backThe UAE and Saudi hospitality markets entered 2026 at a cyclical high. The UAE recorded approximately 32.3 million hotel guests in 2025, with tourism contributing roughly AED 257 billion, or about 13 per cent of GDP, and inbound visitor spending of approximately AED 228 billion.1Sources: UAE Ministry of Economy and Tourism (data published December 2025); HVS, “Shock, Divergence, and Recovery: The Impact of the 2026 U.S.–Iran Conflict on GCC Hospitality” (April 2026). UAE 2025 figures reflect pre-conflict market conditions. Saudi Arabia logged 115.9 million total tourist trips in 2025, with inbound spending in excess of SAR 168 billion and tourism’s share of GDP at approximately 11.5 per cent, already ahead of the original Vision 2030 trajectory.2Sources: Saudi Ministry of Tourism (2025 visitor statistics); JLL, “Q2 2025 Hotels Market Dynamics” and “Unlocking the Investment Potential in Saudi Arabia’s Hotel Industry” (2025); Future Hospitality Summit Saudi Arabia 2025. Saudi 2025 figures reflect pre-conflict market conditions. The pipeline is similarly weighted. Roughly 362,000 new hotel rooms are scheduled in the Kingdom by 2030 under a hospitality investment programme estimated at US$110 billion, alongside a UAE pipeline that takes national room supply toward approximately 235,000 keys by the end of the decade.3Sources: Future Hospitality Summit Saudi Arabia 2025 (US$110 billion programme and approximately 362,000 rooms by 2030); Knight Frank, “UAE Hospitality Market Review — Autumn 2025” (October 2025). UAE total room supply is projected at approximately 217,853 keys by end-2025 and 235,674 keys by end-2030.
The capital architecture has developed in parallel. Regional sovereign and quasi sovereign capital has supported the growth of private credit allocations, and the DIFC, the ADGM and Saudi Arabia each now provide a regulatory framework within which private credit funds can be established and operated. The depth, track record and product range across those frameworks differ and continue to evolve.
The 2026 regional escalation has tested that picture. Following the US Iran conflict that began in early 2026, GCC hospitality experienced an acute and short duration shock. Dubai hotel occupancy fell from approximately 86 per cent in January 2026 to 22.8 per cent city wide for the week ending 14 March 2026, with booking cancellations of roughly 60 per cent in the first 48 hours of the crisis and a 55 to 60 per cent decline in regional aviation capacity.4Sources: STR (CoStar Group) hotel performance data (March 2026); HVS analysis (April 2026); reporting on the U.S.–Iran conflict’s impact on GCC hospitality compiled in Hospitality Net and Hotel News Resource (April and May 2026). One widely cited scenario analysis suggested that inbound arrivals to the Middle East could fall by 11 to 27 per cent in 2026, with potential visitor spending losses of US$34 to 56 billion depending on the duration of the disruption.5Source: Oxford Economics, as reported in Arabian Gulf Business Insight (AGBI), “GCC tourism losses from Iran war could hit $32bn” (April 2026). Oxford Economics projected that inbound arrivals to the Middle East could fall by 11 to 27 per cent in 2026, with potential visitor spending losses of US$34 to 56 billion depending on the duration of the disruption. A US Iran ceasefire was announced on 8 April 2026. Regional air corridors began progressively reopening from late April 2026, although aviation advisories remained in place into May.6Sources: European Union Aviation Safety Agency (EASA) Conflict Zone Information Bulletins (issued March to May 2026); public reporting on the regional ceasefire framework announced 8 April 2026. Government response in the UAE has included targeted support packages, such as the Dubai Executive Council’s approval on 30 March 2026 of an AED 1 billion economic support package that included fee relief for hotels, hotel apartments and holiday homes.7Source: Dubai Executive Council announcement, 30 March 2026, approving an AED 1 billion (approximately US$272 million) economic support package, including fee relief for hotels, hotel apartments and holiday homes, alongside other measures.
Outcomes have not been symmetrical. The UAE, with a structurally aviation and transit dependent demand base and a high MICE and corporate share, carried disproportionate exposure to the disruption. Saudi Arabia, where domestic travel and religious tourism to Makkah and Madinah form a larger share of total volume, retained a more stable baseline through the same period.
None of these changes the structural opportunity. It changes the underwriting. The pre conflict 2025 figures are pre shock numbers. Recovery in 2026 is expected to be gradual and uneven, and credit committees pricing hotel risk in the UAE and Saudi Arabia today are doing so against a market that is still re establishing its operating run rate. That is precisely the environment in which the question for a private credit provider is rarely whether the capital is available. It is where that capital sits in relation to the real estate, the operating business and any existing mortgage debt.
