The International Hotel Investment Forum (IHIF) is now less than three months away, March 6-8 at the InterContinental Berlin. This year's conference comes on the heels of an extraordinary year in the global hotel industry, marked by wide-scale consolidation, a distribution landscape pockmarked with confusion and complication, disruptive new technology and accommodation entries, a social and political landscape fraught with a growing current of nationalism and rise in nativism attitudes and elections that have proven to be a referendum on the status quo and the old guard.
It certainly is not the easiest environment for hospitality-related investment and development. Investors tend to like calm and assurance—not uncertainty. Still, opportunities exist, especially as the global economy strengthens and the prospects—at least in the U.S.—of tax reform that would be less egregious on corporations. Meanwhile, hotel brands continue to proliferate giving developers and travelers even more choice.
Ahead of the conference, we will be conducting Q&As with some of the world's most shrewd industry executives, beginning with Desmond Taljaard, the managing director of hotels, for London & Regional, the London-based investment group, which has a heavy focus on hotels. Taljaard, who prior to joining London & Regional, ran hotel acquisitions and asset management for all property classes for Starwood Capital Group in Europe, runs the hotels group for London & Regional, with global responsibility for all hotel acquisitions and asset management. In the last two years L+R has extended its hotel and related real estate interests into Cuba, Barbados, Cayman Islands, Spain and the UK, which now total over 6,500 rooms.
Here, we asked him his thoughts about 2017 and his biggest takeaways from 2016.
1. 2016 had so many storylines within the hotel industry. In your estimation, what was the biggest of them and how or will it carry over into 2017?
Taljaard: The Marriott and Starwood tie-up. It is a seismic shift in Marriott's global market influence.
Commentary: Indeed, Marriott's acquisition of Starwood, a deal that was completed in September, was as much a shock as it was a response to an industry that was in need of closing the ranks. In today's hospitality environment, power in numbers has never rang so true. With home-sharing sites, online travel agencies and the like nipping at the ankles of traditional hotel companies, growing scale is not only a defense mechanism but a parry against these disruptive forces. Marriott made a bold move, as did, for example, AccorHotels, which made a deal of its own in acquiring FRHI. Further M&A is expected in 2017 for an industry that—probably for too long—has been more fragmented compared to other global industries.
2. The hospitality industry operates in this mutable globally connected world—constantly disrupted with the likes of OTAs, home-sharing and whimsical customers. Taking all that into account, has it forced you to change your investment strategy?
Taljaard: We have moved far more up the operational risk curve, as we want to have more control over yield-management strategy, including use of OTAs, and margin profitability.
Commentary: L+R is fashioning itself as an active owner. Data suggest that hotel asset transactions will be less intense than in years prior, including a watershed year in 2015. There is a heightened buy-sell gap, which is prompting more owners to hold onto assets instead of disposing them. Such the case, it's imperative that while they hold onto these assets, that they vigilantly asset manage them to extract as much value as possible. Note: Taljaard and L+R have no compunction using OTAs to sell their rooms. This is against a backdrop where hotel companies have made large marketing efforts to drive customers to book direct. Will it make more of a dent in 2017?
3. How would you characterize the overall state of hotel investment and development on the European continent? Are soaring valuations in today’s frothy M&A environment making it difficult to find deals?
Taljaard: Some areas, for example the UK and Spain, still show potential for growth, so arguably valuations are justified. In other markets, for example France and The Benelux Union, growth potential is less obvious, so we have tended to steer away from such markets for now.
Commentary: In April, L+R acquired Atlas Hotels for a reported £575 million. Atlas was sold by Lone Star Funds and owns and operates 48 hotels in the UK, mostly under the Holiday Inn Express flag. Beyond the UK, L+R also acquired a resort in Cuba, in late 2015, and said it was looking invest $500 million in the development. In Spain, L+R owns the ME, Ibiza. Beyond that property, L+R's portfolio heavily slants toward the UK, save for a hotel in Barbados, two in Monte Carlo and one in Dublin, according to its website.
4. What will be your focus in 2017? Where do you see opportunity and what segments will deliver the highest yields?
Taljaard: Asset management and strategy execution.
Commentary: The brevity in Taljaard's answer drives back to his answer to question No. 2: Squeezing out as much profit from existing assets as possible. That strategy is a global one as, mentioned above, transaction volumes should slow in 2017.
5. What do you think will be the key storyline in 2017 that everyone will be talking about?
Taljaard: IHG being taken over.
Commentary: That is something that we have heard before. Back in late 2014, UK-based InterContinental Hotels Group was plagued by rumors and speculation that it was going to be acquired by another company—names like Starwood and Wyndham were thrown in as possible suitors, enamored by the manuever known as a tax inversion, wherein a U.S. company buys a foreign company and is therefore afforded that country's tax rate, usually lower than the U.S.'s relatively high 35-percent corporate rate. (Speculation is that President-elect Donald Trump might put an end to this move.)
Exactly two years later, Anbang, which owns the Waldorf Astoria in New York and also recently acquired the Strategic Hotels portfolio from Blackstone, denied rumors that it was looking at acquiring IHG. But while Anbang missed out on Starwood, could they be poised to make another attempt at acquiring a large hotel group? Are their pockets that deep, is the better question. In November 2015, Bloomberg did report that IHG was exploring a potential sale or merger—though nothing came of it. More than a year later, still nothing has. But that won't stop the rumor mill. As long as companies, like IHG, have activist shareholders, nothing is off the table. Taljaard believes 2017 will be the year IHG has a new owner.
6. Why do you come to a large hospitality investment-focused conference like IHIF and what do you look to walk away with?
Taljaard: It's the key meeting/network event in the European hotel investment market and because it's well-attended!
Commentary: In 2017, IHIF will be celebrating its 20th anniversary. The three-day event will be attended by over 2,000 hospitality and tourism decision-makers from over 70 countries.