This article originally appeared in Hotel Management International Middle East magazine
With the news that many of the sanctions against Iran will be lifted and the country’s nuclear programme halted, the Islamic Republic’s long economic isolation looks to be coming to an end, which could mean an opening up of its hotel and tourism sector to international operators. Christophe Landais, COO of Accor Middle East, and Christopher Hewitt, associate director at TRI Consulting, discuss the future of Iranian hospitality, mitigating political risk and the enormous potential of the country’s young population.
It was the end point of up to 20 months of troubled negotiations, and almost 36 years of mutual resentment and frustration. On 14 July, the Islamic Republic of Iran, the five permanent members of the United Nations Security Council and the European Union signed the Joint Comprehensive Plan of Action, a historic agreement that lifts many of the economic sanctions against Iran in return for the end of the country’s weaponised nuclear enrichment projects.
In theory, there’s still a long way to go. But in practice, in some areas at least, international companies can now do business in Iran in the most comprehensive way since the revolution in 1979.
While Christophe Landais, chief operating officer of Accor Middle East, was, like every other proud Frenchman, celebrating Bastille Day, it came as vindication that years of work had not been in vain. Accor has been in the process of building partnerships in the country for years, and the lifting of sanctions means the plans can finally go ahead.
“We were in touch with the Iranians until the sanctions, then we stopped,” he says. “Despite this, they still wanted to build hotels.”
Accor provided its partners with specifications for two properties: a four-star Axis hotel and a five-star Axis Prime, which are now completed and being run by Iranians. Accor hopes to sign a management agreement by the beginning of September.
“We were anticipating it for a few months,” he says. “So when it came on 14 July, we were not surprised but very happy to see it and to be part of the opening up of Iran’s hospitality market.”
Accor is far from being the only player in the hospitality business taking notice of the country’s massive potential. In a report released in May understatedly titled Awaiting the Gold Rush, management consultancy TRI Consulting described Iran as “one of the world’s largest untapped markets”, and predicted a massive push by developers and operators to get a piece of the action the moment a deal was signed.
In the years before the revolution, Iran was something of a regional hub for tourism and hospitality, with international brands from Sheraton to Hilton and Marriott scattered across the country. The modernising Shah Mohammad Reza Pahlavi turned Tehran into a glamorous hotspot, but his regime was propped up by corruption, American patronage and a brutal police state, and in 1979, a popular revolution replaced the monarchy with an Islamic republic.
The Ayatollah Khomeini became the new head of state and the government swiftly began reversing the perceived decadence of the Shah years. Tehran’s luxurious hotels, symbolic of the excess and liberalism of the pre-revolution days, were swiftly brought under government control.
“After the revolution, the management contracts were obviously taken away, and the operators left the country,” says TRI’s Chris Hewitt, one of the authors of the May report, who argues that during those years, the industry made progress but at a very slow pace.
“Due to the nationalisation of a number of hotels, standards weren’t necessarily maintained,” he says. “This continued all the way through the 1980s and 1990s during the war with Iraq, and hotels suffered extremely bad occupancy levels.”
Continued sanctions have taken their toll, and while the hotels have continued to operate, the investment and visitors they could hope to attract have been limited. As a result, many classed as four or five-star establishments in-country would be more likely to be given three by international standards.
The tide began to turn in 2013 with the election of centrist president Hassan Rouhani on a platform of improving civil rights and rapprochement with old enemies. With the beginning of negotiations to lift sanctions in return for the end of the country’s nuclear weapons programme, the market began to rebound, and from July, international companies have swept into the country on fact-finding missions – a trend that has already boosted occupancy rates.
“We visited Iran in October last year,” says Hewitt. “Tehran is a very large city and it’s very dense in places. There’s also a great beauty to it, especially in the northern part of Tehran with the Alborz mountain range.
“There’s great diversity of things to do as a tourist, but there’s also very strong commercial opportunities there, with all the government departments and ministries.”
Accor isn’t the only company with plans in the works, with the Financial Times reporting that French construction conglomerate Bouygues and the UAE-based Rotana Group are planning building and management projects.
While the hotel rooms that will be filled up by businessmen arriving in the country for the inevitable oil and gas bonanza will go a long way to boosting the hotel industry’s fortunes, it’s the diversity of the country and the immense potential of Iranian tourism that’s got hoteliers so interested in setting up shop. The industry is already big business, with visitors from abroad contributing 6.1% of the country’s GDP and creating an estimated 414,500 jobs in 2013. By 2024, the nation expects 5.2 million visitors annually.