Hospitality complicates the answer. Hotel transactions in the region, particularly internationally branded and institutionally financed transactions, are frequently structured through a separation between the property owning vehicle, the propco, and the operating vehicle, the opco. The split is not universal. Some transactions, including certain owner operator deals and group internal structures, do not adopt it. Where the split is used, it improves ring fencing, isolates operating risk and supports asset level leverage on the real estate. It also means that value, control and cash flow may not sit in the same entity. Once that is true, labels such as senior, mezzanine and non subordinated require closer scrutiny.
Through that lens, private credit in UAE and Saudi hotel transactions is best understood as a structuring tool rather than a single product. It may refinance senior bank debt, sit alongside it, bridge a leverage gap with mezzanine or HoldCo capital, or fund capex, repositioning or brand conversion. In each case the analysis turns on the same questions. Who owns the hard asset. Who controls the operating cash. Who holds the key contracts. What the recovery and loss given default profile looks like if the structure comes under stress.
Why the structure matters
The opco propco model separates the real estate from the hotel operations. The propco typically owns the land and hotel asset and is the natural home for mortgage backed financing. The operating business generates the cashflows from which debt service and distributions ultimately derive. Depending on the structure, those operations may sit within an affiliated opco or be conducted by a third party manager or franchise operator under hotel management and branding arrangements. In the UAE, structures will also reflect whether the asset or the relevant holding vehicles sit onshore, in a financial free zone such as the DIFC or the ADGM, or across a combination. In Saudi Arabia, ownership rules, sectoral licensing and constraints applicable to foreign participation may further shape entity choice.
The split is capital efficient, but it creates a recurring problem at the financing layer. The hard asset collateral often sits at propco, while the cashflows needed to service the debt may be generated elsewhere in the structure and shaped by hotel management arrangements, FF&E reserves, working capital absorption, operating expenses and limits on upstreaming cash. A lender can therefore be well secured against the real estate asset while still facing a more complicated route to cash than the term sheet suggests. Loan to value comfort at propco level is not the same as debt service coverage at the consolidated group. The two can diverge sharply, particularly through a downcycle, a renovation or an exogenous demand shock of the kind the region experienced in the first quarter of 2026.
Hotel financings do not lend themselves to shorthand analysis. A statement that a facility is senior says little on its own. Senior to what, at which borrower level, against which collateral package and enforceable in which forum are separate questions. In an opco propco structure, they often produce different answers.
Where private credit can sit
Private credit can be deployed at multiple points in the capital stack, although the available positions in any given transaction are constrained by the borrower vehicle, the existing finance perimeter and, in Saudi Arabia, by the regulatory framework governing any fund vehicle if one is involved. At one end of the stack, private credit may replace or supplement traditional mortgage financing as senior secured debt at propco level. At the other, it may appear as unitranche, second lien, mezzanine, subordinated or HoldCo capital, sometimes with payment in kind features, equity related economics or other terms that move the instrument closer to the equity line. Each position carries its own loss given default profile, its own duration sensitivity and its own dependence on going concern value rather than liquidation value.
The choice is rarely about coupon alone. Senior private credit at propco may offer the cleanest route to hard collateral, but it must be tested against the operating structure and the contractual framework that governs the hotel. Junior or structurally higher capital is often easier to insert where existing mortgage debt remains in place. The sponsor may avoid disturbing a syndicated bank facility and the senior lender may keep its position, but the junior provider accepts a different recovery profile and a greater dependence on equity value migrating up through the group.
Flexibility is private credit’s strength and its risk. It can underwrite leverage that some traditional bank lenders, constrained by internal limits or regulatory capital treatment, will not. It can also blur the line between commercial creativity and structural weakness. The financing must work not only in an upside case of rising RevPAR, accretive repositioning and refinancing into a tighter market, but also through a refinance, a covenant breach, a workout or an enforcement scenario. Each is governed by local law in ways that may differ materially from English or New York law expectations. A further point is jurisdiction specific. Under prevailing market practice in both the UAE and Saudi Arabia, the business of advancing loans to locally incorporated borrowers is typically treated as a regulated activity. Cross border and one off transactions may be seen in practice, but the analysis is structure specific and depends on the applicable regulatory perimeter and exemptions in each case. Lenders should resolve their licensing and platform options before, not after, term sheet signature.
