• Middle East oversupply fears

An ongoing theme of the hotel industry right now is the superlatives being generated in the Middle East concerning new developments, particularly in the Gulf.

Many people outside the region are questioning whether the level of investment makes sense. But this sentiment is not commonplace among people based there.

Last week's Arabian Hotel Investment Conference in Dubai heard how the current investments being made in the region are both longer-term and sustainable, with a growing intra-region travel market and thrusting stock market.

It is not easy to tell which view is correct. Due to its emerging market status, transparency in the Middle East is not as great as in more established markets, although this is changing.

At the forefront of this change is Kingdom Hotel Investments which is now both listed and publishes some of the most detailed results your correspondent has ever seen. They drill right down to performance at individual property level.

The company not only has exposure to the Middle East but has significant interests in emerging markets in both Africa and Asia.

Full-year results for the newly listed KHI show that a company focused on owning and developing hotels can deliver returns in the region.

Last year it delivered $12.3m of net income, up 179% on 2004. And it is expected to see a six-fold increase in pre-tax profit this year to $64m, according to Deutsche Bank estimates.

The perceived danger with KHI is in the possible wild performance swings within individual territories. To counterbalance this, KHI has spread its geographic wings. It even has a 25% stake in the George V in Paris, although it stresses this is an atypical investment.

Geographic diversity could well prove an essential for the company. Although in its results presentation it made much of the \improving resilience\ of the Middle Eastern hotel market, there remains some cause for caution.

Certainly, the Middle East seems less susceptible to impact from events, particularly terrorism, as can be seen by the quick recovery in Egypt following the Sharm El Sheikh attacks in 2005 compared to the much slower recovery in Luxor following the attacks there in 1997.

But the bigger worry for the Middle East is the potential oversupply. HVS is estimating that more than 60,000 hotel rooms are currently under construction in the region, representing around $15bn worth of investments.

Particularly likely to suffer over the next three years is Dubai, says HVS, which it predicts will suffer a correction from its heady rise in the past few years. The market is not going to implode but tougher trading seems certain.

Fortunately for KHI, it has just three of its 17 trading assets in Dubai. The remaining assets are spread across Africa and the wider Middle East, including exposure to the several markets that HVS believe will see double digit revpar and profit growth this year.

The situation is more worrying for those owners and operators who are more concentrated in just a handful of markets in the oil rich Gulf. While it is hard to see many distressed sales given the substantial wealth of the region's owners, operators will undoubtedly see the terms of their management agreements coming under close scrutiny.

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