Competition in the European hospitality space can be chalked up to three major trends, Chris Day, global managing director of Christie & Co., believes: an appetite for leases (particularly from the increasing number of younger brands looking to expand), strong transactional values and compressed yields.
Compressed yields, he said, are a challenge for opportunistic investors searching for high returns to find appropriate markets, Day said, which brings about questions about whether or not the investment cycle has reached its peak.
On the first day of the upcoming International Hotel Investment Forum (IHIF) in Berlin, Day will be part of a panel entitled “Follow the Money,” in which he and several analysts will share their views on the hospitality investment landscape, latest transaction trends and deal structures. Ahead of the conference, we spoke with Day about some of the biggest trends impacting the industry.
1. What hospitality trends and storylines will dominate discussion at IHIF and why?
There are four big trends:
- More appetite for leases. Brands, and particularly young brands, are now keen to take on leases to expand in a very competitive market. Owners are still very interested by leases.
- Compressed yields. It's more and more difficult to find markets for opportunistic investors looking for high returns.
- There are divided opinions on the investment cycle between investors who believe we are at the peak of the market, and others who still believe there are a few years to go.
- Strong transactional volumes despite restrictions on Chinese capital—is this sustainable?
2. What are the markets/countries that you looking at for future development and what makes them an attractive investment?
An attractive investment depends on risk profile, long-term performance uplift outlook, good infrastructure, a fairly liquid and transparent market, investment return and stable income; the increased appetite for leases will please investors. Spain continues to shine as a hot spot for future development, while the UK remains attractive and France is starting to make a comeback. The Scandinavian market is still proving difficult to penetrate although increased interest in leases may lead to a shift in these markets.
As a company, we see lot of focus on the UK and Ireland, Spain, France, Germany, Poland, Finland and Scandinavia. France is definitely coming back, with some sort of a “Macron effect,” and the UK is still very attractive, as proven by the multiple portfolio transactions that have/are taken place in 2017 with capital flowing from North America, Asia, but also European investors. Spain is still a hot spot but very competitive for the right opportunities, and Scandinavia is still very difficult to penetrate although the increased appetite for leases may make a difference in these markets
An attractive investment depends on your risk profile, but you want a long-term performance uplift outlook, good infrastructure in place and more to come, a fairly liquid and transparent market, return on investment opportunities for opportunistic investors and fairly stable income for the institutional investors (again, the increased appetite for leases will please this type of investors).
3. With so many brands in the marketplace, what makes them a success and are they differentiated enough in the market? Do both customers and developers understand the differences?
Hotel groups are now marketing companies rather than operators and owners, thus their core expertise is selling brands. The more products they have, the more hotels they believe they can brand. Furthermore, it is sometimes easier to convince owners to brand their property with a shiny new brand rather than make them invest in the new generation of an older brand, which typically requires a fair amount of investment as well.
Hotel groups have become experts at selling brands, but location inevitably differentiates a hotel group in the market place. The number of brands may be overwhelming for the majority of guests and a developer would be wise to consider development value versus costs, as opposed to solely the brand.
Hotel brands are not differentiated enough in the market. At the end of the day, it’s down to who secures the best location for their customers.
Savvy, regular travelers will learn to spot the differences between brands but the majority of guests may be overwhelmed by the number of brands out there, with the exception of those who really bring something different to the market (e.g. AccorHotels' Jo and Joe with their hostel product, and Kimpton with their emphasis on F&B).
For developers, the rationale behind choosing a brand remains very much linked to the gross development value versus development costs rather than the brand itself. Brands like CitizenM or Hoxton, who manage to sell rooms for upscale rates with budget room sizes, are interesting for developers. Interestingly, both brands are part of an owner-developer-operator business model rather than franchise or management models.
4. What are the strategies hotels are employing now to boost revenue and curb costs?
On the cost side, check-in automation, multi-skilled staff (e.g. receptionist is also barman), outsourcing, renting out F&B space for better profit margins and pushing guests to make as many decisions as possible before checking in to reduce staff interaction on arrival (e.g. choose room temperature).
On the revenue side, [there’s been a] big focus on F&B in recent years, and trying to get guests out of the room and spending more time in communal spaces where they consume more F&B. Also, hotel are incentivizing guests to book direct to minimize OTA costs (incentives such as complimentary drinks, points, member rates etc.).
5. How has the role of new technology, home-sharing disruption and online travel agencies impacted your business?
The industry is finally utilizing technology to its advantage, bringing unprecedented transparency to the market and pushing hotels to improve service levels. Owners are trying to find solutions to mitigate costs, spend CapEx smartly and at the right time and attract guests direct.
For the industry, [we see] some positive consequences as the industry is finally moving slightly faster in terms of technology. Booking.com and TripAdvisor are providing unprecedented transparency to the market, pushing hotels to improve service levels and really be focused on the costumer.
6. What has been keeping you busy in the past year and what will you be focusing on in the year to come?
Mostly due diligence work for the numerous portfolios that are—and have been—changing hands, and a lot of development advice activity as well in the UK. Next year, we expect more due diligence as new portfolios are launching, as well as operational reviews to mitigate increasing costs and potential threats and opportunities surrounding Brexit.
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