A tale of many cities – the Turkish hospitality boom

It'll be 60 years in June since Turkey's first international branded hotel, the Istanbul Bosphorus, opened its doors, but even Conrad Hilton couldn't have predicted the way Turkey's hospitality scene would evolve over the proceeding decades.

Now one of the world's most popular destinations, Istanbul hosts more than 800 properties and 50,000 rooms; as of February 2015, 4,981 more are under development - a higher figure than any of its regional rivals - and 53 international brands have followed Hilton's lead, with 25 boasting more than one property.

For a long time, the ambitions of international brands in the region would begin and end in the Turkish capital. However, buoyed by the country's growing economy, attention has shifted to developing the regional cities, coastal locations and heritage sites. Turkey is now the sixth most-visited country globally.

Growth in all the right places

Over 41 million tourists entered the country in 2014 - a year-on-year increase of nearly two million and dwarfing the 16.8 million of just a decade earlier. Feeding into the government's '2023 vision', everything from winter to health tourism is earmarked for development, aiming to attract 63 million visitors, become the fifth-largest tourist destination globally and generate $50 billion of revenue.

It may not have reached the 2010 high of 9.2%, but Turkey's forecasted 4.5% annual GDP growth for 2015 is still impressive. This strong economic performance has fuelled a construction boom, with the hospitality sector a major beneficiary. With growth expected to continue, hotel brands are buying into the government's vision.

But while international operators are flocking to the country en masse, the investors come with much more of a local accent.

"There's very little foreign investment in the tourism industry. Almost next to none," says Mehmet Onkal, managing partner of BDO Hospitality Consulting. "There's a lot of enthusiasm, but much of the world still sees investment in Turkey as risky.

"The investment is all from domestic investors, most of them construction companies because of all the development there has been in Turkey. They started to become the main investors in the tourism industry and were followed by textile manufacturers. Turkey is the leading country in the world in the field of textiles and we've seen a lot of them invest in hotels. Even more recently, the automotive industry has started investing."

Invested to succeed

Hotel brands have been quick to build relationships with these local investors. This has traditionally been driven through management contracts, but as the market beyond Istanbul matures, so too do the development models; the burgeoning mid-market bracket, as well as a budding entrepreneurial spirit, has seen the franchise model grow in importance.

"Generally, hotel brands prefer franchising because the Turkish investors want to interfere, which the hotel brands don't like to see," says Onkal. "They want a say in management, they want to ask questions, they want to be the management companies. The most common way is for brands to give the investor the franchise and let them run the show themselves, but keeping a good eye on it to see that standards don't fall. There are so many ways of tracking hotel performance now anyway, so it's much easier to do."

As international brands seek to expand into unfamiliar cities, many have taken to adopting a 'manchising' model - where new properties are operated under management contracts for the first few years, guiding the owners and educating staff, and then passed on to the owners as a franchise. With so many tertiary cities earmarked for strategic growth, it's a compromise that's becoming increasingly popular.

With Turkey's economy continuing to outperform many of its rivals, secondary cities like Adana, where the robust textile and leather industry attracts a significant amount of international business travel, have presented excellent opportunities for operators to capture the corporate customer. In regional cities like Malatya, the rise of the Turkish middle class has meant a growing requirement for mid-market accommodation.

"We expect the mid-market development to continue a lot more than the upscale because there's only so much you can grow in that top bracket," says Robert Koren, vice-president and regional director for Southern Europe at Starwood. "You have to be in the right location and in the right city, which really limits it to Istanbul with views of the Bosphorus. But in secondary and tertiary cities, you have a huge opportunity to grow in the midscale."

Hit the ground running

Already in 2015, Starwood has opened a Sheraton hotel in Samsun, a city famed for its cluster of medical and manufacturing businesses, as well as providing a major port to the Black Sea. Later in the year, two Four Points and another Sheraton will be inaugurated into its Turkish portfolio, and for Koren, developing these brands is a crucial part of Starwood's expansion strategy as it seeks to attract corporate customers looking for comfort and convenience, rather than opulence.

"The number of international travellers that do business in Turkey through industry and commerce has significantly increased," says Koren. "The demand for Turkey as a corporate and meeting destination has increased with its international profile. It's a lot less expensive to manufacture or produce there and that's opened up a lot of corporate account potential."

As well as a surge in international corporate travellers, the growing regional industry is paving the way for domestic hotel customers too. A by-product of the expanding economies is the improvement to transport infrastructure, increasing the propensity for domestic travellers. Along with the rising Turkish middle class - and with that a need to provide accommodation for parties and weddings - it's given hotel brands an opportunity to capitalise on the domestic market.

"There is a lack of quality accommodation that's affordable in these cities," says Mike Collini, vice-president of development for Turkey, Russia and Eastern Europe at Hilton Worldwide. "Alongside these regional cities, there's significant migration in terms of workers to Istanbul and Ankara and, generally, people are travelling more.

"A very well-established airline structure is in place, the rail networks are improving and there's considerable investment going into high-speed connections, the national road system and bus network. All this is helping people, particularly in the regional cities, and as a result, there's a very strong emerging domestic market. People migrate for work, and these cities are the centre of significant production plants and manufacturing units."

Time to act

The Hilton brand has always had a special relationship with Turkey; the Istanbul Bosphorus was the company's first property outside the US. There are now 32 Hilton-operated hotels across the region, eight of which were launched just last year. Another 22 are currently in the pipeline.

"Turkey has been a fantastic example of where our development strategy has really worked out with all our brands from luxury down to economy," says Collini. "If you look at the breakdown of our brands, we now have 22 Hilton Garden Inns - six open and 16 under construction - and that's where we're seeing the volume of our growth. That brand, that type of hotel, is absolutely essential to the regional cities."

Such is the power and diversity of the Turkish hospitality sector that Starwood will soon have representatives from all nine of its brands operating in the country. As Hilton's regional operations come to fruition, it will seek to develop some of Turkey's other less-exploited assets. With Turkey's popularity as a tourist and business destination set only to rise, and with its economic growth continuing, international brands will likely have no trouble filling rooms. The next big question is the extent to which international investors are willing and able to get involved.