Published by MENA Hospitality Market – MHM
When an investor or developer decides to develop a hotel, the search often begins with one question:
Which hotel brand could manage the project?
The owner looks for an international name that can strengthen the project’s market presence and begins approaching management companies to understand their interest in the location. Brand and operator selection are important decisions, but they are not the first decisions that should be made.
Before considering a brand name, there are questions with a far greater influence on the investment’s future:
• Does this location need a hotel?
• Who is the expected guest?
• What hotel segment can market demand support?
• What is the appropriate scale for the project?
• Which facilities does the hotel genuinely need?
• What development cost can the operation realistically recover?
• Should the project be a full-service hotel, or a more efficient and lower-cost product?
The wrong answer to any one of these questions at the start of a project can follow the owner for years. Even the strongest operator cannot easily correct it once design and construction are complete.
The operator manages what has already been developed
It is important to distinguish between the developer’s responsibilities and the operator’s responsibilities.
The management company operates the hotel, appoints the team, manages revenue, applies hotel-brand standards, markets the property and delivers the guest experience.
But an operator cannot easily change the fundamental decisions made before it arrives, including:
• The project location.
• Total development cost.
• The number and size of rooms.
• Space planning.
• The share of revenue-generating areas.
• The scale of restaurants and meeting facilities.
• The number of floors and lifts.
• The efficiency of service and back-of-house areas.
• The capital structure and its cost.
If a project is developed at a cost above what the market can support, higher occupancy alone will not produce the required return on investment.
If large areas are allocated to facilities that guests do not use, the hotel will carry their operating and maintenance cost without receiving proportionate revenue.
And if the selected segment does not match demand, the operator faces two difficult options: reduce rates below the brand’s intended level, or maintain rates and accept lower occupancy.
Hotel success therefore begins before the general manager arrives, before the operating team is appointed, and even before the management agreement is signed.
A strong location does not answer every question
A location may be excellent, but it does not by itself determine the right hotel product.
Proximity to an airport, business centre, tourist destination or major development creates an opportunity, but it does not automatically explain:
• The nature of demand.
• Average length of stay.
• Guests’ spending power.
• Market seasonality.
• The scale of corporate and group demand.
• Whether the market needs restaurants, meeting space and additional facilities.
• The rate level that can be achieved sustainably.
The same location may support more than one hotel concept, but each concept will have a different development cost, target segment, risk profile and return.
The project should not therefore begin with the question, “Which brand do we want?” It should begin with:
Which hotel product is best suited to this location and its expected demand?
Owner ambition should not come before market capacity
It is natural for some owners to prefer a luxury hotel or a well-known brand because it enhances the project’s image and perceived value.
But the market does not pay a higher rate simply because a hotel was expensive to build.
Guests pay for the value of the experience, the strength of the location, the available alternatives, the purpose of their visit and their ability to spend. If demand in an area is mid-market or price-sensitive, it will not automatically become luxury demand because an expensive brand has been selected.
Choosing a segment above market capacity can lead to:
• Higher construction and fit-out cost.
• A higher development cost per key.
• Unnecessary facilities.
• A larger employee base.
• Higher maintenance and energy cost.
• Higher brand and management fees.
• Difficulty achieving the required Average Daily Rate (ADR).
• A longer investment payback period.
In some locations, an upper-midscale or midscale hotel can produce a stronger return than a luxury hotel, even with a lower average room rate, because it requires less capital and operates with a more efficient cost structure.
The right decision is not to select the highest possible segment. It is to select the segment that creates the best balance between demand, cost and return.
Not every area within a hotel is a successful investment
One of the most costly mistakes is treating a greater number of facilities as proof of a stronger project.
An owner may want to add several restaurants, a large ballroom, a spa, a fitness club, multiple lounges and expansive public areas in the belief that these elements raise the hotel’s classification and value.
But every additional facility means:
• Construction and fit-out cost.
• Area that could have been used differently.
• Additional staff.
• Energy and water consumption.
• Maintenance and operating cost.
• A continuing need to market the facility and generate demand.
The question is not: can we add this facility?
The more important question is:
Is there sufficient demand for it to become a revenue centre, or will it become a cost centre?
A business hotel may need practical meeting rooms rather than a very large ballroom. A hotel near a leisure destination may need one strong restaurant rather than several weak outlets. In another case, reducing some public areas and adding more rooms may create better value for the owner.
Quality does not mean excessive space. It means using every square metre to support both the guest experience and investment return.
Development cost per key begins with design efficiency
A project should not be assessed only through its total budget. It should also be analysed through development cost per key and the relationship between revenue-generating areas and total built area.
