The news struck first at the Jordan World Economic Forum: a consortium under leadership of Saad Hariri is creating Saraya Aqaba, a major new leisure project in the Gulf of Aqaba, Jordan’s Red Sea destination regarded as very promising for international recreational and aquatic tourism.
Ten years ago, the Aqaba region featured little more than 1,000 hotel rooms and an interesting topography and spectacular coral reefs nearby. Today, the area is focus of two huge tourism development zones with several large-scale projects each, and after visitor numbers to Jordan last year began rebounding from their 2002/2003 lows, hotels are hot properties.
Partners in Saraya Aqaba from the private sector are Hariri’s Saraya Jordan enterprise and the Arab Bank, teaming up with the kingdom’s Social Security Corporation and Aqaba Development Corporation on the public sector side. What made the news of Saraya Aqaba savory from an investment perspective was that the developers, besides putting up initial capital of $242 million, announced a $120 million private placement and appointed Jordanian investment bank Atlas Invest, a daughter of Arab Bank, as lead manager.
According to Atlas Invest, Saraya Aqaba will indeed be a mega-project. Situated on a territory where a 100 meter stretch of coast line has been developed into a man-made lagoon with a 1.5 kilometer beach front, the project will comprise four five-star hotels and one six-star hotel with a combined 1,500 rooms plus commercial areas, conference and sports facilities. Built up area is projected at 648,000 m2 on a total land surface of 610,000 m2.
“The initial cost projection for the tourism complex is $620 million,” corporate finance expert Fares Hammami of Atlas Invest told Executive, while residential construction on the outskirts of the development would bring the total scope into the $1 billion range and be running on a fast track. While being constructed at the same time as two competing projects in Aqaba, “Saraya will be done within three years, faster than the others,” he said. The commitment to fast execution of the project is reminiscent of Rafik Hariri’s breakthrough project in Taif in 1978, when he built the city’s first hotel in nine months.
But the existential question for investors in the project is of course if a tourism venture is rational, secure and rewarding from a financial angle. Conventional wisdom says that in the past, the construction of hotels and forays into new tourism ventures were the sole domain of hospitality sector experts who had the expertise and confidence to run such an enterprise in the often unpredictable business of attracting and serving foreign visitors. Investment banks thus are not all always eager to enter into tourism ventures. “It is a very special field, where the key criteria is revenue generation. This is totally different from financing real estate, which often is a one-time shot,” said Walid Mussallam, CEO of Beirut-based investment bank MECG.
Tourism is a volatile business, acknowledged Hammami and his asset management colleague Sami Naboulsi at Atlas Invest. To secure that the Saraya Aqaba project stands on sound fundamentals, they said Atlas Invest had it valuated by two independent consulting firms, one based in Jordan and one based in the UK.
“From an investment banking point of view, investing in tourism is capital-intensive and long-term. Real estate in Jordan is still among the cheapest in the region and this, plus the political stability and the country’s role as gateway to Iraq, attracts foreign investments,” added Naboulsi.
The Saraya Aqaba project is well in tune with the recent surge of huge tourism-related projects in the Arab countries. Within Dubai ‘s development pot that is boiling with projects under the motto, the bigger the better, tourism ventures such as Dubailand and mega-hotels make up huge chunks. The fever has also struck Qatar, which launched a $15 billion program for creating its tourism infrastructure.
Such moves in directing abundantly flowing oil revenue are definitely more promising for regional development than the shopping sprees which Arab capital undertook in the US and Europe during the first oil price boom. But that does not mean that the individual investment projects could not overheat.
“If you are creating a green-field (something out of nothing) destination, the biggest challenge is that you have to spend tons of money. It only works if you have government support and a critical mass,” said Naji Butros, Beirut-based partner in the international firm Colony Capital, which is engaged is several large tourism enterprises and projects from Sardinia to the US and the Far East.
