COLUMN
Prospects for Middle Eastern Investors in the U.S. Hotel Industry Why and how economic factors are creating the ideal climate for Middle East investment in the U.S. hotel industry, by Andres Szita co-founder and chairman of Ethika Investments
S
ince the global financial crisis of 2008 and 2009, economic recovery has been erratic in certain markets. However, the United States has seen a slow and steady upward trajectory, particularly in its commercial real estate sector. Although the hotel industry was one of the hardest hit during the recession, today it continues to post some of the largest gains, making high-profile U.S. hotel assets of particular interest to foreign investors, including those in the Middle East. Capital appreciation in real estate looks to continue over the next few years for several reasons. First, strong capital inflows have curtailed cap rate expansion, with net capital increases in the commercial mortgage industry totaling more than $200bn in the last three years. Additionally, cap rate spreads against 10 year U.S. Treasuries are 50 basis points above their 20 year averages, and 250 basis points above their 2007 peaks. Finally, supply growth remains low, at under 1.5%
64 / HOSPITALITY BUSINESS MIDDLE EAST
NOVEMBER 2013
of existing stock for all major asset classes. Recent statistics indicate that hotel sector values are on track to increase 26% between 2013 and 2015. Why this sudden turnaround for the hospitality industry? There are numerous factors at play, including rapidly recovering demand in the corporate travel sector and minimal growth in supply resulting in strong revenue growth; the asset-purchasing activities of hotel Real Estate Investment Trusts; and the generally favorable financing environment for lodging assets. Further, the hospitality industry in the U.S. shows no signs of slowing; rather, the increase in demand for hotel rooms will continue to outstrip new supply by a ratio of more than 2:1 over the next two years, and more than 70% of revenue increases in the industry will be due to higher rates instead of occupancy. This means there is a great deal of cash flow potential available for owners of well-
managed hotel properties. Middle Eastern investors can utilise strategic tax structures, such as leveraged blockers, to help them minimise liabilities. Regulatory action continues to support foreign investment, including a proposal currently before U.S. Congress that seeks to alter capital gain withholding rules in order to afford foreign pension plans treatment similar to that of their domestic counterparts. To successfully invest in the sector, it is essential to find the right local partner. Hotel assets have a distinct set of physical and operational needs that must be attended to in order to avoid obsolescence and devaluation, including understanding of revenue management strategies, renovation planning and compliance with branddriven aesthetic standards. With the proper strategy in place, hotel assets in the U.S. provide an unparalleled investment opportunity for Middle Eastern investors
cpimediagroup.com