At the Mediterranean Resort & Hotel Real Estate Forum, Nov. 30-Dec. 2, in Barcelona, Philip Bacon, the director of planning, development and valuations for Horwath HTL, will moderate a panel on developing and managing mixed-use resorts. Topics will include getting the right component mix to draw tourists and buyers to a project that generates a positive ROI; assessing the importance of the various components, from residential and leisure to spa and sport developments; considering place-making when developing mixed-use resorts; and taking seasonality into account: how it affects development and management of hotels
In this Q&A, Bacon discusses the overall investment and development landscape among the Med region, where deals are flowing, the impact from Brexit and what the key issues people will be talking about in 2017.
1) How would you characterize overall the state of hotel investment and development in the Mediterranean region?
Acceptance of the post-Lehman reality, economic growth for some key outbound markets and geo-political uncertainty still characterize the market in the Mediterranean. In addition, large global investment funds are focused on achieving desired returns in a low-interest, low-inflation environment. The potential yields of hotels and of associated residential real estate are therefore very attractive.
Moreover, banks are finally waking up to the idea that they need to lend for new development projects as well as find solutions for many failed projects that still have some upside potential, but that also need life breathed into them. Inherent real estate value is a myth for many, especially in the resort market. Investment return comes from creating added value for the customer, not from building design-driven architectural White Elephants.
The perfect world of the existing, high-quality property that has significant upside but that is available at a so-called “distressed” price, simply does not exist in the volumes that the investor market wants. Supply of good properties available for sale is limited. Consumers are more demanding. Competition from the so-called disruptors (who are now mainstream) is fierce. The demographic shifts are significant. New products are needed and the industry must rise to the challenge.
2) In what countries and cities are we seeing the most amount of investment activity and why? Where are we seeing the least?
In the regions where we are focused, this is driven by appetite, the profile of individual investors and, to some extent, by the marketing message sent out for different regions. Spain is in the spotlight, as is Portugal. The former is enjoying the bounty of record tourism arrivals and a range of destinations that offers something for virtually everyone. Residential volumes have increased as the ever-present demand for a home in the sun has been met with a more pragmatic approach to pricing. Island destinations, in particular The Balearic Islands and The Canary Islands, are benefiting from the natural supply constraints provided by nature, helping both the hotel and the residential markets.
Portugal is also benefiting from a resurgence in consumer demand, the investment market has returned, helped by the Golden Visa program (a fast track for investors to obtain a fully valid residency permit in Portugal), and up-to-date interpretation of the second home sale and leaseback product.
3) How has the Brexit and other recent instability impacted hotel investment and development?
Brexit has created uncertainty and not much else—if you assume that the devaluation of sterling will be relatively easily absorbed by the markets. Uncertainty affects different people in different ways, mainly related to their perception of risk. Some welcome uncertainty and there are opportunities to be exploited, but at the same time, the more risk-averse may shelve plans or defer their execution for a while. In the meantime, life goes on. People still take holidays; businesses continues to trade; and investors continue to demand returns.
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4) What are the key considerations for investors when looking at mixed-use resorts in the Mediterranean? What are the essential components for a successful resort?
The Right Stuff:
- Place (not just any place, a place with a story to be told)
- Land (with the right views and preferably not at a prohibitive cost)
- Scale (in line with proper market depth analysis)
- Phasing (without undue disruption of the resort experience)
- Authentic experiences (this is what people buy, not suites or square meters)
- Business model mix (balance risk with reward, build in a fall-back position)
- Marketing strategy (as always, know your customer today and your customer of tomorrow)
- Legal structure (be conscious of overlapping interests of all stakeholders)
- Financing structure (adequate equity and debt structured in line with business model risk)
- Operators (choose your brands carefully, all have both strengths and weaknesses)
5) As we move into 2017, what are the key issues people will be talking about as it relates to hospitality investment?
- How to differentiate in the eyes of the consumer through investment in new and improved products and still make money
- How to deal with the impact of non-traditional hotel products
- How to find higher returns on capital in the current economic environment
- How to manage more effectively and spread the risk between ownership and operator
- How to finance new development and manage development risk
6) Which companies/brands do you think are being particularly dynamic/innovative in the Mediterranean?
There is an increasing divide between the mainstream branded operators and the product-driven, destination-driven independents. The distribution platforms available today, coupled with intelligent PR and communication strategies, allow businesses to reach their target audience with greater efficiency and effectiveness than ever before. The creation of a true identity and an honest, transparent product offering focused on value for money, at whatever level, whether €100 or €1000 per night, is what will attract sustainable demand. These are the companies and brands that will continue to succeed in this region.
7) What do you look forward to most at MR&H this year?
The chance to find out what I can learn from other players and other regions.
8) Outside the conference, what will you be doing in Barcelona? Any tips of places to see/things to do for other attendees?
I will try to visit some of the more recently-opened hotels like The Cotton House and The Monument.
The Mediterranean Resort & Hotel Real Estate Forum is Nov. 30-Dec. 2 at the Fairmont Rey Juan Carlos in Barcelona. Click HERE for more information on the conference, the agenda and speakers and how to register.