Iran, the second-largest nation in the Middle East, has been one of the most talked about in recent years, most notably surrounding the Joint Comprehensive Plan of Action (“JCPOA”) which was agreed in July 2015. This agreement paved the way for the lifting of the majority of EU sanctions measures applied in respect of Iran in acknowledgement of Iran implementing limitations on its nuclear programme. The easing of the sanctions is expected to open up what is arguably the sole remaining major hotels market largely untouched by international brands.
Tourism currently only accounts for around 2% of Iran’s GDP. However, with a population of approximately 80 million people, there is huge potential for growth in both domestic and international travel to Iran. Moreover, the total number of hotels throughout Iran is just 640 (less than the number in Dubai alone) with only 96 hotels based in Iran’s capital, Tehran.
Potential Opportunities
To date, sanctions regimes imposed on Iran not only restricted those in the hospitality industry, but across many sectors. The lifting of certain sanctions is expected to open up opportunities in a variety of sectors, including oil and gas, financial services, telecoms, technology and media, pharmaceutical and consumer goods. However, whilst European companies and persons will have much greater freedom to access Iranian markets, US citizens and US entities are likely to still be heavily restricted in their dealings with Iran. Indeed, there is significant movement from France, Germany and Italy in particular, with corporations gearing up to be in first mover positions following Implementation Day. This increase in activity across sectors will inevitably result in an increase of business travellers to the country, boosting demand for hotels to cater for their needs.
The immediate demand is therefore likely to be from business travellers. This is expected to be from both domestic and international business persons, the latter of which are likely to flock towards internationally recognised brands, with an estimated 65% of business travellers already being part of hotel loyalty programmes. Therefore, the hotels market is likely to reflect an initial focus on catering for both international and domestic business guests, though it is also predicted that as soon as a wider variety of new and internationally recognised range of hotels become available this will trigger a rise in general domestic travel.
The current lack of any experienced hotels operators in Iran presents vast opportunities in all hotel classes. According to reports, only 13 out of the 96 hotels in Tehran are classified as four and five-star, although it is widely acknowledged that these would not meet internationally recognised standards for these classifications. Consequently, there is a clear opportunity for an influx of international class high-end hotels (which would also take market share from the existing 4 and 5 star hotels) as well as “true” luxury brands.
Another significant opportunity has been flagged in the mid-range sector, with a particular focus on modern, trendy hotels to cater for the young population of Iran, with around 70% of the total population aged under 35 and generally eager to travel domestically. Additionally, there is likely to be a growing demand for budget hotels, particularly those maintaining internationally recognised standards. Accor have clearly seen the potential across both the budget sector, in the opening of Ibis in Tehran, as well as in different classes, as demonstrated in the opening of the mid-scale Novotel, both of which opened in Tehran in October last year.
These opportunities in the hotels market are coupled with a series of recent incentives for foreign investors provided by the Iranian Government. These incentives include 100% income tax exemption for new hotels and tourist infrastructures in less developed areas for which a licence is issued by the Iranian Cultural Heritage, Handcrafts and Tourism Organisation (ICHTO) after the Iranian Year of 1395 (commencing 21 March 2016). Hotels and tourism projects in developed towns and areas will also benefit from 50% income tax exemption. In addition, the Iranian government has recently announced that it will issue visas for nationals of nearly 65 countries (including citizens of most European countries, Australia, New Zealand, Qatar, Oman, and the UAE) upon their arrival at Iranian airports.
Outside of business travel, there are other significant markets to be considered, particularly once the number of international tourists (as opposed to business travellers) begins to grow, which is likely to be a more organic pace. These include religious tourism, in particular to the various World Heritage Sites and religious and health tourism, with Iran boasting outstanding medical expertise and knowledge at competitive pricing. Such markets will spread demand throughout the country, and also call for tailored hotels.
Obstacles to Market and Legal Issues
To date, the sanctions regimes which have been imposed on Iran have prohibited foreign corporations doing business in Iran. Whilst the position has eased for EU companies, this position will effectively remain for US individuals and companies.
Despite the large potential opportunities in Iran, a number of hurdles will remain in place in the hospitality market. Firstly, the lack of greenfield sites in the major cities has resulted in elevated prices for land and this is coupled with much ambiguity surrounding the legal framework for foreign investment. The lack of any high degree of certainty around such investment will mean inevitable delays whilst any foreign investor gets comfortable with their position and potentially require more extensive key money from any hotel operator.
There are also a number of practical difficulties to overcome, such as the current inability to make payments on international credit cards and the training and consistency of hotel staff. Whilst the population of Iran is generally highly educated, potential staff are unlikely to have any experience in the international hotel sphere and considerable input would be required to create a suitably trained workforce.
Legally, there are a number of peculiarities to the Iranian market which will need to be considered prior to entering. Firstly, there are various issues around land ownership, required permissions and building restrictions which will need to be covered in the early development stages. This is coupled with the afore-mentioned ambiguities surrounding foreign investment. There are also a number of particular issues to be aware of when drafting agreements, noticeably surrounding termination provisions, enforcement and choice of law, and the location of the execution of documents. Consideration will also need to be given to any corporate structure used and if a locally based entity is appropriate, which of the seven structures available under existing Iranian law should be used.
Observations
Whilst it is generally acknowledged that the lifting of sanctions will result in an increase in business travel, this may cause issues in itself, and there are also certain reservations with regard to general tourism travel. The predicted significant increase in business travellers would leave the current hotels landscape unlikely to be able to cope. The result will be a race to develop suitable hotels, particularly any maintained to global standards, with those brands who are able to infiltrate quickly reaping the benefits of repeat custom and others entering at a disadvantage later. Whilst this would give developers and operators the chance to construct hotels built to modern day global standards to cater for international tourists, the timing is different to that required for business travellers. This presents a potential conflict in timing and focus of hotels, and it will be interesting to see the strategies adopted to cater for this.
Iran holds much potential to be excited about, but it remains to be seen how the hotels industry will move to exploit the great many prospective opportunities.
CMS Pars is the first international law firm to open an office in Iran since sanctions have been eased. Please feel free to contact us should you wish to discuss any matters relating to Iran in more detail.
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