Why Hotel Development in Iran Has Investors Excited
The lifting of sanctions on Iran has opened range of investment opportunities in the hospitality sector. After more than 35 years of economic isolation, Iran has a strong need for investments in hospitality infrastructure and will provide a major opportunity in next few years.
Iran is an extremely attractive tourist destination. The country has a rich cultural heritage with 19 UNESCO listed sites. Its tourist attractions range from ancient Persian ruins to beaches on the Persian Gulf and Caspian Sea to ski resorts in the Alborz mountains.
According to the World Travel and Tourism Council (WTTC), Iran’s tourism industry contributed 6.1% of the country’s GDP in 2014. This proportion is expected to rise by an average annual growth rate of 5.5% through 2025. Visitors export generated IRR 24,903.4bn (1.1% of total exports) in 2014 and is forecasted to grow by 3.0% pa to IRR 34,604.1bn in 2025 (0.8% of total). Moreover, WTTC data shows that the country hosted around 5 million tourists in 2014. Taking into account the positive effect of lifting of economic sanctions on Iran, this flow of tourists is expected to increase steadily to reach 20 million by 2025.
Considering its young population, 60% of which is below the age of 30, relatively high GDP per capita, and a location Iran has a strong potential to become a leading tourism market globally.
Before the 1979 revolution, Tehran’s hotel market had one of the highest penetrations of international hotel operators in the region with IHG, Hyatt, Hilton and Starwood operating hotels in prime locations. Following the revolution, the industry witnessed decades of stagnation. The departure of international hotel operators had significant impact on the quality of hotel management, resulting in a generally low quality of service.
Since the lifting of sanctions, Iran’s government has demonstrated that it is eager to attract foreign investment to meet rising demand. In the last year, the number of business travelers in Iran has increased significantly, creating demand for branded hotels operated by international hotel chains. Acording to research by Horwath HTL, a global hospitality industry consultancy, Iran currently boasts just 640 hotels with 96 located in Tehran, of which only 2 belong to an international brand. In comparison, Istanbul alone has 57 branded hotels.
Moreover, Tehran has only 13 properties that are classified as 4 or 5 stars. However, these do not meet international standards for the classifications. The lack of branded hotels and increasing demand from business travelers and tourists create a clear opportunity for international hotel chains to enter the market.
Aside from a joint Ibis and Novotel property recently opened by Accor in Tehran, there is nearly a complete lack of braded hotels in Iran, but this is set to change. Accor has plans to develop across the different segments in Iran’s major cities. Rotana group, based in the UAE, has already signed management agreements for four hotels in Iran – two in Tehran (opening in 2018) and two in Mashhad (opening in 2017). Similarly, the Spanish company Melia Hotels has announced its plans to open a 5 star hotel in a 130 meter tall tower on the Caspian Sea.
The early activity has focused on luxury and business travelers, but there are still more market segments to be covered. There is significant demand for modern mid-range hotels to cater to young Iranians travelling domestically as well as international tourists arriving on the growing numer of direct routes to Tehran opened by foreign airlines. Drivers for tourism include the appeal of cultural sites, but also the regional importance of pilgrimage sites for religous tourism and the regional appeal of Iran’s high quality of healthcare for medical tourists.
Foreign investors looking to capitalize on these opportunities have also been provided with a series of incentives by the Iranian Government. New hotels and tourism infrastructure in less developed areas will receive a 100% exemption on income tax if a license is issued by the Iranian Cultural Heritage, Handcrafts and Tourism Organisation (ICHTO). Hotels and tourism projects in developed towns and areas will also benefit from 50% income tax exemption.
Horwath HTL has prepared export finance opportunities for foreign and local investors to raise funds for the future hotel investments. In these scenarios, a European bank enables up to 80% of financing for the investments located in Tehran and maximum of 60% for investments in other regions. The financing is provided for 5 years considering the 0.5 % of CIRR interest rate for EUR (as of end of June 2016) and average annual real cost of credit (IRR) reaching the level of 4.27%.
Given that financing remains a key challenge for many projects in Iran, the favorable view taken by banks looking to hotel investments is promising. The hospitality sector will likely be one of the first to see international brands, European financial institutions, and local partners collaborate with the assistance of key advisors. Tourists in the country will hopefully experience the benefits of greater comfort and better service soon.
Photo Credit: Accor