A pipeline of high-profile master developments has enabled the emirate of Ras al-Khaimah to attract multi-billion-dollar investments in recent years.
However, in the wake of rising interest rates and a repricing of risk premiums securing finance for new projects has not been an easy task, particularly for new and relatively smaller market entrants. This has forced master developers to resort to workarounds to overcome the lack of access to capital to deliver on their project ambitions.
“Without an existing asset, financing can be a challenge for newcomers who are keen to introduce new offerings in our market,” said Abdulla al-Abdouli, CEO at master-developer Marjan.
“That being said, what truly helps is the industry working together to introduce new products and financing schemes to support developers who want to invest in the region.”
“The UAE will always be a hotspot for real estate. As for locations, I believe waterfront developments will continue to be in demand for the next few years across Abu Dhabi, Dubai and Ras al-Khaimah. People will always prefer a beachfront. Therefore, opportunities are definitely there.”
Even as financing gets more expensive and complicated, and the quantity of flows is affected, developers emphasise that the need for capital is urgent and a critically important element for the delivery of the master developments.
“We cannot do everything ourselves,” said Benoy Kurien, CEO of premium lifestyle real estate developer Al-Hamra Group, during the Ras al-Khaimah Real Estate Business Leaders Forum.
“We need to secure additional external investment. For now, we are taking on the riskier projects ourselves and delegating the less risky ones to investors coming in.”
Kurien noted that financing is less of a problem for residential projects because developers can redirect funds from unit sales back into the project pre-launch or during the construction phase.
“It’s more of a challenge in hospitality projects,” he said. “I’m on the board of Marjan, and we regularly have first-time overseas investors seeking opportunities in Ras al-Khaimah. The issue however is that banks remain slightly conservative in this regard, and many of these deals don’t come through.”
Kurien sees why banks are hesitant to support the ‘riskier ventures’ but emphasises that it is an issue that developers and financiers must jointly resolve. Developers including Al-Hamra are turning to solutions such as joint ventures with new players to build more bankable schemes.
“The investor or operator might have the customers and the market, but we have the local know-how, the land and the skills to build. A joint venture further ensures lenders have a level of comfort and trust with the project delivery.”
Master developers such as Marjan are resorting to building hospitality assets themselves. Once built, they divest and allow other players to acquire stakes or develop smaller portions of a project. It is all about coming up with innovative ways to get around the financing challenges.
Cyril Lincoln, executive vice president, and global head of real estate finance and advisory at Mashreq Bank, said that banks “appreciate the nature of hospitality investments” and continue to be inclined to lend, especially to the joint venture models.
“It’s not only the bank financing but also about the entire capital stack,” he said. “The bank looks at who’s putting money into a project. If it’s only a foreign investor, they will typically try to minimise the capital they commit. Logically, there should be a local partner. Being familiar with the two parties is more likely to help the financing fall into place.”
Meanwhile, Tatiana Veller, managing director at consultancy Stirling Hospitality Advisors, added that the cost of finance in the region is simply adjusting to match what borrowers pay in other, mature, international markets.
As a subsidiary of state-backed hospitality asset manager RAK Holding, Stirling currently oversees a portfolio of hotels and resorts valued at over $1.25bn, including 3,500 keys across three countries.
“In this part of the world, we are blessed with prompt returns on capital projects if compared to markets such as Europe,” she says. “Securing a five-to-eight-year return on investment when building a hotel is unheard of in most parts of the world.
“Gradually, as we grow in global stature, the cost and style of financing is just getting closer to the way markets typically work.”
Veller added that hotel projects are a long-term undertaking when it comes to returns.
“Hotels are very often counter-cyclical to other types of real estate investments. So, if the rates of your office spaces are going down, your hotel may be holding steady.
“Additionally, hospitality tends to be treated more like a business rather than just a real estate property. This is what makes it such a unique type of asset and is the reason why pension funds around the world love hotels so much – because they are resilient and adjustable in terms of the returns. Yes, returns are slow but stable if managed correctly.”
Mashreq’s Lincoln shared a similar sentiment: “What we like about the hospitality industry is that you can reprice your product in a very elastic way,” he said. “If we look at residential or even commercial properties, the rents are locked in a long-term or fixed-income state. Hospitality, however, can respond quite quickly to supply-demand and inflation.”
Khalid Anib, CEO of Abu Dhabi National Hotels (ADNH), which recently announced plans to develop an AED1bn resort with 1,000 rooms on Al-Marjan Island, said that lenders must also consider the difference in lending risk between regional and international markets when making their assessments.
“We are very lucky in this part of the world, mainly because of the high loan-to-value (LTV) ratio,” he said. “If you compare us with Europe, where the maximum you will get is 50-50, it’s a win-win in regard to the return, on the total investment – and on your own equity, it’s much higher than that.”
Typically, loan assessments with high LTV ratios are considered high-risk loans and thus carry a higher interest rate.
Mashreq Bank’s Lincoln noted that although challenging global conditions are impacting project finance, the UAE and wider Gulf region still hold a “competitive advantage” because crude producers have been insulated from energy price shocks due to higher revenues from crude exports.
“We’ve all seen interest rates rise quite quickly, along with inflation and a lot of problems,” he said. “I think we’ve been fortunate in this market and avoided the energy price shock. In Europe, the US or elsewhere, they’ve seen energy prices in houses and hotels rise by a factor of four to six times. These are things you simply cannot control. This is an external shock to budget, planning, and obviously, to cash flow.”
Despite this, the hospitality sector remains an attractive asset class for investors and lenders, even though Lincoln does not deny the risks attached.
“I’m not suggesting there is no risk, but it is a more diverse revenue space, and I think that provides some resilience and comfort to banks and lenders amid the very big macro problems affecting all financial markets around the world.”
Sameh al-Muhtadi, CEO of listed developer RAK Properties, recommends that financing consider long-term operational expenditure.
“When we talk finance, we’re always focused on upfront finance – but equally, we have to think long term and take into account the longevity and maintenance of assets,” he said.
In particular, for green projects, long-term considerations of the entire asset lifecycle can help improve the quality of the product and its costing, he said.
“This is where many of us are challenged in real estate and hospitality. We must take into consideration operators and end-users. Finance must be linked to operational expenditure, especially with inflationary pressures. Hospitality is a complicated sector."
By Megha Merani
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