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Accidental hotelier

Horeca

Back in the late 1980s, all Samih Sawiris wanted was a destination quieter than his childhood haunt of Hurghada, Egypt. He just wanted to fish with his family and friends, dock a few boats and relax in a handful of villas. Today, almost by default, he has created from scratch, along with his two brothers, a nearly isolated Egyptian town about 25 kilometers north of Hurghada on the Red Sea. It has 8,000 full-time residents, eight resort hotels, six more resorts under development, and a burgeoning business called Orascom Hotel Holdings (OHH).

Accidental hotelier

El Gouna (The Lagoon), more than 10 years in the making, encompasses 17 sq. meters (6.6 sq. miles) and is only the first Disney-like integrated destination resort community developed by the three Sawiris brothers.
Samih is chairman of Orascom Hotel Holdings; Nassef heads the Orascom construction company; and Naguib runs the Orascom tele-communications company—most all of the ingredients you need to create the infrastructure to support a resort community.
Complete with golf, diving, conference facilities, shopping, a hospital, school, private police force and airport, El Gouna is not without its headaches and growing pains. But it has turned out to be so successful, the Sawirises are replicating the blueprint in Taba Heights, Egypt, and in late July signed a deal for a similar development in Aqaba, Jordan.

When Samih Sawiris first went to the government for land, he was told his personal needs were not a sufficient reason and that he must link any development to tourism. He thought to himself, ‘why not?’ and went ahead with his first hotel and sold a few adjoining villas. But then Sawiris realized critical mass and ancillary services were fundamental for the success of the overall population, no matter how big or small, or how temporary or permanent. He went back to the government for more land and built a second and third hotel. From there, interest in the destination began to grow. By the way, because of the abundance of land in a third-world country such as Egypt (there are 2,500 sq. kilometers of beachfront), the government is happy to sell it to a promising investor. It takes approximately US$1 per square meter paid over seven years, and another US$3 for every sq. meter sold by the developer. The caveat is the developer must provide jobs and create its own infrastructure, according to Sawiris.

It is complete control that Sawiris believes is vital to the project’s success. ‘Developing hotels in third-world countries while ignoring what is happening around you is a very dangerous thing,’ says Samih Sawiris, who in July sat down for an interview with HOTELS’ Investment Outlook. ‘We could put up fantastic hotels and find the town is not up to it, or its people are working against you. So from the beginning, we chose to make sure the location of the hotels is controlled by an entity with long-term interest in the surrounding area.’
The other keys to success, according to Sawiris, are cheap labor, a 12-month season that no other Mediterranean nation can match, monopolizing room supply at a destination and selling rooms that can dictate the rate as a function of the destination. ‘I’m dying to see the day not so much for the money to authenticate my theory,’ says the 43-year-old mechanical engineering graduate. On the surface, Sawiris is laid back and admits to having more of a taste for leisure than work.

Sawiris is invigorated and excited when it comes to discussions about OHH and its investments, which also include deluxe business hotels in Cairo. Revenue should reach 150-160 million Egyptian pounds for this year with profits between 5 to 8 million Egyptian pounds, according to Sawiris.
Actually, OHH is strictly a hotel player and a publicly listed offshoot of Orascom Projects & Tourism Development (OPTD). OPTD is 70% owned by the Sawiris family’s very successful Orascom for Investment and Development, founded in 1950 by Onsi Sawiris, the father of the three brothers. The remaining 30% of OPTD is quoted on the Cairo Stock Exchange. OPTD owns the real estate of the surrounding resort towns, as well as the winery, brewery, distillery, utilities, construction and real estate companies, as well as a land bank and 54% of OHH, which has a market cap of 450 million Egyptian pounds.

OHH intended to dilute the controlling shares owned by OPTD and increase capital with a February stock offering to enable its full independence. Unfortunately, market conditions did not support the offering and, for the time being, OHH took what is necessary from the existing shareholders and issued a bond to keep the business plan on track. ‘We’ll go back to the market at the right time to get the fair value,’ says Sawiris. ‘Egypt is not exactly a hot market these days.’
OHH gets all of its financing from local banks. Each hotel is owned by a shareholding company that takes a loan of 50% of the total cost. Often, OHH has partners with minority stakes in this holding company. OHH also has a bond issue of 100 million Egyptian pounds payable after seven years.

