• Alternatives heading into mainstream

Alternatives to hotels are alive and growing and giving investors an increasingly viable home for their money, according to last week’s Hotel Alternatives conference, organised by Hotel Analyst.

There were some objections from existing hoteliers at the London event, who felt that that they were being painted as “dinosaurs” and protested that they would “continue to evolve”.

The day began with a presentation from IPD’s Mark Weedon, who said that, looking at annualised total return, hotels had outperformed traditional asset classes over the past 10 years. He commented that, while capital values did not beat the appreciation of commercial property, “alternative sectors offer both income and capital”.

He added that hotels were a “much stronger hedge against inflation than residential and commercial property” and performed “well against falling economic performance”. Hotels, he said, had a “superior risk/reward profile compared to core asset classes and lower volatility”.

Ryan Prince, vice chairman of Realstar International, was in agreement, with his investment focus being around what he described as “quirky assets” – now called alternative assets. The common theme is operating income with real estate. “We’ll do anything in our space – buildings with beds – we want to position ourselves not as a vulture, but educated, well capitalised.
 We like having levers in the assets so we can mitigate any downturns. We like income over capital – because you can’t eat capital.”

Quirky assets saw Prince sharing a panel with included Meininger, where CEO Navneet Bali said that, in addition to offering a flexible product, which he described as a “designer budget hotel experience, with the same features of a hostel – so you can book by the bed too” – the group was also open to a flexible ownership model.

He said: “The leased model appeals to investors in Germany, but we could do management contracts in the future. Our investors are typically developers – we are very flexible.”

Flexibility in expansion was also a theme for Simon Champion, CEO at EasyHotel, who added: “There’s a place for freeholds and franchising in EasyHotel, we’re looking to invest capital in major European cities and franchise elsewhere.”

Sean Worker, president & CEO, BridgeStreet Global Hospitality, commented: ‘“We see leases in key cities and management agreements that have all sots of nuances – we’re like the meat in the sandwich – we’ll invest. You have to have skin in the game – we won’t purchase but we’ll take key interest. The power of the covenant is everything and distribution is critical. We run at 90% occupancy which gives a credibility with financial community.”

John Wagner, director of Cycas Hospitality, which works with InterContinental Hotels Group to expand the Staybridge Suites extended stay brand in the UK, told delegates that there was strong demand for the product in the region. He said: “Today’s extended stay customers are in B&Bs, company housing, residential apartments – they’re around and they will fill up extended stay hotels.  More than eighty per cent of our business comes from corporate accounts, they come from the multinationals. There is extended stay demand in the UK.”

Cycas’s model, which often sees a more traditional hotel, such as a Holiday Inn on or near the site, was viewed by Wagner as being a way for everyone to work together to reassure investors, who might otherwise be wary of extended stay on its own. He said: “Dual-branding with a hotel helps the investor – there’s some safety in that. For operators, we love the model – it’s very profitable”.

Russell Kett, chairman of the London office of HVS, suggested that, for existing hotels, “if you’re struggling to get over 70% occupancy, there is an argument for a hybrid between a hotel and extended stay.”, to which Wagner warned that, “if you are going to dual-brand you need to run them as separate businesses or it won’t work. Extended stay rooms in a dual-brand are only ever used for upgrades”.

Defending Zoku, a new, standalone aparthotel due to launch this year in Amsterdam, was Marc Jongerius, co-founder and managing director. He said: “We have a full landscape of investors; ourselves, private equity (who are looking at IRRs above 20%, 25%), a bank loan and we have secured a fixed-term lease.”

He added that the brand, which was created by the founders of Citizen M, would also be a hybrid, commenting: “We knew that business and leisure were now combined and we needed to integrate business, leisure and the office. We now have that”.

He was confident of the brand’s future, commenting: “Why do some companies grow at 10 times that of their peers? They innovate and use technology to leverage their growth. I believe in following the drivers of trend to help you grow faster than your peers.”

Despite Jongerius’s strong financial backing, there remained doubts amongst panelists, with Shane Harris, CEO, Jupiter Hotels, telling delegates: “I love innovation, but there’s a premium to be paid for innovation”.

He objected to claims that the traditional hotel sector was not innovative, stating: “The sector has already developed a number of sub-sectors. We don’t need new people coming in, we’ve already evolved. The hotel industry has been successful providing exciting and innovative experiences for many years. We’re not dinosaurs. Hotels will and always will be the best alternative for investors.”