Such investments need a long-term vision, while capital in this part of the world mostly is trading capital, with a limited horizon, Butros said. He cautioned that raising private equity and seeking an Initial Public Offering for a venture prior to it being up and running creates hype. “Investors are making money from the hype of a project. As disciplined institutional investors, we don’t evaluate these projects. After the hype there will always be a return to basics.”
According to Butros, investing in tourism projects, especially green-field projects, needs a long-term vision, large size, preparation through extensive independent studies, a loyal base of wealthy clients at the project, a clear view of the competition, and avoidance of hype.
Although it has not been caught by a wave of enthusiasm for over-sized investments, Lebanon has its share of both large-scale and smaller tourism investment projects, and tourism is by far the biggest point of attraction to regional and foreign capital givers, many of whom are pure financial investors and not hospitality operators.
Under the Investment Development Law 360, the Investment Development Authority of Lebanon (IDAL) has been offering its attractive package deal contracts since 2002 to investors with projects valued upwards of $50 million. According to article 17 in the law, package deal benefits can entail an income tax exemption for up to ten years, exemption from land registration fees, and up to 50% reduction of construction permit fees and fees related to hiring foreign employees.
The procedure of granting a package deal contract starts with presenting an application for the project to IDAL, which then reviews the proposed project under feasibility, environmental impact and job creation aspects. If the agency determines the proposal to be meeting the required criteria, the project is presented to the council of ministers after which, when approved there, it benefits from the incentives, in addition to further assistance from IDAL in dealing with Lebanon’s labyrinthine bureaucracy.
IDAL-administered package deals are available in six areas of economic activity, among which tourism projects have gained an outstanding role. “We have the mission of promoting the investment climate in Lebanon. Tourism has a great potential and it is the sector that is simplest for us to promote,” said Nabil Itani, IDAL chairman and general manager.
After the $64 million Royal Hotel Resorts project of the investor group headed by Marwan Kheireddine was approved last month, the share of tourism projects climbed from 57 to 63% in IDAL’s statistics on successfully closed package deals, which means from the agency’s perspective that a project has received approval in the Council of Ministers. Among projects that have already been submitted and are currently in the pipeline for approval, an even higher 89% are classified as tourism deals.
This group of projects does not yet include the Sannine Zenith venture, but Itani said that he expected developer Tony Abou Rached to call on him at any moment. And since closed deals furthermore include 28 % [check] of “mixed projects” with a strong tourism component, the trend points in reality to over nine tenth of IDAL-supported investment arrangements in Lebanon as being in tourism, and continuing to be so.
A weakness of the current package deal structure is that many projects in metropolitan Beirut, with their high land costs, easily satisfy the requirement to be worth at least $50 million, whereas such a dimension often is not feasible for interesting projects in rural areas. Here, Itani said, “we need to develop lower criteria for attracting investment projects to regions within the north, south and the Bekaa, in order to achieve economically balanced development.” One region with predominant tourism potential where a program for improving of the investment climate is currently being finalized, is the Ibrahim river valley, he added.
While IDAL has an edge in assisting big developments in Lebanon, small and medium ventures in tourism have been supported by the loan guarantee program of the Kafalat corporation. Kafalat has been a success story in supporting Lebanon’s entrepreneurial invigoration and economic diversification through small and medium enterprises in tourism and other sectors.
The range of enterprises financed through Kafalat-guaranteed loans encompasses mostly restaurants, but also about four dozen small hotels and furnished apartment enterprises as well as some 15 tourism operators and service providers, Kafalat chairman Dr. Khater Abi Habib told Executive.
Counting 382 tourism-related companies under the wings of Kafalat, with a combined loan value of $45 million, Abi Khater said that the company was working on increasing the ceiling of loan guarantees it can provide from $200,000 to $400,000, albeit at a lower level of guarantee to the bank issuing the loan.
As the rate of loan defaults under the scheme had been exceptionally low, banks apparently are still too conservative in evaluating applications and lending to small enterprises, Abi Khater pointed out, which is an indicator that the financial company and its loan guarantee scheme is still going to be “needed for the foreseeable future.”