Despite Egypt’s weak economy and public market, the Sawirises are determined to move forward with development along the Red Sea, based on the long-term potential of the region, which is accessible from Europe in just about four hours. This year, OHH is adding to its room count by 20%, and Sawiris says El Gouna will keep growing until it reaches 3,000 hotel rooms. Average key cost started at 90,000 Egyptian pounds and is now down to 80,000.“
When we reach 3,000 rooms, we will sit down to decide if we need more,’ says Sawiris. ‘There are so many other opportunities in the country. So why not leave these hotels to prosper with over-demand, make tons of money and put more hotels elsewhere.’
Because of poor real estate performance, high interest rates and a cash squeeze in Egypt, Sawiris is disappointed with the number of villas and condominiums sold at El Gouna, which has reached 900 units. Sales have been stagnant the past two years, and this year will be no better, reaching 25-30 million Egyptian pounds. ‘We should be selling double the amount because of better infrastructure and the improving image of El Gouna,’ says Sawiris.

What Sawiris wants to avoid is becoming another destination like Sharm El Sheikh. ‘The peak of Sharm El Sheikh as an attractive destination was at 3,000 rooms,’ says Sawiris. ‘It was commanding incredibly high rates and running great occupancies compared to costs. Then there was a rush to open more rooms. Today there are 16,000 rooms, and they are still building. Rates and occupancy are off, and history is showing me I can make more money when the number of rooms is limited and just enough to attract necessary attention.’
In El Gouna, 1,800 rooms (a Sheraton, Mövenpick, LTI, Steigenberger and other 3- and 4-star hotels) ran at 90% occupancy in April. Sawiris hopes to close the year at a 70%-75% average. Average rate has reached about US$40, as OHH is currently willing to sacrifice rates to build business. Sawiris hopes to reach US$80 within a few years. Customers already accepted a 25% increase in room rates this past winter.
What is missing from the El Gouna plan is luxury hotels, which Sawiris believes will come once the destination matures. ‘Mykonos used to be a dump, and only when it matured did the yachts show up to draw the super luxury,’ he says. ‘El Gouna will reach this status in three or four years. Why should investors suffer until the time is right?’

If you ask Sawiris to daydream about other grand tourism development plans, he mentions an unknown island in the Indian Ocean, south of Yemen, called Soukartra. ‘It’s beautiful like the Seychelles, only closer to Europe,’ Sawiris says with an understated confidence that could make anyone believe he can turn his dreams into reality. ‘There is little inhabitance there, so we could easily take a stretch of 50 kilometers, put in a landing strip and start another town. It’s doable.’ Sawiris says he has looked at the Dominican Republic but simply has too many other projects to focus on at this time’ Taba, for instance, where OHH is the main shareholder, OPTD has a big minority stake and several single shareholders hold 10%-20%.
The first hotel in Taba Heights, a 426-room Hyatt Regency, opened in July. Plans call for a Swiss Inn by November; a 300-room Marriott by the year’s end; a 300-room Sofitel by March; a 500-room Inter-Continental by the end of 2001; a 650-room Club Med by 2002; and several boutique hotels. The development will also have a small casino and a downtown with cafes and shops. ‘We’re not waiting 10 years for Taba Heights to become a real town,’ says Sawiris. ‘We’re pushing faster and need 2,500 hotel rooms to make it a destination.’

Sawiris has a similar plan in mind for Aqaba, where OPTD and the local Abu Jaber Group are joining forces to develop a major tourism project on a 2.7 million-square-meter site on the southern beach of Aqaba, Jordan. The newly created Jordan Projects for Tourism & Development Company (JPTDC) will purchase the land from the Aqaba Re-gional Authority for the estimated US$300-350 million project. JPTDC and OHH will develop four 5-star hotels of 300 to 350 rooms, one or two 4-star hotels and a 3-star hotel, along with a village, shopping, marina, restaurants, water sports, conference center and staff accommodations for up to 6,000 people. JPTDC will make a minimum 25% public offering to carry out the project. JPTDC is required to develop a minimum of 1,000 rooms within five years. JPTDC says the first rooms should be open within three years. ‘Jordan is not developed at all on the Red Sea,’ says Sawiris. ‘There are, perhaps, five hotels but there is no theme. We will be the first serious developers, with little competition.’

