Choosing a hotel operating model is a major decision and one size certainly doesn’t fit all. Hala Matar Choufany, president of HVS Middle East and Africa, has the insights that hotel owners need to make their evaluations and selections, with a view to optimizing returns.
Hotel management is complex, with the value of the property highly dependent on the operating performance of the asset and the achievable earnings before interest, taxes, depreciation and amortization (EBITDA) levels. As such, evaluating the most suitable hotel operating model for a hotel investment is crucial to ensure that the owner’s return is optimized. There is no single model that fits all; hotel owners should therefore investigate, evaluate, negotiate and assess, to find the most suitable operating model and brand that will allow them to successfully operate in the ever-changing hospitality market.

Changing Market Dynamics

A recent HVS survey on global operators in the Middle East revealed that 84 percent of branded hotels operate under management agreements, 11 percent under franchise agreements and 5 percent as leased properties. However, franchise agreements are rising, accounting for 20 percent of new signings, and this trend is set to continue. Mature markets, such as the US and Europe, see a higher prevalence of franchise models – 70 percent and 40 percent respectively – compared to 25 percent in Africa and 20 percent in the Middle East.

Given these trends, there’s much to be gained from analyzing how franchise agreements and management contracts work in detail, and the emerging role of third-party operators.

Franchise Agreements: On The Rise

Franchise agreements have gained traction in mature markets like the US and Europe, and are steadily increasing in popularity in the Middle East. By 2025, they are expected to account for 25 percent of hotel agreements in the region. This growth reflects owners’ confidence in their ability to control costs and enhance asset value, particularly in emerging or secondary markets. Operators also benefit by expanding their brand presence, while reducing financial risks.

Franchise agreements typically last 10-15 years, with franchisors retaining termination rights if brand standards are not met. Owners gain access to brand recognition, marketing resources and operational support. However, these benefits come at a cost: franchise fees rank among the highest operating expenses after payroll. These fees usually include an upfront payment and ongoing charges for using the brand’s name and marketing and reservation systems.

When choosing a franchise affiliation, brand attributes and the structure of franchise fees are critical considerations. While franchise agreements allow owners greater operational control, they must maintain brand standards, often necessitating experienced management teams or the hiring of third-party operators.

Hotel Management Agreements: Balancing Risk and Reward

Management contracts dominate in the Middle East, historically favored by owners and operators alike. The GCC region has seen substantial growth in upscale and luxury hotels under management agreements, with increasing interest in midscale and economy brands over the past five years.

These agreements have evolved to balance risk and reward between owners and operators. As owners become more sophisticated, employing asset managers and consultants, they negotiate terms that offer flexibility and control. Key changes in modern management agreements include:

1. Shorter contract terms – contracts are becoming shorter, with options to transition to franchise models. This offers owners increased flexibility and control over their properties.
2. Evolving tiered fee structures – base and incentive fees are structured to align operator incentives with achieving performance benchmarks, such as adjusted gross operating profit (AGOP) and net operating profit (NOP). Incentive fees are expected to increase for operators who achieve strong AGOP levels, while base fees have been steadily declining.
3. Enhanced budget approvals and performance tests – owners now have greater influence over budget approvals. Stricter performance tests ensure that operators remain accountable and meet predefined thresholds.
4. Diminished area of protection (AOP) – the significance of AOP clauses has lessened, with owners focusing more on shorter terms and fees linked to profitability metrics.
5. Stronger exit strategies and termination rights – owners place greater emphasis on exit strategies, leading to stricter and more enforceable performance test thresholds. This provides added security in cases of underperformance.
6. Key money contributions – operators are increasingly offering upfront financial incentives, especially for strategic assets in prime locations, as part of their bid to secure management agreements. These developments reflect a growing demand from hotel owners for better control mechanisms, flexible exit options and greater alignment of operator incentives with property performance.

Third-Party Or White-Label Operators: Welcome flexibility

Already well established in North America and rapidly growing in Europe, third-party operators are gaining traction in the Middle East, Asia-Pacific and Africa. These operators manage hotels on behalf of owners, operating as independent properties or under franchise agreements. Their appeal lies in their flexibility, competitive fee structures and shorter contract terms compared to branded operators.

Third-party agreements typically involve lower base and incentive fees, shorter initial terms (5-10 years), and more flexible exit options, such as termination at will. They are especially suitable for independent hotels or franchised properties, where owners lack operational expertise.

The key advantages of third-party operators are:

Strategic evaluation required

Choosing the right operating model – franchise, management agreement or third-party operator – will largely come down to three key factors: what the owner’s goals are; the market conditions; and the characteristics of the property. Franchise agreements offer brand support and operational control, but require adherence to strict standards. Management agreements provide a comprehensive operational framework, but may need adjustments for modern ownership demands. Third-party operators combine operational flexibility with professional expertise, making them especially suitable for independent or franchised properties. As the hospitality landscape evolves, hotel owners must strategically evaluate their options to maximize returns and adapt to market dynamics.

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