GLOBAL INVESTING: Why investors should look at Makkah hotels
Are there enough rooms in the holy city?
I was amazed to read a December 2016 research report by global property services firm JLL on the holy city of Makkah entitled "Unlimited demand growth in Makkah's hotel sector". This vindicates exactly what I predicted in columns on Makkah's four-star hotel markets, unquestionably the most attractive hotel investing opportunity I have ever seen in my professional investing career. Makkah is revered as Islam's most holy city by the world's 1.8 billion Muslims but it is extraordinarily difficult for non-Saudi citizens to invest in its hotel market.
Land prices in Makkah are higher than in downtown Tokyo or Paris, thus ensuring that five-star luxury hotel supply growth is the norm, as Jebel Omer's offerings demonstrate. Makkah is also at a macro inflection point since 25,000 three-/four-star rooms were demolished or reclassified by the Saudi authorities. The Saudi government intends to triple Umrah visas to 15 million by 2020 as per the kingdom's Vision 2030 policy. Yet our on-site research in Makkah told us there was an inventory of only 12,500 four-star, branded hotel rooms in Makkah to cater for at least two million new Umrah pilgrims, from the populous, wealthy Muslim states of Southeast Asia.
My Saudi partners at Asas Capital and I decided that this low level of four-star inventory necessitated the need for at least 50,000 new four-star hotel rooms in the next three years to handle the influx of new Umrah visitors. Yet the banking credit crunch in the kingdom due to the oil crash (interbank rates in Jeddah were triple of Libor rates) meant that new supply growth is severely curtailed. Our solution to this dilemma was to lease land from Makkah's ancient Islamic endowments (waqf), engage an international hotel operator and structure a DIFC GP/LP structure that enables non Saudi citizens to invest alongside us in Makkah. Thankfully, the Gulf's leading hotel owners, property developers and family offices agreed with our analysis on the 14-16 per cent cash-on-cash dividends offered by Makkah four-star hotels. My key insight was that Makkah was not a proxy for the Saudi credit cycle but a proxy for sustained wealth creation in the Islamic world and Muslim communities in Europe (the reason we acquired a Makkah tour operator in Paris) and North America. The new Saudi growth stock market, Nomu, offers investors a credible exit at seven per cent since Makkah hotels, once open, easily command 50 per cent bank debt finance. The mathematics of pre-IPO investing means a three times initial capital return for anchor investors!
Makkah hotel investing is also attractive because the Makkah's religious tourism market is dominated by tour operators who pre-book rooms en masse for the season and place a premium on new, internationally-branded hotels. Since we use Makkah-based contractors, hotel construction and fit out costs are $74,000 per room, compared to at least $100,000 to $120,000 in Dubai. Saudi banking's current credit crunch also means that supply will struggle to keep pace with the secular, multi-million rise in Umrah visas (Hajj and the last 10 days of Ramadan are limit up 100 per cent occupancy ratios) that is now Saudi government policy, as per the Vision 2030 document. The capacity expansion of King Abdulaziz airport in Jeddah, the construction of the Haramain high-speed trains and the expanded transport infrastructure in Makkah cost the kingdom at least $60 billion in the past decade. The sheer scale of the construction/infrastructure projects forced Saudi Arabia to cap the Umrah visas since 2012. Yet as visa issuance rises in 2018, so will pricing power and occupancy ratios for operating, branded Makkah hotels, such as our 630-room Park Regis brand twin towers. In any case, Makkah real-time occupancy ratio was 68 per cent as on December 2016, excellent for a highly-seasonal market with flat Umrah visa issuance since 2012. Makkah is unquestionably the world's most resilient, low-risk, price/demand inelastic, supply constrained, foreign capital inaccessible, secular growth hotel market.
The configuration of the Makkah hotel industry ecosystem also enhances returns for investors. A four-star hotel need have only one, not multiple, restaurants. During Hajj and the last 10 days of Ramadan, four star-hotels can have four pilgrims share a single room. There is no need for amenities like satellite TV, pool or spas, though it is mission-critical to have six elevator banks and 24/7 shuttle busses to the Grand Mosque. It is no coincidence that the world's most-profitable hotels are located in Makkah. This is a no-brainer investment strategy!
The writer is a global equities strategist and fund manager.
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