
developments. Interest and other financial charges have also
Buyers will be led by lower leveraged, long term players looking
increased across MENA reflecting the shortage of available funds
for opportunistic acquisitions which would not be available in
for real estate investment. Both of these factors have resulted in
more buoyant market conditions. As investors continue to focus
investors requiring higher cash yields from property to maintain
on local markets to decrease risk and given the increased
equity return levels. The results of Jones Lang LaSalle’s second
importance of relationship lending, domestic investment will
Investor Sentiment Survey (undertaken in March 2009), shows all
remain the dominant source of capital.
investors are now looking for net initial yields for hospitality
assets in advance of 10%, with the level of yield expectations While yields have been moving out for all commercial property,
having risen by between 100 and 150 basis points over the past hotels in poor condition, weaker locations and encumbered by
6 months. unfavourable management agreements are seeing the largest
movement.
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 a
challenging 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 are
positioned and operated effectively. There is also likely to be
greater attention on ensuring that capex is appropriate to trade
through the down cycle.
 Pulse • MENA House View • May 2009 5

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.

CURRENT PREVIOUS
INDICATOR CHANGE
MONTH MONTH
ECONOMIC INDICATORS
Oil Price (Brent Crude) - 26/04/09 $51.55 $50.82
EIBOR (%) – 26/04/09 3.16 3.53
EUR : USD (26/04/09) 1.32 1.36
REAL ESTATE MARKET INDICATORS
DFM Real Estate Index 2,723 2,124
Value of registered property transactions (M-o-M Change) -52% -26%
Number of registered property transactions (M-o-M Change) -43% -15%
Value of construction tenders (existing and new) (millions) $27,000 $57,000
Value of projects cancelled / on hold (millions) $26,000 $166,000
Construction cost index (Jan 08 = 100) 119 124
HOTEL & TOURISM INDICATORS
Occupancy (Dubai – All Hotels) 77% 71%
Revenue per available room (Dubai – All Hotels) $217 $224
Source: Various
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For more information on how Jones Lang LaSalle can assist you, please contact:

Graham Coutts Andrew Charlesworth Ian Ohan Matt Hammond

Advisory Services Corporate Finance Advisory Investment Transactions Agency Services
graham.coutts@jll.com andrew.charlesworth@jll.com ian.ohan@jll.com matthew.hammond@eu.jll.com

Jalil Mekouar Blair Hagkull Craig Plumb Natasha Ladha

Hotels Managing Director Research Corporate Strategy
jalil.mekouar@jll.com blair.hagkull@jll.com craig.plumb@jll.com natasha.ladha@jll.com

MENA House View – May 2009

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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.