Iran as a Major Opportunity for US Hotel Brands and Developers

By: Shirin Heidary and Albert Pucciarelli of McElroy, Deutsch, Mulvaney & Carpenter, LLP

Hyatt, InterContinental, Hilton, Sheraton – these United States hotel brands were once associated with Iran. During the Shah era, Hilton had a hotel in Tehran called the Royal Tehran Hilton; InterContinental had one called the Tehran InterContinental; Sheraton had the Arya-Sheraton Hotel; and Hyatt had the Hyatt Crown Tehran.

Following the 1979 revolution, hotel management contracts associated with these US brands, among other foreign brands, were severed as the hotels became state-run and nationalized. Additionally, foreign investors were later limited from investing in Iran due to international economic and political sanctions against business dealings.

On April 2, 2015, the permanent members of the UN security council and Iran broke through years of mutual exclusion by inking a provisional agreement on a framework that, once finalized and implemented, would be exchanged for limits to Iran’s nuclear programs. As a result of this agreement, UN sanctions were lifted on January 16, 2016. Since then, most of the European Union sanctions have also been eased.

US sanctions, though, remain largely in place awaiting the outcome of this agreement. The recent Presidential election also casts uncertainty on the nation’s commitment to the nuclear agreement, and the uncertainty itself will discourage US investment activity in Iran.

While the United States mulls over its position with Iran, European hotel developers have been acquiring some of the choicest tourist spots in Iran to construct new hotels. Meliá Hotels International is planning to open a 319-room hotel in 2017 on the Caspian Sea. In stride with the Middle Eastern nation’s efforts to modernize, private ownership by non-Iranians is now permitted for commercial or industrial property as well as for personal residence.

Next, in 2014, Accor Hotels, the French multinational hotel group, the sixth largest in the world, became the first international hotel group to enter the Iranian market since the 1979 revolution. Accor Hotels will open an Ibis property and a Novotel branch near Tehran’s international airport. The move comes just two months after the historic nuclear accord which the West says is aimed at preventing Iran from building a nuclear bomb. Combined, these two hotels have a total of nearly 500 rooms.

Other hotel operators have also seen the potential and have already entered the market. Abu Dhabi-based Rotana Hotel Management Corp. has signed management agreements for four hotels in Iran – two in Tehran (opening in 2018) and two in Mashad (opening in 2017). The Dubai-based Jumeirah Group is also looking to capitalize on the tourism potential in Iran.

Forecasts and Effects

Iran is estimated to have almost 900 hotels within five years, compared to 768 now according to a forecast by Euromonitor International. The firm predicts that lodging revenue is set to increase about 25% during this time as the number of visitors is forecasted to grow by a similar percentage to 6.3 million.

One of the largest countries in the Middle East, Iran has a strategic position connecting Russia and Turkey to the Arab world as well as being a key hub for transportation between Asia and Europe. Iran has one of the top 20 largest economies in the world and the lifting of sanctions will now open up a new phase for foreign investment. In anticipation of increased foreign investment, the Iranian government is already implementing strategies to accelerate the development of key sectors, especially oil and gas, technology, and tourism. According to the International Monetary Fund, GDP in Iran will grow by almost 4% as an immediate result of the foreign investment the country will receive after the lifting of sanctions.

Tourism is undoubtedly one of the industries with the most promising growth prospects. Iran expects to attract more than 20 million passengers per year by 2025, compared to the current 5 million. This will require the development of additional transport infrastructure and hotel capacity, estimated to be at least 150 hotels catering to this increased demand. The government has recently revealed its intention to acquire up to 160 Airbus jets to add to the Iran Air fleet as well as build more than 500 kilometers of new railway lines every year and new highways.

The implications of this upswing in development are vast and quite lucrative. Hotels have been one of the most effective tools at the outset to attract new investment into a region. Businesspeople, investors and tourists are more likely to visit an area that has name brand recognition in the form of an established hotel chain. And an adequate supply of hotel rooms surely helps to promote other businesses in the region.

Comparison to the U.S. Embargo against Cuba

The reluctance of the United States to conduct business with Iran is reminiscent of the country’s economic embargo against Cuba. Although an embargo on the sale of arms was imposed earlier, since 1960, the US has imposed strict commercial, economic and financial bans against Cuba. In 2009, the Obama Administration began easing the embargo by allowing Cuban-Americans to travel freely to Cuba. In February 2016, the US Government allowed two American men from Alabama to build a factory that will assemble as many as a thousand small tractors per year for sale to private farmers in Cuba. The $5 million to $10 million plant was the first significant US business investment on Cuban soil since 1959.

In 2016, Starwood Hotels and Resorts (now part of Marriott International) broke an almost 60-year drought of US hotel activity in Cuba with its announcement of the signing of three hotel deals in Cuba. Marriott International itself has separately indicated an interest in doing business in Cuba. Other U.S. hotel companies will surely follow.

European hotel companies, though, have been operating in Cuba throughout the embargo years. Cuba is the second most popular tourist destination in the Caribbean, behind only the Dominican Republic, with 3.5 million tourist arrivals in 2015. Hence, the US brands will not have the advantage as the first among the international brands on the scene. Even so, the power of the major US brands can be expected to attract occupancy at high daily rates as only these recognized hotel names can do.

Conclusion

The embargo against Cuba has cost the US economy approximately $1.2 billion per year in lost sales and exports as well as $3.6 billion per year in economic output according to the US Chamber of Commerce and the Cuba Policy Foundation respectively. For US hotel developers and brands, the door to Iran is now open and it is not clear how long this will be the case. Now is a good time for hotel developers to team up with one of the major US brands and investigate the opportunities in Iran.

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About the Authors 

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

 

Further Resources:

1. “Hotel Groups Eye Iran Tourism Potential as Sanction Deal Nears,” Financial Times, June 21, 2015.
2. Official Website of the Contemporary Architecture of Iran
3. “Significant Changes to U.S. and E.U. Sanctions Against Iran,” Ropes & Gray Alert, January 26, 2016.
4. “High Costs for New Construction in Iran,” Global Property Guide, February 25, 2015.
5. “Meliá Hotels International announces its first Gran Meliá hotel in Iran alongside a leading Iranian industrial & developer group,” published on Meliá Hotels International website, March 2, 2016.
6. “Iran to Get Luxury Hotel Along Caspian Sea as Tourism Thaws,” Bloomberg News, March 2, 2016.
7. “Accor to Sign Iran Hotel Deal,” Wall Street Journal, Business Section, September 15, 2015.
8. “Meliá Hotels International announces its first Gran Meliá hotel in Iran alongside a leading Iranian industrial & developer group,” published on Meliá Hotels International website, March 2, 2016.
9. “United States embargo against Cuba,” Wikipedia, December 20, 2016.
10. “Starwood: 1^stS. Company to run Cuba Hotels in Decades,” U.S.A. Today, March 21, 2016.

 

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