A project may look architecturally attractive while containing corridors, public areas and back-of-house areas that are larger than required. In that case, the owner pays to build and maintain areas that do not create a direct return.
Efficient hotel development balances:
• Guest comfort.
• Operating requirements.
• Hotel-brand standards.
• The efficiency of circulation and services.
• Construction cost.
• Revenue-generating area.
That is why a hospitality specialist should review the design from the earliest stages, working with the architect and hotel operator, rather than presenting a near-complete design to management companies and attempting to amend it later.
The later an error is identified, the more expensive it becomes to correct. What can be changed easily on a drawing may become costly or impossible after construction.
Brand selection is the result of the study, not its starting point
Once the target market, hotel segment, scale, facilities and viable development cost have been defined, it becomes possible to create a realistic shortlist of suitable brands.
At that stage, the comparison is not limited to the recognition of a name. It should include:
• The brand’s fit with the target segment.
• The strength of its reservations and distribution system.
• Its presence in source markets for demand.
• Its record in similar hotels.
• The cost of delivering its standards.
• Flexibility in design and services.
• Base and incentive fees.
• Marketing, reservation and central-services fees.
• The level of development and pre-opening support.
• Terms relating to duration, performance and termination.
Two brands in the same segment can create very different outcomes for an owner because their standards, costs, fees and distribution strength differ.
The objective should therefore not be simply to persuade a global hotel brand to accept the project. It should be to select the brand that adds value beyond the cost it imposes on the investment.
Why an owner needs an independent hotel development advisor
The management company views the project through the lens of its brand and operations. The designer views it through an architectural and engineering lens. The contractor views it through execution and cost.
The hotel owner needs a party that brings these perspectives together and connects them to feasibility and investment return.
The role of a Hotel Development Advisor begins before discussions with operators and usually includes:
• Analysing the market and demand generators.
• Identifying target segments.
• Evaluating the appropriate hotel segment and product.
• Preparing the initial hotel concept.
• Defining room count, mix and sizes.
• Identifying facilities and revenue sources.
• Reviewing space and design efficiency.
• Assessing development cost per key.
• Preparing operating and financial assumptions.
• Recommending suitable hotel brands and operators.
• Managing and comparing requests for proposal.
• Representing the owner in negotiations.
• Reviewing the commercial terms of the management agreement.
• Monitoring the alignment of design and delivery with operating requirements.
The advisor’s value is not in adding another layer of complexity. It is in preventing decisions whose later correction may cost far more than the advisory fee.
A simple example: more is not always better
Assume a location can support the ADR and occupancy of an upper-midscale hotel with selected services.
If the owner chooses instead to develop a luxury full-service hotel, it may achieve a higher average rate, but it will also carry:
• Higher construction and fit-out cost.
• Larger public areas.
• More food and beverage outlets.
• More employees.
• Higher-cost design and operating standards.
• Higher brand and management fees.
• A longer path to stabilized performance.
The luxury hotel may generate higher revenue and still deliver a lower return on capital than the smaller, more efficient hotel.
That comparison cannot be resolved through instinct or brand prestige. It requires a study that compares development cost, expected performance, cash flow and asset value in each scenario.
Costly decisions do not show their effects immediately
The danger of poor development decisions is that their effects may not be visible on opening day.
A hotel may look good, receive positive reviews and achieve acceptable occupancy, yet several years later the owner may discover that:
• The return does not match the capital invested.
• Operating costs are higher than expected.
• Some facilities do not make a profit.
• The hotel requires additional capital expenditure.
• Operating and distribution fees consume a large share of profit.
• Debt service pressures cash flow.
• The asset does not achieve its target return on exit.
At that point, the available solutions are limited and expensive. The project may require repositioning, a brand change, a major renovation, changes to facilities or a restructuring of financing.
A substantial share of these issues could have been avoided if the key decisions had been tested before the design, budget and contracts were approved.
Conclusion
Brand and operator selection is an important decision, but it is part of a sequence of decisions that begins with market study and ends with developing a product capable of sustainable returns.
Neither a global brand nor a strong operator can alone compensate for:
• An unsuitable hotel segment.
• An inefficient design.
• Facilities that demand does not support.
• An excessive development cost.
• Unrealistic financial expectations.
• A management agreement that does not protect owner interests.
Every decision made at the beginning of a project affects development cost, operating efficiency, the hotel’s ability to compete and its future asset value.
In hotel investment, the most important decisions do not begin with operator selection. They begin much earlier—when the owner determines what to build, who it is for, what it should cost, and how it will generate sustainable returns.