Akfen REIT cracks the code of success for hotel investments in Turkey and Russia

Rising incomes and a reborn middle class discovering the joys of travel are creating a pressing need for hotels - a need first discovered by Turkish developer Akfen REIT. As Accor brands Ibis and Novotel sprout in major Turkish and Russian cities, Akfen aims for the top in the hotel business

quipped with a sound perspective that allows it to tap into Turkeys fast growth and backed by a strong ally, Akfen REIT shines among the countrys property developers, which have become symbols of its new-found prosperity. A key reform undertaken by the Turkish government, which has been laying the groundwork for the nations economic miracle since 2003, was to encourage transparency in the property sector through REITs publicly-traded real estate investment trusts. Rapidly changing a sector notorious for its opaqueness, REITs triggered a snowball effect, forcing all companies that do business with them to act accountably. In the past, one had to go buy physical property to invest in the sector. Now, one can enjoy exactly the same upside by investing in the shares of 23 REITs currently being traded on the Istanbul Stock Exchange, says Orhan Gunduz, general manager of Akfen REIT. Akfen is the only one that exclusively focuses on urban hotel development. It develops threeand four-star hotels through a strategic agreement with European giant Accor. Two Accor brands, Novotel and Ibis, have been extremely successful in Turkey thanks to this partnership based on an exclusivity. Since 2005, Akfen has built 11 hotels with a total capacity of 1,945 rooms and handed them over to Accor to be managed. Ongoing investments comprise eight hotels and one office complex, with total room capacity of 1,662. Akfen is also the only developer that Accor works with in Russia on a lease agreement basis: an Ibis in Yaroslavl started operations in September, while three more Ibis hotels and one office project are in the pipeline. But why not be like one of those colossal groups that manage luxury five-star hotels, enjoying much more expensive prices than, say, 75 per night at an Ibis? The answer, for Gunduz, lies in economic development.

Stars of development
As a nations economy develops, the number of stars in hotels have to decline, he smiles. A country which only has luxury hotels and dread-

ful hotels with nothing in between is not a developed one. But as the middle class flourishes, hotels that cater to their needs should be built. GDP per capita in Turkey has surpassed the $10,000 mark for the first time in history, and Akfen REIT has predicted a boom in domestic mobility. Todays Turkey has a huge middle class, with citizens discovering the joys of travelling and they choose two-, three-, four-star hotels, Gunduz says. Add to this the countrys rising appeal for foreign tourists, plus Istanbul rapidly becoming a global hub for congress tourism. The numbers back the perspective. Average bed supply per population among the top 10 tourism countries stands at 6%, while in Turkey the figure is only 1.4%, according to 2009 data. The bed supply/foreign visitors ratio stands at 9% among the top 10 tourism nations, while it is a meagre 3.9% in Turkey. This indicates vast potential, and the exclusivity agreement with Accor allows Akfen to benefit from it. According to the deal in Turkey, Akfen can only work with Accor in hotel development, renting hotels to the European giant. In return, Accor can only work with Akfen regarding the Novotel and Ibis brands the most successful in its franchise. The company acts like a co-investor with Akfen, having a say starting with the land selection phase. The two partners have thus created a unique system of checks and balances, as Accors experience blends with Akfens aggressive expansion. We are the only company in the world to have such an agreement with Accor, Gunduz notes proudly. Other partnership models generally expose local developers to the risks of both the hotel business and the property business. What Akfen has is a simple lease contract with Accor, which pays a variable lease to the Turkish company either 70% of gross profit, or 25% of revenue, as a minimum. Thus, if the profit margin at a given hotel falls below 44%, which is a rare occurence, the revenue clause is triggered. Akfen projects 2016 lease revenues to stand at 48.7 million, while the EBITDA margin is expected to rise to 88% from the current 72%, as earnings climb to 42.8 million. The companys

Orhan Gunduz, general manager, Akfen REIT

profit margins are rising every year, making possible these figures that have become sources of envy for most European hotel investors. Akfens initial public offering in May was a resounding success at a time of global financial turmoil, and the company currently commands a market value of around $180 million. Over the next decade, we aim to build nearly 60 hotels in Turkey, half of them in Istanbul, says Gunduz. Soon, we may become Turkeys biggest hotel investor.

Akfen Real Estate Investment Trust Co.Inc. Levent Loft-Bykdere cad. No:201 C Blok Kat:8 34390 Levent Istanbul-TURKEY Tel: 0090 212 371 87 00 e-mail: infoakfengyo@akfen.com.tr web: www.akfengyo.com.tr

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