GLOBAL REPORT—Increases in Islamic travelers and Middle East sovereign wealth investment coupled with burgeoning Middle Eastern banks have resulted in renewed interest in hotels that purport to Islamic “sharia” law, even outside national and traditional Islamic destinations.
Ensuring hotels satisfy sharia law is not as simple as giving alms, sharing profit and forbidding alcohol, handling or eating pork and representing the animal form in art. Guidelines also exist in relation to lending, investment, auditing and the separation of sexes.
Graphic: courtesy of Sharia Finance Watch
Click image to expand.
Guy Wilkinson, managing partner of Dubai-based Viability Management Consultants, said the sharia concepts gained more visibility when “Islamic finance (became) a viable source of debt for hotel projects in the first years of the new millennium. A number of would-be investors thought Islamic finance would be ‘easy money.’
“In reality, hardly any of the Islamic hotel companies proposed in the last decade survived, and those that did were recognizably conventional chains that only eschewed alcohol. There are in fact very few true sharia-compliant hotels outside of Saudi Arabia,” Wilkinson said.
Many experts agree with Wilkinson that most destinations cannot support the moral code, with most “sharia” properties satisfying only some key principles usually sufficient to please all but the strictest religious adherents.
Many non-Middle Eastern hoteliers appear wary of starting discussions on development and ownership under what they feel are strict guidelines.
William Perry, global head of hotel asset management company CII Holdings (Proprietary) Limited, in the Pretoria suburb of Centurion, near Johannesburg, is one hotelier active in the field of sharia compliancy outside the Middle East. Among his properties is the Hilton Cape Town City Centre; he is closing on another sharia-compliant hotel in South Africa.
“You have to find the right people, have a sharia board and designate ‘halah’ (permissible) and ‘haram’ (forbidden) areas and practices,” Perry said, “and the business model and accounts must be absolutely separate.”
In Perry’s Cape Town property, bars serving alcohol are sectioned off, technically do not form part of the hotel and do not generate income for CII Holdings except for non-alcohol sales in its restaurants, which do not sell pork.
For Perry, the key was finding an understanding partner in Hilton.
“Another top-end company did not want to touch the idea with a bargepole,” he said, “but now they’ve seen it work in Cape Town, (the company) has said privately they might be back in.”
Mixed messages
“The sharia concept adds complexity,” Perry said. “Hotels probably are already the most complex operations in real estate, so it’s easy for many to say, ‘No, it will not work.’ But if you are willing to roll your sleeves up, it can.”
The motivation for CII Holdings, which seeks to add 10 to 15 such full-service hotels in Africa over the next five years, is from an investment perspective.
“Shareholders are looking for sharia-compliant investment tools,” Perry said. “When we started we had complex, 40-page contracts, but sharia scholars said, ‘No, it is quite simple: CII Holdings can profit, but Hilton cannot taint the ownership books.’ Now the contracts run to a single page.”
“The decision of Islamic financing or sharia compliance for hotel projects is derived from (several) variables, the most critical being the investor’s profile,” said Ramsay Rankoussi, associate director of development and asset management for the Middle East and Africa at Millennium & Copthorne Hotels. “Sharia compliance does not represent a business model but rather an alignment of investment principles and religious belief.”
Millennium has two sharia-compliant hotels in Dubai, while others open or in the pipeline are and will be compliant due to government regulations and restrictions, such as those in Kuwait, Saudi Arabia and Sharjah in the United Arab Emirates.
Wilkinson said regional banks provide up to 60% debt even for sharia projects, but he believes global chains do not pay much attention to the model and that running dry hotels in wet countries is avoided as a rule, as it cuts down on market potential.
Rankoussi said Islamic financing represents a specific and more complex mechanism where commercial terms are drafted initially and then converted to Islamic and sharia-compliant principles. There are two structures, he said: “Murabaha” (buy-back or cost-plus) and “ijarah” (leasing):
- Murabaha: A bank purchases the property, then re-sells it at a fixed profit. The property is registered in the buyer’s name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of contract, and there is no interest rate.
- Ijarah: This type of transaction is similar to real-estate leasing or a rent-to-own contract. The bank purchases the property and retains ownership until full payments are completed. Then the property transfers back to the buyer. This model specifically relates to the hotel space, with operators usually entering into three-party agreements, also known as non-disturbance agreements, in which all three parties will be protected and all understandings defined.
“There have been some successful dry chains and brands established that are now regional in reach,” said Wilkinson, “notably Rotana, Hospitality Management Holdings—which includes the Coral brand—and Shaza Hotels, which has a property in Bosnia & Herzegovina.”
Exporting sharia
Wilkinson is seeing an increasing proportion of Arabic investors wanting to develop dry hotels for religious reasons, but he is not convinced they represent an appealing business proposition.
“Most investors are realistic that strictly sharia-compliant hotels are not a good business proposition. Too many Muslims are just too moderate in their views to want to ‘suffer’ for their beliefs when staying in a hotel, especially at the luxury end of the market,” he said.
Hala Matar Choufany, regional managing director of HVS Dubai, said that for every 10 new hotel projects in Doha, Qatar, eight are for dry hotels.
“A number of new hotel developments, particularly in Doha, are dry, and there seems to be an increasing requirement from Qatari owners for a dry operation. This is largely attributable to sharia financing sources, or purely religious beliefs,” she said.
“In destinations such as Dubai, Beirut and Turkey, however, where a drink is able to be bought by walking several minutes from your hotel, the notion of dry and wet hotels has less meaning or consequence,” Choufany added.
Following the slowdown in the liquidity market supporting commercial real-estate mortgages, Rankoussi has seen major Islamic banks looking to allocate capital and liquidity into sharia-compliant projects.
Even Middle Eastern countries that enjoy a good share of Western leisure business are seeing such developments, fueled by increased intra-regional travel.
“Destinations such as Dubai or Oman represent a product diversification that is supporting a market opportunity to meet an increasing demand from Muslim travelers. The (Gulf Cooperation Council) market represents the largest feeder segment. Dubai is a concrete example of a city with an increasing trend of sharia-compliant hotels for all the aforementioned reasons,” Rankoussi said. “Our two Dubai hotels are top performers within the market and against their respective competitor set. We foresee increasing development opportunities as well as comparable performance.”
Back in South Africa, some hoteliers think that sharia-compliant hotels have an uphill battle.
“From a domestic perspective there’s limited demand. It would be mostly seasonal from the local Indian market out of Johannesburg and Durban. From an international perspective, there is too little demand,” said Xander Nijnens, managing director of hotel management company Extrabold, based in Johannesburg.
“The Middle East market to South Africa is small and mainly leisure-focused, which also is seasonal,” he said.