• Resilience of economy hotels tested

Economy and budget hotels have been sold to investors on the basis that they are more resilient in a downturn. This assertion is clearly about to be put to the test.

Accor's figures for the final quarter of this year show so far that, at least in Europe, economy hotels are more resilient than their midscale and upscale counterparts.

Nonetheless, as Accor admitted, some countries were walloped hard. The biggest pain was in Spain and Italy, with revpar down 19.4% and 15.3% respectively. The midscale and upscale hotels were down 23.8% in Spain and 8.6% in Italy.

Across Europe economy hotels were down 3.6% but midscale and upscale saw an 11.1% drop. Even economy hotels in the US, for many years among the worst performers in Accor's portfolio, outperformed more upscale properties with a 6.2% drop.

During a conference call with analysts, CFO Jacques Stern said that he expects the first quarter of this year to show results similar to the last quarter of last year. It would be May before there was enough visibility to look beyond the first quarter.

A factor giving Accor comfort was that new supply in its biggest market, France, had been low for the last three to four years and the company had nearly 50% of the supply of economy and midscale hotels. This means the company can be confident about room rate at least.

"Where we are market leader we will maintain price, where we are not market leader we will play the same kind of game as the opposition," said Stern.

If hotel property prices drop sufficiently, Accor might switch its development activity towards acquisition rather than new build. But acquisitions were a possibility but only if there was a good likelihood of a return above 15%, said Stern. So far, there were few distressed assets. Even in Spain and Italy, territories with the biggest slump in trade, the properties that were currently being marketed were "dustbin" assets, added Stern.

In the US, Motel 6 added 50 new franchised hotels during the year amid tentative signs that it is beginning to get to grips with the troubled operation following the Red Roof disposal. Revpar during October and November for the chain was down 5.7% and 7.8% respectively against competition that shrunk by 5.8% and 9.9%.

The final quarter like-for-like revenue performance saw a 6.5% drop at Motel 6 against between 10% and 12% in midscale and 15% to 20% in upscale, according to Stern.

The performance in Europe confirmed the resilience of economy hotels, said Stern, pointing to a 0.7% increase in the final quarter if Southern Europe (Spain, Portugal and Italy) is excluded.

In the UK, London was showing better resilience than the provinces. Ibis, for example, in London was down 1.1% in the final quarter against a 5.2% drop in the provinces.

Less good news for Accor is the sell-off at its real estate partner in the UK, Land Securities. At the time of the disposal of the 30 properties in February 2007 for £439m, Accor made much of its wish for a long term partner. But Land Securities, the UK's largest REIT, disposed of its Trillium division which had incorporated the portfolio earlier this year.

In the event, the Accor hotels were not included in the £750m sale of Trillium but Land Securities made no noises about retaining the hotels for the long-term in a company that is now focused on either London offices or retail.

The last Land Securities results for the six months to September 30 put a value of £412.4m on the Accor hotels, a devaluation of 7.7% on the previous period.

Economy hotels remains one of the most robust segments for development. Jury' Inn this week announced it is spending £90m opening four hotels in the UK in Glasgow, Newcastle, Portsmouth and Bradford with a total of 830 rooms.

Simon Jones, Jury's Inn development director, said the company had aggressive growth plans and would offer a positive reception to developers and land owners with struggling residential or commercial projects.

For the latest four projects the developer is Northern Ireland based McAleer & Rushe. It is has been a long-standing partner of Jurys and it is currently building four other Jurys Inns as well as the W in London's Leicester Square.

Confirmation that budget hotels will not save all companies came this week with the news that the Real Hotel Group has been put into administration with BDO Stoy Hayward.


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