Accor sees a wide range of opportunities across the country, from the religious tourism of Mashhad to the beauty of Isfahan, and the cultural hubs of Shiraz and Tabriz, with an approach identifying key destinations and developing all their brands depending on the strengths of each city.
“The location will be the main driver,” says Landais. “If we’re on the Caspian Sea, it will be purely tourism, domestic and international; whereas with Mashhad, it will be much more religious.
“I think each city has something to offer: in Tehran, it will be leisure and business, and, depending on where we are, we’ll target more economy and mid-scale clientele. But if we go further north, it will be more focused on the upscale and upper upscale properties.”
Hewitt compares Iran’s capital to another regional hub, Cairo, which serves as an entry point for everything the country has to offer. It’s also a central point for internal tourism – as well as being a significant market – and people travel from all corners of the country to visit friends and family in Tehran.
But before the industry can take off, there’s a real need for investment. Basic infrastructure requirements – for example electricity and water – are essential, as is significant expenditure on transport, oil and gas. Tehran’s old hotels need renovation and are likely to be privatised in the coming years, and large-scale construction projects will be required to meet the massive incoming demand.
“What I found out is that the Iranians have plans for renovations as well as extensions to existing hotels,” says Hewitt. “They are going to raise them to a much higher standard. Some hotels haven’t been touched or renovated in the past few years.”
Much of the capital for the basics will come from the state, but home-grown private investors will become significant players, according to Landais. At the moment, lending rates are high, but he argues that this disincentivises capital flow into long-term projects.
“Certainly the National Bank of Iran will make sure that interest rates go down, so investors from Iran will be more interested in developing products and projects in the country,” he says. “Real estate and hospitality make up one of these areas.”
This hasn’t put off privately owned Tehran-based group Didar Complex from beginning work on a British-designed 500-room hotel in the centre of the capital, with the company’s board chairman Shahram Poursafar having expressed an interest in working with European partners to complete the project.
Young and talented workforce
Much of Iran’s appeal comes from its 80 million inhabitants, who are, in many ways, the country’s biggest asset. More than half are under 30 years old, well educated, keen to work, and possess a significantly more cosmopolitan and liberal outlook than their parents.
“They have some real talents, they’re a very strong resource,” says Landais, arguing that while there’s space for standards to improve, the young staff are exemplary hotel workers. “When they know what to do, they do it very well.”
This gives the country a leg-up. Many of its regional competitors – the UAE, for example – have low populations and must import staff from abroad to fill key positions at significant cost. Iran doesn’t have this problem, and while foreign companies play a role in helping bring standards up to international levels, there’s a feeling that, in a decade or so, the country’s hotels will be run by Iranians.
Hewitt agrees, saying that much of the young population speaks good English, and that as the hotel market begins to grow, potential employees will flock to it. And while there’s a lot to learn, he argues, this is not necessarily a bad thing.
“The skills and knowledge-base of hoteliers in Tehran is quite low,” he says. “But with the presence of new international operators, there’s going to be a great learning curve and opportunities for the hotel market.
“As international operators enter, they’re going to bring all this expertise with them, which is really going to help.”
The challenges ahead
Of course, businesses can’t just enter a long-closed-off market without challenges, particularly when the regime is still firmly in place and the country remains far from the open society many might hope for. Red tape is extensive, as are the licences required to run a business, and companies attempting to get money out of the country face significant hurdles. Banking, for example, is rudimentary for anyone hoping to transfer money internationally.
“The majority of the transactions are done with cash,” says Hewitt. “With the sanctions being lifted progressively, the re-establishment of the financial system in Tehran is going to be at the forefront of that.”
And then there’s always the risk of political instability. The recent deal with the West has drawn criticism from the country’s powerful Shi’a clergy and hardline Revolutionary Guard – could there be a chance that later governments restart the nuclear programme and see a return of sanctions? It’s impossible to say, but Hewitt argues that increasing foreign investment will lend credibility to the industry, citing President Rouhani’s commitment to tourism as a key driver of economic development as an indication that reform is here to stay, and so will hospitality be once it has made its mark.
“So by having the industry at the forefront of the development and the corresponding potential success of that,” he argues, “regardless of what’s going on with future governments, we’ll show how important the industry is.”