The Saudi hotel propco and CMA fund structures
In many Saudi institutional structures, hotel real estate is held through a CMA regulated investment fund rather than through a stand alone corporate borrower. Three regimes account for much of the activity. Private closed ended real estate funds are established under the Investment Funds Regulations. Public real estate funds, including Real Estate Investment Traded Funds listed on the Tadawul main market or on the Nomu parallel market, are established under the Real Estate Investment Funds Regulations. A third regime, the Simplified Investment Funds Instructions, introduces an LP or GP style framework for institutional investors with materially greater contractual flexibility.8Sources: Capital Market Authority of Saudi Arabia, Investment Funds Regulations (as amended by Board Resolution No. 1-54-2025 dated 21 May 2025 and further on 9 July 2025); Real Estate Investment Funds Regulations; Instructions of Simplified Investment Funds (Board Resolution No. 1-26-2026 dated 2 March 2026). All regulations and instructions are published on cma.gov.sa.
The choice of fund vehicle is not cosmetic. It changes the way a private credit lender underwrites the deal at almost every layer.
Start with the legal nature. A CMA regulated fund is, in substance, a contractual arrangement between unitholders, managed by a capital market institution licensed by the CMA to manage investments and operate funds. The real estate itself is typically held by the fund through a wholly owned special purpose entity. A manager licensed only to manage investments, without fund operation authority, cannot operate a real estate fund. Lenders should confirm the manager’s licence scope as part of know your borrower diligence and should understand who replaces the manager if it withdraws, is removed by unitholders or has its licence withdrawn. The credit counterparty for fund level obligations is the fund acting by its manager, not the manager itself, and the security package needs to reflect that.
The fund’s terms and conditions are part of the credit perimeter. They set the permitted investments, the permitted borrowing level, the consents required for material actions, the regime for unitholder approval of fundamental changes, the conflict of interest framework binding the manager and the role of the custodian responsible for safeguarding fund assets. The new Simplified Investment Funds Instructions provide a more flexible drafting environment for qualifying institutional vehicles and, where the fund is structured as a special purpose entity, may waive the requirement to appoint a separate custodian. A private credit lender to a fund held propco needs to know that the proposed facility, the proposed security package and the proposed enforcement remedies all fall within those terms and the regulations sitting above them. Where they do not, the path is amendment. That may require unitholder consent and, depending on the nature of the change, CMA approval. It takes time and may not always be feasible.
The leverage envelope is regulated rather than purely negotiated. Under the Real Estate Investment Funds Regulations, total leverage on a real estate fund is capped at 50 per cent of the fund’s total asset value, and a traded REIT is required to distribute at least 90 per cent of its net profit to unitholders annually. That can be attractive for unitholder yield. It is also a structural constraint on cash retained at fund level to absorb a downcycle and on cash available for debt service to creditors sitting structurally above the fund. Reserve, lock up and distribution mechanics that a credit committee might assume in a corporate propco need to be re examined when the propco sits within a CMA fund structure.
Saudi Arabia has also introduced a dedicated framework for financing investment funds. These vehicles provide a regulated route for direct and indirect lending, including the possibility of public offerings and listings on the Main Market and on Nomu, subject to specific leverage and concentration limits.9Sources: Capital Market Authority of Saudi Arabia, Instructions on the Financing Investment Funds (Board Resolution No. 4-15-2026 dated 11 February 2026), establishing borrowing caps (15 per cent of net asset value for public funds, rising to 50 per cent for Parallel Market listings) and a 25 per cent single-beneficiary exposure limit for direct financing funds; CMA Rules for Foreign Investment in Listed Securities (effective 1 February 2026); Registered Real Estate Mortgage Law (Royal Decree No. M/49 of 1433H).
Taken together, the Kingdom now offers a spectrum of regulated structures. These include private real estate funds and REITs as propco ownership vehicles, financing investment funds as direct lending vehicles and simplified fund structures as an overlay for institutional capital. Each is supervised by the CMA. Each interacts with the others in ways that any private credit provider entering a Saudi hotel transaction should map at term sheet stage rather than after signing.
The three meanings of subordination
Subordination in hotel finance is not a single concept. It is at least three, and they should not be conflated.
The first is contractual subordination. One creditor agrees, typically through an intercreditor agreement, to rank behind another in payment, in enforcement or both. Contractual subordination is visible on paper, can be priced into spread and, assuming a robust governing law and enforcement framework, is often the most straightforward to analyse.