In addition to development from the ground up, Sawiris wants OHH to acquire existing business hotels in Egypt outside of the resort areas of El Gouna and Taba Heights. He says OHH plans to show owners of inefficiently operated single hotels or single owning companies that ‘it makes sense for shareholders to swap their property shares for OHH shares.’ He adds that he is already in discussions with three hotels that are operational and have good cash flow.’
There is not another hotel holding company in Egypt that has the money to spend on high-quality staff to supervise management companies or individually managed hotels,’ says Sawiris, known for his hands-on, controlling style of ownership. ‘A management company might have good intentions, but all it takes is a manager who realizes there is not enough control around. This is a dangerous situation.’

And just how does this hands-on style play with his operating partners? Sawiris says it can be a love-hate relationship between the owner and the operator. But at the same time, he believes his company’s contribution complements a management company’s effort to excel in its job. ‘If the owner has something to bring, why not?’ says Sawiris. ‘The only one who gets very agitated is the actual hotel manager, who wants to be king but is reduced to assistant king.’
OHH is offering contracts of 10-15 years. Management fees are about 1%-2% and incentive fees of 5%-12% of GOP ‘are very high’ according to Sawiris. It kicks in after the owner gets a 10% return on the total project cost. He says Mövenpick will be the first to cash in on the incentive this year, and he expects the Sheraton to cash in next year.
With the exception of the Club Med hotel planned for Taba, managers have no equity in OHH hotels. ‘This 5%-10% is not enough,’ says Sawiris. ‘They also want all these side contracts for technical assistance, marketing assistance and all these other things for just a bit of equity.’Sawiris points out as a hands-on owner, he knows too much.

“Management can’t get away with mistakes, so there is too much pressure on them all the time. It’s this feeling of being under control by the owners that irritates them, but at the same time, they have the feeling of having the support of a professional owner. It creates a unique relationship.’
After talking to a few of the management companies that operate OHH hotels, Sawiris is either feared or revered because no one had a bad word to say about him. ‘Samih Sawiris knows what he wants,’ says Sami Zoghbi, president of Starwood Hotels & Resorts for Africa, India and the Middle East, which operates the Sheraton Miramar at El Gouna. ‘He is very sharp and professional. Gone are the days where investors are not aware of all the facts. He has a very professional group of managers who know the business monitoring the hotels. Some investors only care about the bottom line, but OHH understands what needs to be done to improve the bottom line.’
Jean Gabriel Peres, president and CEO of Mövenpick Hotels & Resorts (MHR) says Sawiris is quite different from a typical owner/operator. ‘Orascom’s view is based on a partnership more geared toward profit achievements,’ Peres says. ‘They are real entrepreneurs, as is the new MHR team, and we share the same understanding of a balanced relationship. He does not interfere as long as we meet our service, quality and financial commitments, whereas some owners interfere in any case.’

Because of the various hotels OHH owns, Sawiris is not representative of a typical owner, according to Andre Pury, senior vice president, Hyatt International. ‘Conversely, our management agreement clearly defines the relationship between the two parties, and who is responsible for what,’ says Pury. ‘An ongoing dialogue with any owner is always key to making the relationship work. Hyatt is very pleased to be associated with Mr. Sawiris and Orascom.’
As for his hands-on approach, Pury says a fair and well-balanced approach is appropriate. ‘Controls need not be tedious and petty to succeed. Instead they need to be focused and justified. It is very important that an owner remain an owner, because getting drawn into the day-to-day management of a hotel can quickly become counterproductive.’
Sawiris says his biggest challenge working with managers was convincing them not to look at their hotel as the one and only important entity. He had to get them to believe the welfare of the town and all the other hotels was the key to making the most money.’
When they finally saw the results of adhering to the suspicious requests of the owner – such as telling the manager of the Sheraton to accompany his familiarization trip guests to the Mövenpick – did they start to accept my ideas,’ he says. In fact, marketing the hotels and the destination today remains one of the critical issues behind the potential success of OHH developments.

