Delegates at the Hot.E investment conference were in confident mood, shaking off the recent demise of tour group Thomas Cook, and the UK government’s continuing chicanery over its Brexit negotiations.
Several still see London as their favourite market for investment, while there are no concerns over the availability of funds. While innovators such as Oyo continue to provide threats to disrupt, Airbnb and indeed the OTAs are increasingly seen as part of the established accommodation landscape. And as ever the event’s experts’ panel provided a lively forum in which concerns of the moment were raised.
Financial engineering continues to impact on hotel investment. Ground rents, which are growing in popularity despite concerns over their long term impact, were debated by experts from IHIC. Desmond Taljaard, managing director of London & Regional Hotels, was unrepentant about liking the look of them as a way to release funds, commenting “economics trumps emotion”. And so they work, for now, “but no one knows what the year 10 or year 20 position looks like.”
Marvin Rust, head of tax Europe at Alvarez & Marsal, declared himself too unconvinced by what happens to ground rent deals ultimately. “Economically, in the short to medium term, it works. The problem I have with it, when we ran the models, it went bust in year 59.”
And, speaking on a private equity panel, JLL’s head of global mergers and acquisitions, Tony Ryan, said that leases are about to be rewritten, to accommodate revised accounting standards. With leases written up as a liability on corporate balance sheets, he predicted shorter terms, or leases with break clauses – as only the period to the break creates the liability. He also suggested that, as the liability attaches only to the fixed element of a lease, here is an opportunity for more landlords and tenants to move to flexible leases, with a top variable slice reflecting on the hotel’s performance.
There remains no shortage of funds to invest into the accommodation marketplace. Steffen Doyle, managing director at Credit Suisse confirmed: “Debt has never been so hot. I do think we’re going to see further consolidation in the market.”
The private equity buyers, too, confirmed they have plenty of funds to deploy. Dominic Seely, director of acquisitions at Westmont Hospitality and Peter Ebertz, managing partner at Art-Invest Real Estate, both favour the Italian hotel marketplace as presenting opportunities, though domestic banks still seem slow to sell on non-performing assets. Seely has also been working on investments in Morocco.
Stephane Obadia, development director at Algonquin, which now has the backing of Schroders, continues to be confident of returns from European hotels, with his group planning a fund to add further investments this year and next. When asked where they would spend a notional EUR75m, London was the most mentioned destination, with the PE investors confident of its medium term returns – as well as having an eye on how cheap it appears, thanks to sterling’s weakness.
While those on the experts panel like the idea of some new brands, they said that finessing their value was a tougher proposition.
Doyle confessed himself impressed by Accor’s new Greet brand, tapping into sustainability: “I saw the trend, and I thought that’s impressive.” While Scott Woroch, managing director of Kadenwood Partners, noted there was a backlash against overly strong brand control: “A lot of consumers are wanting to avoid the big brands’ sameness.” He called out IHG, for keeping its Kimpton and Six Senses acquisitions at arms’ length. “That kind of resonates with customers.”
Doyle noted that brands can still command significant value, particularly at the luxury end of the market. B&B sold on 16 times, while he noted Belmond was bought by LMVH on a 23 times multiple.
But there was a warning about naively falling for the brand story, from Taljaard. “Currently, brands are worth less than shareholders think they’re worth. But there’s a brand paradox” in that it can be difficult to deflag a branded property.
“When we buy a hotel that’s unbranded, we try to do the maths.” Taljaard said he had calculated that, once all the fees and charges of the brands had been added up, he would typically need 18% revenue growth, just to cover those costs. “We changed our minds recently on two acquisitions, which we were about to brand – but it’s very location-specific.”
One brand making itself known increasingly is Oyo. The well-backed Indian startup has expanded across several international territories, and into a variety of accommodation formats, even recently buying the former Hooters hotel in Las Vegas. Jeremy Sanders, its UK head, said the core business is in his territory is to partner with independent hotels: “It’s a franchise – we offer our technology, revenue management, we will also offer them operational support, and then we offer investment.”
“The biggest challenge is, we offer a great deal, but it’s an unknown brand.” With a team of 350 in the UK, Sanders promised “our strength is our speed”, saying they are ready to act, “provided the owners are ready to move the story on.” Credit Suisse’s Doyle, who is doing a fundraise for the fast-growing group, confirmed: “Oyo is really hoovering the independents up.”
HA Perspective [by Chris Bown]: Those with UK-oriented businesses keep having their eyes and ears drawn to the latest shenanigans of the mop-headed truth economiser Boris Johnson – known as British prime minister, at the time of writing.In contrast, it seems from conversations at HotE that those with international interests in the hotel world simply think of Brexit as a little local squabble that’s unlikely to impact substantially on their businesses. So, let’s get on. Oh, and London continues to be an attractive world city that’s a great hotel investment destination, with the added bonus of everything being cheaper than it was six months ago.Internationally, hotel investors are eyeing opportunities in Italy – great if you can really find the family who owns the assets – and Greece – just so long as you are really, really patient. Others, such as Westmont, are looking to northern Africa for their opportunities. There’s no shortage of funds, or appetite for investment.Among those keeping the mood positive were Zleep’s Peter Haaber, itching to reveal a slew of new European signings thanks to the support of partner Deutsche Hospitality; and Navneet Bali, hot foot from another presentation by an interested Meininger bidder.