Philip Lassman, development director, UK & Ireland, InterContinental Hotels Group, echoed his views, adding: “In general the traditional hotel market has kept pace quite well and is seen as a safe investment. Currently there is a huge pool of investors churning in the hotel sector which will mean good returns. The big brands are innovative – anything from technology to look and feel, traditional hotels have been innovative over the past few years.

“I am a big fan of aparthotels, but the bread and butter is the traditional hotel and that’s the safest place for your money. In time there will be greater understanding of aparthotels, but it’s not there. The brands do see a role, but it’s far too early.”
Harris said that, for investors: “There is more scope for demand across the UK for hotels rather than serviced apartments”.

Lassman made the case for the brands, adding: “We’ve had enough of boom and bust and we want to manage our risk and traditional hotels will continue to be the fastest growing segment. The brands exist to enhance your operational performance and they’re growing faster than ever through franchising. Traditional hotels are where the biggest pool of customers are and allying with the global brands gives you added security.”

Marcel Lindt, director, business development, EMEA, Frasers Hospitality, spoke out in favour of serviced apartments, describing them as “a good bet because you have a change of use option”. He added: “Cash-on-cash – extended stay is better than a hotel. But because hotels are more known to investors, investors are putting a risk premium to it”.

Prince agreed with Lindt, commenting that it was “very rare to see the building become redundant in alternative asset classes. There’s longer term resiliency and less depreciation.” 
Kett had the final word, pointing out that, with such a nascent industry, investors would need to see hard figures before committing. He said: “Data is going to be the key to getting the message out and the investment in”.

HA Perspective [by Chris Bown]: The alternatives are growing in stature, and time will tell how they divide-up the traditional hotel market. Serviced apartments, peer-to-peer sites and hostels are all offering a different vision for consumers wanting to stay away from home. Will they have much of an impact on the core hotel market?

One Norwegian delegate insisted that panellists were rearranging the deckchairs on the Titanic, while ignoring the iceberg that is Airbnb. And those hotel managers insisting they are not dinosaurs and have been innovative, are the same ones ignoring demands for better wifi. They do at least have the support of investors, most of whom are inherently conservative.

Metrics may be lacking, but the serviced apartment sector is seeing substantial interest from those who don’t have an investment committee to pass proposals by. Witness Starwood Capital purchasing the former Think serviced apartment portfolio in London recently, a GBP206m investment that puts close to 650 units in its hands. Oaktree Capital Management is keeping the wraps over its serviced apartment launch, due at IHIF Berlin in March, but is backing its commitment to the sector with GBP300m. Such momentum could see the sector finding sufficient scale to start really grabbing the attention, and the business of a more widespread band of hotel guests.

[Additional comment by Andrew Sangster]: There are two things driving the rise of “buildings with beds” that aren’t hotels: the hunt for yield and new distribution opportunities.

The yield story is driven by the extraordinary monetary experiment being conducted by governments around the world. Right now there are 10 governments who have negative yielding debt, according to analysts at Bank of America Merrill Lynch. In this low to zero to negative yield world, real estate is an increasingly attractive option.

With the European Central Bank now joining the Bank of England, the US Federal Reserve and the Bank of Japan in quantitative easing, there will be even more pressure on yields.

In addition, interest rates are at historically record low levels. And the net cost of debt is continuing to shrink as banks tighten margins and loosen lending standards (less of the latter so far but hard to see why it won’t change soon).

Interest rate expectations have shifted markedly in the past couple of years and now it seems highly unlikely that rates will normalise during this business cycle. Monetary Policy Committee members at the BoE have indicated that rates are at most only likely to rise by 0.5 percentage points a year.
In this environment, QE is set to stay in place and continue to be a huge boost to capital values of assets like property.

When this is coupled with the boost to income returns as the recovery finally kicks in and the immediate boost thanks to the oil price cut, it is readily apparent that the pressure on yields is only going to get worse in the next few years.

Hotels, once seen as exotic, are now widely regarded as a mainstream property asset class. Hence the desire for other operating assets that will yield a little more.

The other thing that is increasing the appeal of alternatives to investors is the developing ease with which these businesses can tap into new markets. The distribution revolution means customers can much more easily access buildings with beds other than hotels.

And this is not just the existing breed of online travel agents such as Expedia and Booking.com. A whole new group, such as Homestay.com, are acting as enablers for alternatives to have a share of the traditional hotel market.

What this means is that hotels are being caught in a pincer movement between the hunt for real estate and the hunt for customers.

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