The second is security subordination. A lender may have rights over the same collateral pool as another lender, but with a junior ranking or a narrower package. A common example is a senior mortgage over the real estate at propco level, with weaker or residual rights below for another creditor. Whether a junior security position is meaningful in practice depends heavily on local rules governing security creation, perfection and enforcement. Those rules differ between onshore UAE, the DIFC and ADGM free zones and Saudi Arabia. The differences are not cosmetic. In onshore UAE, real estate mortgages in market practice are usually registered in favour of a financier that is appropriately licensed under UAE banking regulation, so foreign private credit providers often rely on a locally licensed security agent or financing entity acting as mortgagee of record. Floating charges and certain English law style security concepts are generally not available onshore but are recognised in the DIFC and the ADGM. In Saudi Arabia, real estate mortgage registration similarly assumes a licensed financing entity in the chain, and the available security suite over operating cash and intragroup obligations is shaped by Saudi law concepts that do not map directly to English law equivalents. These points go to the heart of the position. They determine whether a security package is what the term sheet says it is.
The third is structural subordination, often the most important and the least appreciated. Debt raised at a holding company depends on equity value migrating up from operating subsidiaries before it can be repaid. If the asset and the operating business sit below, and especially if they are themselves financed, that structurally higher debt may be materially out of the money in economic terms even if its documentation does not describe it that way. The waterfall stops where the cash stops.
Structural subordination is not academic. Where hotel revenues are generated in the opco, mortgage debt sits over the propco and distributions are constrained by lock up covenants, cash sweeps, FF&E reserve mechanics or operator controlled accounts, a lender’s practical recovery may be shaped more by those flows than by its formal title in the capital stack. Loss given default in those circumstances has more to do with the route to cash than with the priority of claim. That asymmetry tightens in markets where demand is recovering rather than running at trend.
Mortgage debt still anchors the economics
Mortgage debt usually defines the economics of the structure. Once a mortgage sits over the hotel asset, any subsequent lender must underwrite its position against that prior claim. This can be done by replacement, by sharing on a pari passu basis, by contractual subordination or by structural separation through a HoldCo or other entity sitting above propco.
How that prior claim behaves in stress is jurisdiction specific. In onshore UAE, enforcement against mortgaged real estate is a court driven process. The mortgagee proceeds through the execution judge, with attachment, public auction and distribution of proceeds following procedures prescribed by the federal Civil Procedure Law and the applicable emirate level mortgage legislation. Clauses that purport to permit a lender to take title or to sell the property without that prescribed process are generally not enforceable in onshore courts.
In Saudi Arabia, the Bankruptcy Law provides a structured restructuring and liquidation framework. Secured creditors are subject to a moratorium during protective settlement and financial restructuring, although the court may grant relief allowing enforcement against collateral in defined circumstances. The framework in its current form is relatively young and judicial practice in stressed hospitality cases continues to develop, so outcomes can be less predictable than the statutory text alone might suggest.
The Saudi real estate landscape continues to evolve in other respects. A new law on real estate ownership by non Saudis (Royal Decree No. M/14) took effect in January 2026, opening non Saudi ownership of real estate in zones designated by the Council of Ministers, with implementing regulations still being finalised at the time of writing. This is directly relevant to any private credit structure that could, on enforcement or otherwise, result in a non Saudi vehicle holding the underlying hotel asset, and its practical scope should be re tested as implementing regulations and zone designations are published.
In the UAE, federal insolvency reform has continued through Federal Decree Law No. 51 of 2023 on financial restructuring and bankruptcy, in force from 1 May 2024. That law retains a moratorium model and permits secured creditors to enforce within the bankruptcy court framework, subject to court oversight. The DIFC and the ADGM operate their own common law style insolvency regimes.
Against that background, a private credit provider considering a pari passu, junior or non propco position should press several questions early. Is the position genuinely senior, or only senior within one borrower entity. Does the lender have direct access to the principal value driver, or only indirect access through distributions that may be cash trapped at a level above. Can the lender take effective security, enforceable under the relevant local law, over the bank accounts, the material contracts and the intragroup obligations that move value through the structure. If enforcement becomes necessary, who controls the process, on what timetable, and what happens to the hotel’s continuity of operations, its licences and its workforce.
These questions matter because hotel value is not purely real estate value. It is also enterprise value. That includes brand affiliation, RevPAR index against the competitive set, operating continuity, management stability, reservation systems, workforce and customer facing infrastructure. A lender that captures the building but loses control of those elements may find that its collateral package, in economic terms, is materially less than the appraised value at signing. The going concern premium can vanish in a poorly executed enforcement.
Why hotel documentation can change the credit
The finance documents do not tell the whole story in a branded hotel transaction. Hotel management agreements, franchise agreements and related brand documentation routinely address matters that move the credit analysis. These include permitted encumbrances, transfer and change of control restrictions, the operator’s rights on a lender enforcement or change of ownership, account control and cash management waterfalls, insurance and business interruption proceeds, and termination rights on default. The substance varies between operators, between management and franchise models and between regions. In international branded transactions these provisions are rarely incidental.
