Hotel franchising model takes off in the Gulf

• Owners embrace chance to choose
• Rate behind US and Europe
• ‘Operators have become more flexible’

Global hospitality brands are aggressively expanding across the Gulf, stepping up competition and giving disgruntled owners unprecedented freedom to choose how and by whom their hotels should be run.

Some hotel owners are opting for franchising agreements and third-party management arrangements.

“Operators have become more flexible when offering their brands under a franchise than they were historically in the region,” said James Wrenn, executive director and head of capital markets in Mena at property management company Colliers.

“Restraints still remain for luxury brands, where operators typically prefer to manage and oversee operations entirely.” 

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According to property company Knight Frank, the six largest hotel operators in the UAE – Accor, Marriott, Hilton, Rotana, IHG and Millennium – have more than 81,000 rooms combined, with another 23,300 in the pipeline expected by 2030.  

As part of their expansion plans, these and other big brands are racing to sign on new properties by taking them over from one another, or reflagging them, when a previous management contract runs out or the hotel owners are no longer satisfied with the service they’ve received.

“Owners in the region have built up significant in-house capabilities for managing hotel assets,” Wrenn noted. “Many reflaggings taking place are shifts from management agreements to franchise arrangements where the owner takes full control of operations.”

Five hotels in Dubai that were previously managed by Emaar Hospitality Group were reflagged earlier this year as part of deals between Abu Dhabi National Hotels and Marriott International and Kempinski. The properties will now be run directly by the Abu Dhabi company under franchise agreements with the partner brands.

According to Turab Saleem, Knight Frank’s head of hospitality for Mena, that trend toward hotel franchising is only going to pick up speed, bringing the region more in line with Western standards.

Alamy via Reuters

Franchising can lead to one of two arrangements, he explained. Either the hotel owner flies the brand’s flag but takes direct responsibility for the property’s day-to-day operations, or it hires a third-party, “white label” operator to come in between the asset owner and brand to run things on the ground. 

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“In the US, 75-80 percent of properties are franchises and managed by somebody else; in Europe 60 percent are franchises managed by third parties,” Saleem said. “Here it is just a beginning, but, in five years, I can see 30-35 percent of hotels will go toward the white label model, or owners will get their own management teams.” 

Saleem told AGBI that it is not more expensive for owners to hire a white-label operator, while they can get a more “focused approach".

Vijay Raghavan is the director of the Arenco Group, which owns multiple hospitality assets in Dubai. His company directly operates those under its Golden Sands brand, while it outsources both branding and management for other properties to big groups such as Hilton and Marriott.

He told AGBI every brand has unique strengths and weaknesses and it is up to owners to find the best arrangement for each property.

Location is a key criteria for Raghavan when it comes to deciding which hotels are suited for direct Golden Sands branding and management, and which need the big names involved directly to be run successfully. 

“We do not say that we know everything and we can operate in all markets,” he said on the sidelines of the Hotel Show this month. “I cannot operate my own property on the beach, because the big boys are there, and you need their loyalty programmes, their support.”