Global hotel investment under the microscope at IHIF

(IHIF 2017)

The 20th International Hotel Investment Forum is underway at the Hotel InterContinental Berlin, Germany, with more than 2,000 delegates from more than 20 countries in attendance. 

Kerry Gumas, president and CEO of Questex, kicked the Forum off by explaining that the program for this year’s event would be split into three distinct days. The first day—Monday—would focus on rethinking hotel investment over the last 20 years, while the second would examine the various business models at work across the industry and the third would explore the innovations taking place within the hospitality sector.  

The Economic Outlook 

IHIF's investment-rich day one was launched by Roger Bootle, chairman of Capital Economics, who provided an overview of the state of the economy. Beginning his presentation by telling the crowd that the world economy is doing reasonably well, Bootle predicted that President Trump’s promise of an increase in spending and a reduction in taxes would lead to a surge in borrowing and an increase in government debt in the U.S. Bootle then outlined further uncertainties facing the U.S., including the rising dollar and whether or not Trump will be able to deliver on promises he made during his campaign. 

In the Eurozone, Bootle reported significant differences among the countries using the currency of the European Union. Ireland and Spain have shown particularly strong growth, while Italy by comparison has enjoyed little. “I can’t remember a time so fraught with political risk,” he said, noting various significant political events on the horizon. “If there is a fracturing in the Eurozone, it is likely to spread.” 

Looking at the UK, Bootle noted three-quarters of growth at a rate of 0.6 percent as one of the main reasons to be optimistic in the region—although inflation is increasing and earnings don’t look set to match this increase. This, he said, would “result in a squeeze on people’s real incomes.” The City of London in particular would “lose a bit of business and some jobs, but it will be marginal. Its position will remain strong.” 

Regarding Europe as a whole, Bootle argued that “the last thing Europe needs now is stability, because stability means stagnation,” and he concluded by stating that in his opinion “interest rates were going to go up sooner, further and faster” than widely predicted. 

20/20 Vision

The session “20/20 Vision: Looking Back 20 years, Looking Forward 20 Years,” saw host Michael Hirst, a consultant with CBRE Hotels, share a conversation with Alison Brittain, CEO of Whitbread and Richard Solomons, CEO of IHG. Both Brittain and Solomons hail from the banking industry, and both are also non-executive directors at M&S, giving them similar insights into travel's past, present and future. Both Brittain and Solomons agreed that the  challenges faced by any global franchise business are similar, and therefore there were lessons to learn from the retail industry in order to succeed in the future. 

When asked about the significant changes IHG has faced over the last 20 years, Solomons said the decision to adopt an asset-light approach had been one which was “partly about returns but a lot about focus.” He also said that the technology change was huge—and, thirdly, that there was now a real focus on guests. This, he said, was how IHG was developing its brands, and the company has seen its highest number of openings since 2007/2008. “It’s really important we continue to have brands that stand for something,” Solomons said. “We don’t want another ‘me, too’ brand—it’s got to deliver something to the marketplace”. 

When asked what the biggest changes coming to the industry will be over the next 20 years, both panelists referred to technology, but Brittain specifically highlighted artificial intelligence and robotics. Solomons is focused on the mobile realm for the near future, a strategy that has worked for the company, helping it grow its mobile business from $0 – $1.6 million in five years. “Technology lets you own the guests,” Solomons said.

European markets that operate similarly to the UK are prime growth prospects for Whitbread, and Germany is a key focus. Brittain felt that the company was never going to the get to the scale required to operate effectively in Asia, causing the company to pull out of the region. By comparison, 10 percent of IHG’s pipeline is Europe, specifically Germany, the UK and Russia, and China has been earmarked as a key growth market for the company. “We have cycles, we have ups and downs, and what is really important is taking a long-term view,” Solomons said. 

Hotel Investment Today

“Hotel Investment Today” focused on presentations from industry experts. Robin Rossman, managing director at STR, provided the hotel performance trends, finding that last year had been positive in general in terms of RevPAR growth, though locations that had been affected by terrorism were clearly visible and suffering. Hot markets throughout 2017 are set to include Amsterdam, Barcelona, Dublin and Madrid, while recovery markets that are seeing stabilization include Brussels, Moscow, Paris and Milan. Meanwhile, oversupply is affecting London, Edinburgh, Manchester and Frankfurt, and demand significantly outpaces supply in Barcelona.

Jamie Chappell, global business director, Horwath HTL, provided delegates with insight on hotel investment in the global economic and political climate. According to Chappell, 2016 was the third-strongest year on record in terms of hotel transactions for the company. “Banks are still lending, private equity is dropping off but we’re seeing a significant increase in funds, particularly in Europe, who are chasing after assets,” Chappell said.

