Global investment a tale of two cities

Global hotel company CEOs shared their takes on international trends in financing and franchising during the International Hotel Investment Forum. Panelists were (from left): Jim Abrahamson, president and CEO of Interstate Hotels & Resorts; Sébastien Bazin, chairman and CEO of Accor; Henri Giscard D’Estaing, chairman and CEO of Club Méditerranée; and Michael Glennie, president and COO of FRHI Hotels & Resorts.Pictured: Global hotel company CEOs shared their takes on international trends in financing and franchising during the International Hotel Investment Forum. Panelists were (from left): Jim Abrahamson, president and CEO of Interstate Hotels & Resorts; Sébastien Bazin, chairman and CEO of Accor; Henri Giscard D’Estaing, chairman and CEO of Club Méditerranée; and Michael Glennie, president and COO of FRHI Hotels & Resorts.

International Report – Give or take specific market fluctuations, U.S. hoteliers and investors are accustomed to industry recovery defined by some general parameters—overall low supply and high demand, plus a general loosening in financing—but beyond U.S. borders it is difficult to paint such a large landscape with broad brush strokes. Still, the picture of recovery beyond the Americas is turning into a study of Europe vs. everyone else.

This year’s International Hotel Investment Forum in Berlin drew more than 2,000 delegates who delved into the specifics of what’s driving international hotel investment growth—or in some cases, what is holding it back. Many of the economists and investors who addressed attendees at IHIF agreed that while European Union recovery is in many ways mirroring U.S. recovery, industry health in emerging markets is not as strong as some have predicted, at least for now.

EU RECOVERY

Compared to one year ago, “the hotel investment landscape in the EU is more upbeat,” said Chris Day, managing director for Christie & Co. He cited several hotel portfolios and assets expected to trade this year, and said interest in investment, particularly in the UK, Germany and France, would continue its upward wave.

Chris Day, managing director for Christie + Co., said Europe’s transactions outlook is strong, and many investor types are interested in hotel deals.Pictured: Chris Day, managing director for Christie + Co., said Europe’s transactions outlook is strong, and many investor types are interested in hotel deals.

As far as investors into these developed countries are concerned, Day said it’s a multifaceted mix led by private investors, fortified by sovereign wealth, high-net-worth individuals and even real estate investment trusts.

Jim Risoleo, EVP and managing director of Europe for Host Hotels & Resorts, said Host is one of those companies actively looking to invest in Germany, the Nordics and Spain, and predicts the next few years will be key acquisition years. “As banks start to liquidate bank-owned portfolios over the next two to three years, these assets will come to market one way or another,” he said. “What’s key though is that we buy at the right point in the cycle. We have to be sure underwriting gives us a premium over our cost of capital.”

Michael Fishbin, global and Americas director for hospitality and leisure at Ernst & Young, said many of those buyers could be U.S.-based private equity investors. “These investors seek to broaden their portfolios,” he said. “Gateway city acquisitions will definitely be top-of-mind, but there’s a renewed interest in secondary and resort markets. These investors have an improved confidence in Europe.”

EMERGING MARKETS

While hotel investment in emerging markets has been a buzz phrase since the recession ended, talk has been largely theoretical. Now performance and economic trend data for countries like Brazil, South Africa and Indonesia are emerging that show a somewhat less stable overall picture.

David Fenton, senior economist for RBS Group, cautioned that full recovery for Europe and beyond will be positive, but a rocky ride.Pictured: David Fenton, senior economist for RBS Group, cautioned that full recovery for Europe and beyond will be positive, but a rocky ride.

“We’ve seen a painful correction [of forecasts in emerging markets],” said David Fenton, senior economist for RBS Group. “Almost to the day that [former chairman of the Federal Reserve] Ben Bernanke started talking about tapering quantitative easing, we saw a fundamental re-appraisal of the risk level in emerging markets.”

This signals a slowdown of “the days of turbo-charged growth” Fenton said the industry saw in these markets over the last five years. “For most of the past 10 years, a presence in these markets was a prerequisite for any good company. Now everyone’s getting jittery,” he said.

Those jitters are concentrated on the investment side, he said. “Developers are asking themselves, what are these countries emerging into? Is there a clear sense of commercial success? Is there good government?” Without the right structural foundation, hotel investment in some of these countries doesn’t make sense. “Poorer countries are focused on commodities like food, energy and copper,” he said. Depending on income levels, consumers tend to dial their spending habits up: Once food and energy needs are met, they turn to spending on durables. Once those needs are met, they spend on services, like travel.

 “There’s terrific opportunity in emerging markets, but there’s a lot investors have to get their heads around first,” he said. “For example, China and India are entering the age of durables, so their focus isn’t yet on travel. The effect on travel and hotels will be huge, but just not yet.”

Fundamentals are strong, so European hotels must see rate hikes, forecasters say

On the operating fundamentals side, increased international travel continues to drive demand and revenue per available room growth around much of the world, according to Elizabeth Winkle, managing director of STR Global.

In 2013, demand growth outpaced supply in all regions except for Africa, where demand plummeted sharply. In Asia, demand only slightly outgrew supply, owing in some part to China’s significant supply growth over the past five years, Winkle said, plus a general slowdown in that country’s general economy.

Demand growth is particularly unprecedented across Europe. “We’ve sold more rooms than ever before in Europe and the past 46 of 49 months have shown positive demand growth,” she said. That demand is growing in each chain scale segment, resulting in strong occupancy numbers, but still muted rate growth.

“Europe is still struggling in pricing, which is having a strong effect on RevPAR,” Winkle said. In 2013, RevPAR in Europe finished at just 1.7-percent growth, while ADR dropped in each segment except for luxury, where it remained static year over year.

Still, Winkle said some of this trending is natural. “Typically occupancy leads rate by about six to nine months before pricing power returns,” she said. “The expectation is that on the back of strong 2013 occupancy growth we’ll see confidence to yield more effectively.”

As a result, she said the time is now to raise rates in Europe. “If we don’t start to price more effectively in 2014, we miss the opportunity,” she said.

Jim Abrahamson, president and CEO of Interstate Hotels & Resorts, which manages 83 hotels across Europe, agreed that operating fundamentals were strong in 2013 for its European portfolio.

While he said that hotel economics in Europe are “a little challenging right now,” opportunity abounds. “We’re growing faster in Europe than we are in the U.S.,” he said, attributing a large part of that growth to “branded boutique-style, select-service hotels in business-oriented markets in Europe.” 

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