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The UAE (and Dubai in particular) is replete with hotels. Ranging from budget-friendly accommodation nestled among the souks to world-class and iconic properties propping up the city’s skyline, Dubai does hospitality like nowhere else.
Finance & Tax
At the start of the second half of 2022, Dubai boasted an enviable occupancy rate of 74 percent across its 773 (and counting) hotels, which places it among the strongest hotel markets in the world (and ahead of markets such as London, New York and Paris), according to some reports.
All of that has led to a significant uptick in hotel transactions across the region. With global investors viewing the UAE as experiencing a post-COVID-19 roaring ‘20s, interest in this important asset class has seen both valuations and demand increase.
A significant number of hotels in the UAE are owned by local family groups and through local arrangements, rather than by domestic or foreign institutional investors. In addition, the UAE has complicated hotel ownership and licensing arrangements, which can require careful consideration to ensure that what a buyer receives is the same as what the seller is selling.
Some owners are unfamiliar with international standards relating to purchaser protection in M&A transactions, such as representations and warranties, indemnity coverage, and so on. It can therefore come as an unwelcome surprise to those sellers (who may be expecting a simple visit to the Land Department and/or the Notary Public to register the transfer) when they receive a draft share purchase agreement with pages and pages of specific warranty cover included. We have heard a number of anecdotal instances where transactions have been aborted in situations like this, and where trust has eroded away, taking the deal with it.
In our experience, concluding a transaction successfully starts with getting the due diligence scope right at the outset and embarking on a cooperative exercise all the way through to completion. Flushing out issues (and fixing them) as they arise only helps the process, as does continual and collaborative engagement with the sellers. Waiting until the purchaser shares the first draft of the share purchase agreement before discussing the key issues is an unlikely way to engender goodwill and confidence that the transaction will close, and it may encourage the seller of an in-demand asset to look for other options to sell. Rather, purchasers will need to act in real time, both in identifying issues and in finding practical solutions to them.
Also of critical importance is distinguishing between fundamental issues that go to value and those that can be addressed or remediated in other ways. We have seen a $200 million hotel transaction fail because a $5,000 insurance policy over a hotel vehicle had lapsed, which cannot be a good outcome for either party.
With assets in demand, it is a sellers’ market. That is why engaging early on with experienced advisors who can help bridge the gaps between local conventions and international best practices on the tax, financial, commercial and legal sides of the deal is of paramount importance in ensuring deal certainty.
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