Two recurring features illustrate the point. First, under most major brands’ management agreements, the operator controls the hotel’s operating accounts and the order in which revenues are applied. Operating expenses, FF&E reserves and management fees typically sit ahead of debt service to the owner’s lenders. Foreclosure on the asset does not, of itself, change that. Second, where the relationship is by franchise rather than management, the franchise agreement is typically a contract with the owner that may not survive an enforcement transfer without further action. In such cases, lenders commonly seek a separate undertaking from the franchisor addressing notice, cure rights and continuity following enforcement.
In international branded hotel financings, lenders often seek direct recognition arrangements from the operator, typically in the form of a subordination, non disturbance and recognition agreement or equivalent, and a separate comfort letter where a franchise is in place. None of these instruments is invariable. Whether the operator or franchisor will provide one, and in what form, is a function of the brand’s internal policy, the strength of the sponsor relationship, the asset and the transaction. Major brands maintain established forms and treat them as commercial negotiations rather than as standard accommodations. In the GCC, the bargaining outcome is also affected by the local law route to enforcement. A recognition right adds limited value if the enforcement remedy it is intended to support is not available in the relevant forum on a workable timetable.
A lender may believe it has a clean exit, only to find that foreclosure, share enforcement, a debt for equity solution or a distressed sale interacts with management and brand rights in a way that affects timing, value or transferability, including, in some cases, the imposition of property improvement plan requirements as a condition of brand continuation. The risk is sharpest where the proposed lender is not replacing existing senior debt. Where a mortgage lender already sits at propco level, the private credit provider may be pushed into a position that is junior by agreement, by security or by structure. Diligence on management and brand documentation is then core credit work, not hotel specific housekeeping. It directly affects underwritten recovery, exit optionality and the credible terminal value of the asset.
What non subordinated should mean
Non subordinated is often used loosely in private credit discussions. In a hotel deal, it should be used with care. A position is not meaningfully non subordinated simply because the facility agreement says so. It is meaningfully non subordinated only if the lender has a credible claim to the principal value drivers without depending on uncertain upstreaming, on residual equity value after mortgage enforcement, or on operator and brand consents that may not be forthcoming when the structure is under stress.
In practice, that usually requires one of three things. The lender controls the principal asset security package. It shares that package on a genuine pari passu basis under a workable intercreditor regime. Or the structure is designed so that entity separation does not deprive the lender of access to the hotel’s operating and enterprise value if matters deteriorate.
Mezzanine and HoldCo capital remain useful tools where senior leverage is capped by loan to value or debt service coverage covenants, where the asset needs repositioning capital or where the sponsor wants flexibility without disturbing existing mortgage debt. They should be assessed for what they are. They are higher risk capital whose returns depend on value surviving above the senior mortgage and migrating through the structure in a usable form. The internal rate of return on paper is not the internal rate of return in a distressed case. That gap widens in a market still calibrating to a post shock baseline.
Practical implications for lenders and investors
Hotel financings in the UAE and Saudi Arabia are unforgiving of imprecision. The opco propco structure improves ring fencing, but it introduces friction between asset ownership, operating cash, control rights and enforcement outcomes. In the present cycle, that friction matters more, not less. The fundamentals, including the supply pipeline, sovereign commitment, brand penetration and structural demand for both leisure and religious tourism, remain supportive. The 2025 figures reflected a market at or near peak. The first quarter of 2026 reminded participants that operating run rates in the region can move sharply and quickly, and that recovery, while under way, is unlikely to be linear or uniform.
Credit analysis should therefore begin with the structure, not the label. Before committing capital, a lender or investor should be able to answer, in concrete terms, where the real estate sits and through what vehicle, including whether in Saudi Arabia it is held through a CMA regulated private real estate fund or REIT. In those cases the fund’s terms and conditions, the manager’s licence scope and the custodian or equivalent role become part of the analysis. The analysis should also identify where the operating business sits, where the cash accumulates, how debt service is funded through the cycle, how value moves through the group and whether it can be trapped. It should confirm whether the management and brand documents support or constrain the proposed remedy package.
The diligence list should resolve the regulatory route into the borrower jurisdiction, the local law security and enforcement architecture and the operator recognition package required to make the credit work as documented. Only then is it possible to assess whether the capital being offered is genuinely senior, structurally junior, or being described in terms the transaction cannot sustain.
Private credit is likely to add real flexibility to the capital stack in UAE and Saudi hotel deals through the rest of the cycle. Deal volume, the supply pipeline, macro trends and the repricing of risk after recent shocks all point in that direction. It cannot eliminate the consequences of structure. In hospitality, structure is the credit.