When Lebanese businessman Nadim Fakhry drives from the offices of his family-owned real estate, construction and hospitality group in the UNESCO area of Beirut to his latest hospitality venture, he traverses a main business district on the rim of the Lebanese capital along the Corniche Mazraa artery. He passes outlets of every major bank, hundreds of retailers and dozens of restaurants. What he won’t see on his trip in the bustling Cola, Barbir and Mathaf neighborhoods is anything similar to the venture he will open this summer at his destination in the Badaro district: a modern mid-market hotel.
The Smallville — playing on the appeal of the wildly successful TV-series on the adventures of young Superman — is a project with 146 guest rooms and suites, with the possibility to reconfigure it into up to 180 accommodation units. Realized by Fakhry’s company Beam Developers and to be operated by his Beirut Homes hospitality company, the hotel is a counterpoint in a gloomy time when Lebanon’s tourist count and hospitality malaise have filled the news with hotel closures, not openings.
And the project is no small fry by local standards. It will be one of the biggest hotels in Beirut and if he were to buy the land and start developing it today, “it would cost $50 million,” Fakhry claims. Think of doing that at a time when the head of the Lebanese Hotel Owners Association, Pierre Achkar, seems to have more inquiries from journalists asking about the country’s horrifically low occupancy rates than inquiries from foreign tour operators. Last month, Achkar was quoted giving estimates of 10 percent occupancy for hotels outside of Beirut. He put the occupancy rates in Beirut during the latest Lebanon promotion campaign in January and February at an estimated 45 percent. Or listen to Garrick Aird, a Beirut-based veteran consultant on tourism development, who tells Executive, “I wouldn’t advise anyone to open a hotel in Lebanon in 2013.”
Fakhry too, who is founder, chairman and chief executive of the family group — which has been active in construction for 45 years and operating serviced apartments since 2002 — sees the current timing as decidedly inopportune for opening his largest hospitality venture ever. “Two years ago the situation in Lebanon was ‘whoa’, this year it is below normal,” he says. “People say that a hotel today is a bad investment but we have to finish it, we have no choice.”
The company committed to the hotel project initially in 2006 when it acquired the plot in the Badaro district, considered an up-and-coming area of Beirut. Fakhry says he bought the plot for less than $5 million; the same space today would be priced at $17 million.
After spending a couple of years on the process of obtaining the required licenses and permits, Fakhry started construction in 2009 with a planned completion date for 2012, but extended the construction phase when tourism in Lebanon got hit by regional instability.
Coming across as a levelheaded businessman who is not in the habit of projecting marketing allures, Fakhry describes his attitude in face of the latest vagary of enterprise in this country. “One day in Lebanon the situation is normal and the next day it collapses, as Lebanese we are used to this system,” he says. In business terms, that means Beirut Homes is prepared to swing more into offering long-term stays at the Smallville to customers in this market segment as long as the more profitable short-term tourism market is in the doldrums.
A summer start
The property is scheduled to open early this summer, with basic construction already complete and fit-out and hiring/training phases for employees expected to require five months. Although Beirut Homes already operates three smaller serviced apartment projects in the Hamra and Ashrafieh districts of the capital, embarking on the Smallville operation will require some serious stepping up of hospitality capabilities. For this, the company will rely on expert consultants and create a new company that is intended to expand over time into the business of services and hotel operations, adding new hotel operations in Lebanon and possibly outside of the country.
As the family group involved private investment partners in the hotel project and on top of the portfolio of residential developments it has in its books, including a 36-story residential complex with 150 small and mid-sized apartments in Ashrafieh, the Smallville is not a single card on which Fakhry has bet.
Additional factors that work in favor of the project’s feasibility are the high value gain of the land, and the cost reduction and project value optimization opportunities. The benefits Fakhry acquired were on one hand tapping into government-subsidized loans for about $10 million, a major part of construction cost, and the chance to double the land exploitation factor for a relatively moderate fee under a now expired law supporting hotel projects.
The market demands
While Aird, the consultant and head of an offshore company that has developed a computerized solution to assess a hotel’s feasibility and cash flow requirements, is unenthusiastic about hotel openings this year and sees better opportunities for (presumably risk friendly) investors buying distressed hotel properties, he is adamant that the market for hotel developments in Lebanon is anything but glum in fundamental terms.
Based on the sufficiency of supply at the top, Aird sees no need for new luxury hotels but in the more affordable price categories, he perceives much untapped potential. “There is huge demand for good functional hotels in the two, three and four-star category and we are probably at around 15 percent of what it should be,” he tells Executive.
The business of running hotels is often misjudged in the sense that occupancy rates are not the only and often not even the most important figure for operational performance. “Who cares if occupancy is down to 40 percent? That is only one figure. What really matters is how much it cost you to build it, how it is financed, what repayments you have and what your revenue generation rate is,” he says. It should in no way be considered a coincidence that Aird’s company, XiCorp, has just developed a software solution facilitating hotel feasibility and cash flow projections.
In one investment view, a hotel may represent income-generating real estate but, according to Aird, it is far more appropriate to view a hotel “as a factory. In a pure real estate project, you only get benefit for the economy during the period of construction with a lot of leakage in terms of materials and whatever. All hotels are labor intensive… A major property of 300 to 400 rooms could not only have a direct employment of 500 to 1000 people, but knock-on benefits could easily be three or four times that for the economy.”
Recent closures of hotels that might have once been favored by beach-and-bar visitor groups bear witness to the fact that Lebanon’s hotels are caught in a maelstrom of regional risk, which impacts mostly, but not only, relaxation seekers from the Gulf region.
The Smallville in this context could be a litmus test for a price-combative four-star hotel in the vicinity of universities, hospitals, religious institutions, the French embassy, government offices and the National Museum. But can it meet its cash flow needs from a broad market that primarily is not the one of luxury or leisure?
“Given the situation, we cannot target only specific groups. Our sales office targets everybody: tourists, business travelers and companies. And our rates are very competitive,” says Fakhry.
On a national level, the country has committed one central error in Aird’s view. “One thing that Lebanon is guilty of is complacency. You [should]spread the risk and don’t put all your eggs in the Gulf basket and just sit there hammering at the same market after they put travel restrictions where none of their citizens will travel to Lebanon,” he says, adding that Lebanon should wake up to the idea that there are many other markets and many other ways of promoting.
When Lebanon’s public sector deciders are tempted to grab their next seasonal hospitality promotion strategy from the recycling bin, this sounds like a perspective to keep in mind.