Andreas Scriven, international managing director and managing director consultancy, Christie & Co, discussed consolidation and M&A activity, noting that “hotel development will shift from mature to emerging markets.” Scriven's other insights included expectations for future capital investments coming from Asia and the Middle East as fuel for M&A deals, as well as pressure from industry disruptors. Lastly, he foresees a transformation in booking behavior with major investment requirements, warning "there is no end in sight for consolidation.” 

Philip Ward, CEO of hotels and hospitality group EMEA, JLL, concluded the presentations with insight into cross-border investment. “China has increased investment in the hospitality sector by 80 percent from 2012 to 2016,” he said, and urged attendees to “remember these global trends have been positive.” He felt there was renewed interest in the hospitality industry from the Middle East—particularly upscale, luxury assets in major markets. He also said that U.S. funds were showing an interest in the UK and Spain, and that overall there was “strong appetite and strong demand, a very positive outlook.”

Rossman predicted that alternative accommodation, including hostels, would be the most significant change to the hospitality industry in the next 20 years. Scriven noted the resilience of the sector and how it reinvents and reincarnates itself continuously. Ward noted that “the emergence of hotels as a mainstream real estate asset and the development of lodging REITs” has been one of the most significant changes to the industry over the past 20 years.  

The second annual HAMA Europe 2017 Asset Management Achievement Award was then presented to Chris Pfohl from Pyramid Hotel Group, and Angelo Gordon by Theodor Kubak, president, HAMA Europe Chapter, senior investment manager, Union Investment, and Chad Sorensen, partner, CHMWarnick.

Investors on the Spot

The next session, “Investors on the Spot: Updating the Fundamentals of hotel Investment,” was moderated by Nick van Marken, global head – hospitality, Deloitte in conversation with Coley Brenan, partner, head of Europe, KSL Capital Partners; Zachary Schwartz, VP of European hotels, Cerberus Capital; Sanjay Singh, MD, Fico Corporation; and Desmond Taljaard, MD – Hotels, London & Regional. 

The session started on a positive note with Singh saying he was “reasonably confident in the UK as an investment target for the next six-12 months’ time.” Taljaard said the EU referendum results in the UK created a “fourth-quarter dip as people started to get nervous,” but this had now stabilized.

When asked about the importance of a brand, Taljaard said that he would flip the question around and ask, “What value the brand can bring to the hotel?” The economics of branding, he said, would start to be questioned, but “if brands can find a way to keep the costs of the value they add in balance then there would be a place for them.” 

The debate turned to the OTAs, and Taljaard said that people needed “a lot more weaponry” in the war with OTAs.

Lifetime Achievement

The next session saw the presentation of the IHIF Lifetime Achievement Award 2017 to Arne Sorenson, president and CEO, Marriott International, followed by an interview with Tanya Beckett, business journalist and broadcaster. After receiving his award, Beckett asked Sorenson about the recent acquisition of Starwood by Marriott. Sorenson said the deal was “a starting point for something we have to build. We need to create something better, not just bigger, than what there was before.” The key driver for the acquisition, he said, was a need to create an “ecosystem of loyal customers with whom we can develop great relationships which would allow us to protect and grow our business.”

Marriott has 90,000 hotel rooms scheduled to open in 2017 and currently runs a $250-billion property portfolio across 30 brands. Asked about the biggest threat to the industry, Sorenson cited “the global wave of populism,” and said that Hillary Clinton lost the U.S. election more than Donald Trump won it. Sorenson has a “strong sense that immigration and refugees is not an area we have consensus on,” and he is nervous of the trend that “too many countries in the world, including my own, are turning too far inward.” He emphasized the need to communicate that people are welcome to the U.S., and noted that 10 percent of the country’s GDP is driven by travel.

The Next 20 Years

The following session, titled “The Next 20 Years: A Collective Look at the Hospitality Investment Landscape,” was\moderated by Cameron Cartmell and included Jim Abrahamson, chairman and CEO, Interstate Hotels & Resorts; Cody Bradshaw, SVP and head of European hotels, Starwood Capital Group; Tim Helliwell, head of hotels, Barclays Bank; and Hubert Viriot, CEO, Yotel. 

As the panel began, Bradshaw said hotel brands need to take an overhead-light and asset-light approach for the future. “Cost synergies are subsidizing many of these deals, but there's no trickle-down in cost savings to owners," he said. "My prediction is that Google is going to be a real disruptor in this space. In the next 20 years, something has got to give—the brand fees are not that different to the OTA fees.” 

Monday closed with Bradshaw examining the strength of the millennial buyer, stating that while millennials have helped shape the industry they come baggage holding them back from turning into the golden goose the industry deserves. Specifically, bradshaw said millennials have “significantly less disposal income than previous generations due to high levels of student debt,” hampering their buying power. 

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