• Sector bullish as it battles disruptors

The hotel sector was established as an investment class and was confident of riding the growth in global travel through a downturn, delegates at the International Hotel Investment Forum in Berlin were told.
Disruptors such as Airbnb and Oyo were largely not felt to be a threat according to most speakers at the early March event, as the sector looked to growth in brands and loyalty programmes to help them weather any impact.
Chris Day, global managing director, Christie &Co, described the hotel sector as having “come of age” with 49% of investors into deals last year coming from the institutions. He added: “Office and retail sectors are in turmoil. These markets and been disrupted, while hotels are playing a greater part in diversifying portfolios. The availability and the low cost of funding are having a positive impact and ground lease transactions are fuelling the released of equity without loss of control.”
Cody Bradshaw, managing director and head of hotels, Starwood Capital, agreed, commenting: “The equity volatility means that bricks and mortar real estate looks quite interesting.” Competition for assets was, he said, strong, even in the UK where the imminent exit from the EU was provoking caution in some.
Bradshaw was confident that the sector as a whole was robust enough to survive the impact of the sharing economy, commenting: “Here we were supposed to be dying because of Airbnb, yet Airbnb achieved staggering growth rates and hotels are seeing fantastic occupancy and it’s retail which is suffering. So we survived the great disruptor.”
The operators were similarly confident, with Sonia Cheng, CEO Rosewood Hotel Group, telling delegates “Airbnb and the sharing economy will not have an impact on us because we are non-traditional. We should thank Airbnb because it has opened up the eyes of the hotel industry to point out that they want authenticity. Brands like us, which innovate, which standout, will do well in a downturn. Consumers will come to us rather than Airbnb.”
David Kong, Best Western CEO, said: “Homesharing has been around for many years but the Airbnb marketing message has made it hip. They have significantly reduced occupancy and reduced our profitability. The industry should wise up on how we market our industry, because we offer so much more and we are a different type of experience altogether.”
Airbnb was not the only disruptor under discussion, with Robin Rossmann, managing director, STR, describing the growth of Oyo. He said: “A new disruptor has entered the fray and is the eighth largest hotel group by number of rooms in 2019. Their focus is smaller unbranded rooms, less than 100 brands but really around 30 rooms. They are doing something different to franchise hotels – all hotels are required to give 100% of their pricing control to Oyo, which gives them total control.”
The familiar issue of brands against owners was raised by Bradshaw, who felt that owners were missing out in the current round of M&A. He said: “It’s not as though this consolidation is going to be passed down to owners, it’s being kept as synergies. These companies are all public and they are under huge pressure to get into as many locations as possible, against improving profitability for owners.”
Christophe Vielle, CEO, Gaw Capital Partners, added; “I don’t think the big five buying everything is helpful for us. It’s an issue, I’m not happy with that.”
Despite the pair’s reservations, the brands continued with proliferate, with Accor announcing two during the event: Tribe and The House of Originals. Rossmann said: “If you look at every single hotel property which had opened over the last 50 years, currently two branded hotels open up for every unbranded hotels. Owners are choosing more brands than unbranded.”
The sector was, however, seen as being more comfortable with the online travel agents, than in past years, with Sébastien Bazin, chairman & CEO, Accor, telling the event: “Five years ago everyone wanted me to admit that we were in a fight with the OTAs, but I’m not scared about my relationship with Expedia, it’s sophisticated and I get what want.”
In conversation with Bazin, Mark Okerstrom, CEO, Expedia Group, talked what kept him awake at night: “We think a lot about Google, we think a lot about Facebook. Any time someone sits on a broader mountain than you, you have to be careful. They have a lot of what consumers want has everyone in the world and hundreds of millions if not billions of eyeballs, telling Google what they like and what they want.”

HA Perspective [by Katherine Doggrell]: Bullish didn’t really begin to touch the sides at IHIF this year, with the message from the stage being that nothing was going to stop the sector now. Money flooding in, brands flooding out and the seemingly endless wave of people eager to travel buoying the whole jamboree along.
It wasn’t possible to go more than an hour without the launch of a new flag and/or a CEO talking about how they weren’t afraid of Airbnb/Oyo/the big bad wolf and it was onwards, forever upwards.
On the sidelines, brokers were whispering that this might not be the greatest time to buy, maybe and the owners were certainly not holding back from pointing out that they felt ever-more marginalised as the operators got larger and their pipeline obsession grew as much as their empire-building aspirations.
The fight for better alignment will only sharpen in the downturn, as owners and investors find themselves being more keenly courted by those who need to keep their shareholders happy. Accor was eagerly touting its new loyalty programme, but also talking about how, with a focus on management contracts rather than franchises, it was more in touch with the owners than some of its global rivals. Bazin talked about how investors were sometimes mystified by the company’s diversification in recent years, as he built an ecosystem to drive constant contact with the Accor customer.
The more owners are required to invest in loyalty and shareholders are told that a stake in a concierge company is a must have, the more the brands will have to think about their relationship with their other customers, the ones who put them on the map.

Additional comment [by Andrew Sangster]: Has the hotel sector detached entirely from the vicissitudes of the business cycle? While the correlation has historically been over exaggerated, it would be a brave assumption to believe that economic downturns have no impact.
In Europe, we are now clearly in a downturn. Italy is in recession, Germany missed entering a recession in the final quarter of last year by the narrowest of margins, and growth in France slumped to the slowest rate since 2016 with the final quarter seeing a year-on-year expansion of just 0.9%. In the UK GDP growth was just 0.2% for the fourth quarter.
In addition to this, the pipeline for new hotels (room count opening this year as a percentage of total supply) is at, in many territories, the highest level for a decade according to STR. In Germany it is at double digits across many of the main cities including Berlin, Frankfurt, Hamburg and Munich. In the UK it is 4% in London and higher in many other key cities notably Edinburgh (10%), Manchester (7%), Liverpool (7%) and Leeds (6%). Elsewhere in Europe, the pipeline picture is similarly one that exceeds growth in demand: Amsterdam, for example, is at nearly 8%.
It is possible to be optimistic about the industry in spite of the challenging economic headwinds but if there is also challenging supply issues then I fear that the optimism on display at IHIF is misplaced. Factor in the political landscape which has Brexit and a rising tide of populism across Europe which is anything but conducive to the growth of travel and tourism, then you have reason to be gloomy.
Start adding in the cost challenges facing operators – labour and distribution are two obvious examples – and it is a very challenging outlook indeed.
The crowd at Berlin is mostly deal makers and not surprisingly they tend towards the sunny side. And there are certainly deals happening, and about to happen, which reinforces this confidence.
But this has the feel of peak market. A big crash does not look likely but a significant softening over the next couple of years seems probable.

 

Image: Sébastien Bazin and Mark Okerstrom

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