Sun, sea, and sales: investors eye up Sharm el-Sheikh’s hotels

Experts say that Sharm el-Sheikh cannot simply increase the number of rooms; it must also raise the quality of the accommodation to attract a higher-spending customers if it is to compete. Flights are also an important part of the equation and the return of several international routes and tour operators to the resort has helped hotels diversify their clientele, lowering the risk of dependence on one foreign market. In the past, changes in Russian or British flights significantly affected the city's occupancy.

Sharm el-Sheikh has benefitted from its layout, with a nexus of hotels surrounded by activities and services directed at visitors, as well as being a year-round destination that that reduces the effects of seasonality. This gives hotels a longer operating period and more regular cashflows.

Build new, or renovate?

After a period in which hotel renovation was deprioritised, there are now opportunities for those seeking to rehabilitate existing hotels, rather than start from scratch. Economist Yasser Al-Alam noted that these hotels "are offered at valuations that are lower than the cost of establishing similar hotels, which provides an opportunity for funds and companies to buy it or partner with its owner, then renovate it and assign its operation to an international brand".

It can be time-consuming to buy land and obtain licenses, before laying the groundworks then embarking on construction, so renovating an existing hotel can take much less time. Acquisitions and redevelopment deals were expected to continue, said al-Alam. "The future of investment in the city will not depend on one of the two options alone, but on a combination that revives existing assets and increases hotel capacity at the same time.

Those who prefer to buy existing assets and update them to raise their value often want to benefit from site. "That can difficult to replicate," says economist Mohamed Abdel Aal. He argued that the combination of two models—building from scratch and renovating—would help "diversify tourism supply, improve infrastructure, and create job opportunities, provided that competition risks and demand fluctuations are managed and the natural environment is preserved".

He said: "Hotel investment is different from near-term funds that enter to benefit from interest rate differentials or currency movements, then exit at the first turbulence. The tourism investor is linked to a fixed asset, bears the risks of development and operation, and combines Egypt's land, labour and experience with capital, management and foreign marketing." Investment in hospitality can be a longer-term source of foreign exchange from rapid financial flows, but its ultimate impact remains linked to the size of the domestic component, reinvested profits, and employment ratios of Egyptian labour.

The state has helped the development of roads, airports, and other infrastructure by allocating land and approving its use. It has also introduced initiatives to help finance renovations in a sector that requires significant up-front capital expenditure. Today, real estate investment funds may open an additional channel for the entry of foreign capital.

Using funds

In statements quoted by Al-Borsa newspaper, Sherif Adly, the founder of Better Home, proposed the use of Egyptian real estate funds that allow foreign investors to buy documents and benefit from the returns of the fund's portfolio, without transferring direct ownership of the asset to it. This proposal is particularly important in South Sinai, where foreign ownership is subject to legal and regulatory controls.

If it goes ahead, the funds could finance hotel renovations and expansions. Smaller instruments could also be created to finance restaurants, establishments, and tourism-related services. The investor base from large corporations to institutions and individuals would expand, and hotels would become an asset class that could be a regulated financial investment, rather than just direct buying and selling.

Egypt needs stable sources of foreign currency to cover its debt servicing costs, with conflict having adversely affected its transit fee revenues from the Suez Canal. Tourism investments therefore have a twin benefit of capital inflow (during construction or acquisition) and recurring dollar revenues (during operation).

In the latest developments in Egypt's tourism hotspot, some detect a slight change in the nature of the tourism product itself. The Kuwaiti project, for example, is not limited to a hotel but includes branded residences, a beach club, and health and leisure facilities. This model helps finance the project from unit sales and gives the visitor an integrated experience but blurs the boundary between hotel investment and real estate development. Presenting residential complexes as hotel investments could cause problems, say analysts.

There are other risks, too, including the concentration of assets in the hands of a few major groups, and the area's sensitive environmental constraints, from water and energy consumption to coral reef protection. The reefs are an economic asset that underpins diving and marine tourism and cannot be replaced if they are irreparably damaged by the effects of excessive visitor numbers.

While the statistics look positive, it is still too early to say whether Sharm el-Sheikh will have enough investment to turn it into the world's next tourist list-topper, and declared investments do not become working assets until financing, licensing, construction, and operation are completed. Part of these planned units may, in the end, be more real estate than hotel, so the test will be in the number of rooms, the quality of the brands, the tourist spending figures, and the quality of the experience.