Some good news about Egypt as a destination crossed the wires in early August. Tourist arrivals in Egypt reached 410,000 in May, up 13.6% from the previous year. The country received 5.6 million tourists in the 12-month period to May, unchanged from the 12-month period ending in April. Revenue from travel climbed to US$993.2 million in the first nine months of the fiscal year 1999/2000, up from US$764.7 million for the same period in 1998-1999. Sawiris points to Turkey’s 8.5 million annual visitors and expects Egypt to reach or exceed Turkey’s numbers.
Nonetheless, marketing is, perhaps, the biggest issue facing OHH and the management companies operating El Gouna hotels. OHH does direct marketing of the destination and works with the hotel operators on their individual efforts. ‘Mövenpick is very strong in Switzerland and should attract attention from the press,’ says Sawiris, who is anti-marketing by nature, but has quickly learned its value. ‘Hyatt is strong in Israel, and its marketing will help the hotel and the destination.’

Through the OHH marketing department and its personal contacts, very close contact is maintained with the international tour operators, according to Roger Tabet, managing director for OHH. ‘We have already tied alliances by selling shares of two hotels to tour operators,’ says Tabet. ‘We are also currently negotiating joint ventures with tour operators for two other hotels. We believe the future lies in alliances with tour operators, as well as land operators and receiving agents.’
Because OHH controls the entire destination, it does not allow marketing that includes competitive pricing. ‘There is no price undercutting,’ says Sawiris. ‘This helps develop an image for the destination. El Gouna was 15%-20% cheaper than Hurghada three years ago. Today, we are about 15%-20% more expensive.’
In fact, in April of 2000, OHH generated on a consolidated level 1.5 million Egyptian pounds, with a 40%-50% gross operating profit and zero labor cost, as pay is generated by the 12% service charge. The occasion marked the first time OHH made a profit.
The other marketing issue facing OHH is airlift. Skeptics of Red Sea resort development say it is hard to attract independent travelers because it is so difficult to reach the area. In addition, dominant Egypt Air has kept out national investment in the sector. But Sawiris foresees Egyptian entrepreneurs becoming more aggressive in developing regional airlines ‘once the government proves it is not only speaking about Egyptians competing with Egypt Air but actually does it.’ On that day, Sawiris says, ‘You will see a swamping of the market with new airplanes and airlines. The same thing happened in Turkey. This is not a worry.’

Since its inception, OHH has increased revenue 50%-60% annually, according to Sawiris. It now operates more than 1,800 rooms, with 2,500 expected to be operational by the end of the year. But this growth company is hard to assess because so much of its inventory remains non-operational. At any point in time over the next five years, there will be at least 1,000 rooms under construction.’
Investors have to believe in our long-term strategy,’ says Sawiris. ‘We want to reach the stage Sharm el Sheikh was at seven years ago, when investors were making 70%-100% ROI.’
Sawiris says he has no investment cap and wants to become the biggest hotel player in the Middle East. Today, the biggest company is a stagnating Egyptian state-owned company called Egoth. ‘We need to outgrow them,’ says Sawiris. ‘Nothing should stop us from reaching this position if things continue to go well.” In five years, excluding potential mergers and acquisitions, OHH should have about 6,000 rooms among El Gouna, Aqaba, Taba Heights and Cairo.

As for competitors trying to replicate Sawiris’s game plan, he says several developers have looked at what OHH has done and have acquired “huge chunks of land” for similar development. ‘But we have time on our side, as it takes at least 10 years to develop and mature a site,’ he says. ‘It took us four years to open our first hotel in Taba Heights. It will take us six years to reach critical mass there and another four years to reach maturity.’
Besides, Sawiris says he does not like to compete. ‘I like being ahead of people so as not to be in touch with them too much,’ he says. ‘It is much easier not to go into a market that has a lot of players and have to elbow your way through. When I started El Gouna, I wasn’t taking business away from anyone, so no one could complain I was undercutting prices or luring away guests. It is a pleasure to be looked upon by competitors as doing something different.’
The final measurement, says Sawiris, will be when OHH hotels reach 50% ROI per annum, and it holds on for a number of years. ‘Then I can say I was right.’ he says. ‘And if things continue as they are, we can reach this measurement in another three years.’