IHG has signed its seventh multiple development agreement (MDA) in Germany, underlining its strategic desire to expand its Holiday Inn brand family in the key German hotel market.
The latest deal was signed with existing owner partner Sierra Hotel Management. An agreement to deliver five hotels together has been kickstarted with work on the Holiday Inn Express Karlsruhe – City Park, a newly constructed hotel with 115 rooms that will open in mid 2016.
“Holiday Inn Express is a strong hotel brand with fantastic growth potential in Germany,” said Sierra CEO Uwe Aschke. “The new Holiday Inn Express in Karlsruhe is a significant milestone in the company’s growth strategy.”
IHG’s actions in the German market are a response to a curious combination of local issues. First, there is an apparent lack of substantial local operating partners, meaning IHG gets to help grow its country franchisees from a stage where they have little in the way of track record to offer comfort to investors.
Second, German accounting regulations restrict the ability of institutional investors to receive income from operations, so effectively ruling them out from signing management agreements. Thus, if they are to invest in commercial real estate, leases are the way to go.
“Germany is a key market for us,” said Martin Bowen, associate vice president of development in Germany. “It is the biggest outbound market for us, and the biggest economy in Europe.”
“Franchising was not that successful, down to franchisees not having a strong enough balance sheet,” explained Bowen. The company decided, he said “to put your money where your mouth is, and together with our franchisees we put the MDA together.”
With the requirement from landlords to sign a lease, “the lease guarantee put a heavy burden on the franchisee”. The solution, IHG’s “franchise plus” gives the franchisee support in one of several ways, but typically in the form of a lease guarantee. That support allows a franchisee to take on leases, and to use the support across several sites – with the aim that their scale will, at some point in the future, mean they are able to take on the liabilities unsupported.
Bowen said the aim is to be visible and open to investors, giving them comfort. “When we have an MDA partner, we usually enter into an agreement to allow the lessee to inform his landlord of performance figures. It helps the asset owner to understand hotels better.”
“It has also opened up the eyes of banks,” he added. A recent sale of a property in Berlin City East to a pension fund “could not otherwise have happened,” without them having understood the business model and taking comfort from that higher level of understanding.
MDAs generally state a number of hotels, from 5 to 20, with an expected timetable that both parties aim at – though obtaining planning consents and other issues may interfere with timings. “There is no real penalty,” said Bowen, “we make our profit from opening profitable hotels. The reward lies in helping the franchisees grow.”
As an example of the success of the agreements over the long term, partner Foremost Hospitality has just announced its 14th hotel in a 20 hotel agreement signed with IHG in 2007. The 140 room HIE at Stuttgart – Hauptbahnhof will be built for opening in 2016. Nine of the 14 hotels signed so far are already open and trading.
Other hotel groups are now following IHG’s lead, said Bowen, and are putting together similarly structured deals, to get more hotels built. Meantime, in Germany alone, IHG has the lead, with more than 70 hotels signed under MDA agreements. The activity in Germany feeds into a global push by IHG to grow the Holiday Inn Express brand, with two a week opening around the world. In Europe, currently there are 221 hotels under the brand open, with a further 39 in the pipeline.
HA Perspective [by Chris Bown]: Faced with a unique set of circumstances, IHG has come up with a hybrid solution – franchise plus – that uses the strength of its covenant, without straying too far from the asset light route it has set. And that solution looks to be delivering results, putting in place a substantial pipeline.
The fact that accounting rules prevent certain institutional landlords from signing any agreement other than a lease, is a frustration that affects the whole hotel sector in Germany, not just IHG. And it demands radical actions. Recent moves by expanding Austrian management group Vienna International into the German market have seen the company buy into individual hotel properties, simply to agree the type of management deal it wants, before remarketing the property to fresh investors.
Meanwhile, IHG has established partners in other European markets, such as Kew Green and BDL Redefine in the UK, who might be expected to join IHG in expanding into the substantial German marketplace. And while the opportunity in Germany has demanded this proactive solution, there appears little appetite on the part of IHG to stray from its asset light strategy in other country markets, where property developers are an essential delivery mechanism.