Confidence in a recovering market European Hotel Market Survey 2014 Contents
Foreword...... 01 Overview of our European Hotel Market Survey 2014: Top ten highlights...... 02 Top ten highlights...... 04 Current trends in the hotel sector...... 10 Industry leader’s insights: Josh Wyatt...... 12 Industry leader’s insights: Philippe Bijaoui...... 16 Industry leaders’ insights: Diane Scott and Tony Burnell...... 18
Our research was carried out in January/ February 2014 and is based on data from over 400 online interviews with a cross-section of hotel industry professionals based in over 20 countries worldwide.
Any unattributed quotes which feature in this report were made by respondents to our survey. Berwin Leighton Paisner LLP
Foreword
Does 2014 herald a new dawn for the hotel sector? Certainly enthusiasm is running high for the majority of our respondents as the caution of the past few years gives way to hope that I am delighted to present the improved trading seen in many European locations will the results of our survey stick and that a bankable recovery will set in. Over 97% of our respondents predicted growth in European REVPAR over of over 400 respondents the next 12 months. This confidence is however measured, from the hotel sector with 63% of respondents expressing continuing concern over – investors, lenders, the stability of the Eurozone. There is also some debate as to owners, operators, whether this recovery will be long-lasting, with a number of our respondents predicting that the present momentum will developers and advisers. not be sustained beyond the next 12 to 24 months.
In addition to the current buoyancy in the European market, we are seeing increased optimism and an uptick in development in the wider emerging markets, notably Africa and South East Asia.
As well as setting out the top ten market highlights from our survey, we have included in this report the thoughts of our respondents on some of the customer-facing trends in the sector – namely the drive to provide more of a personal service to hotel guests, the desire to capture the Millennials market and the threat – or otherwise – presented by the upsurge of holiday rental online booking sites.
Finally, I am very pleased to share with you the personal views of four industry leaders in the hotel sector, namely Josh Wyatt of Patron Capital Partners, Philippe Bijaoui of IHG and Diane Scott and Tony Burnell of Lloyds Banking Group, which appear in our feature interviews.
Karen Friebe Partner, Hotels Group [email protected]
Confidence in a recovering market /01 Overview of our European Hotel Market Survey 2014
Overview of our European Hotel Market Survey 2014 Top ten highlights
97% predict that REVPAR in 76% Europe will grow
believe that London will see the most M&A activity, followed by Paris at 49% and Berlin at 25%
51% 60% 54% expect to see strong believe investors increasingly think that hotels have inward investment into value hotels as an “attractive” outperformed “traditional” the European market asset class commercial property
02/ Confidence in a recovering market Overview of our European Hotel Market Survey 2014
21%
online comparison sites such as TripAdvisor are not troubling profitability - 21% saw profits increase as a result of appearing on such sites
69% think that we will see an increase in brands franchising in 2014
61% 64% institutional investors expect less traditional increasingly value the forms of lending, such as 69% benefits of hotel property insurers providing senior believe that investment as an attractive real estate debt or engaging in sale will be focused on asset class, according to and leaseback transactions, Western Europe 61% of respondents to increase this year
Confidence in a recovering market /03 Top ten highlights
Top ten highlights
1 97% predict that 3 51% expect to see strong 4 60% believe investors REVPAR in Europe inward investment into increasingly value will grow the European market hotels as an “attractive” Enthusiasm was running high Respondents were asked asset class for the majority of respondents, for the reasons behind their Many years of low interest rates as the caution of the past few confidence in the hotel sector and depressed economies have years gives way to hopes that in 2014. The leading response led investors to step out of their the improved trading seen in was the expected growth of the traditional markets and look many locations in Europe will European economy, alongside for higher returns in unfamiliar stick and a bankable recovery strong inward investment into locations. For the hotel sector, will set in. Both the corporate the European market. which has found itself out of and leisure markets have seen favour in recent years, this has With Western Europe the focus improvements across Europe, meant some new entrants. of investment, respondents with locations including the Our survey revealed that 37% were asked from which region regional UK market picking of respondents found hotels they believed the majority of up after being hit hard in ‘highly attractive’, with 59% investment would come in 2014. the downturn. rating them “attractive”, ahead The Middle East and North of residential or office assets. There is however continuing Africa were the most popular concern about the stability choices. Political unrest in the As REVPAR increases across of the Eurozone. region has seen many investors Europe, this is expected to looking to protect their capital translate into even more heady 2 76% believe that London by acquiring trophy assets in asset deals, fueled by the belief will see the most M&A cities such as London and Paris. that the key European capitals activity, followed by Paris Sovereign Wealth Funds in can do no wrong. The US at 49% and Berlin at 25% the Middle East have shown a REITS have shown themselves Both London and Paris saw particular appetite for the hotel to be particularly acquisitive strong growth over recent sector in Western Europe. during the downturn, with the likes of Host Hotels and years in terms of trading and China was also a popular Resorts looking for properties deal volume. This provides choice as a likely source of in gateway cities with strong reassurance for those who have investment, which has already brands attached. The increase invested in the sector in these been borne out in deals over in models which allow cities, whether in trophy assets the past year in London. Dalian investment into the sector or in budget sites. Wanda was just one of the without expertise in hotel companies to announce that A number of respondents also operation is expected to act as it was investing in the capital, expected to see an increase a further attraction for return- with a new luxury hotel as part in private equity and High Net hungry money. Worth Individuals coming into of a £700m investment on the the sector, drawn in particular South Bank. China’s consistent to trophy assets in the two economic growth has allowed capitals. Attendees of the IHIF Chinese companies to take It is market dependent advantage of the economic might also be expected to but I believe that hotels spend some time shopping downturn elsewhere around for opportunities - with Berlin the globe to start realising which are performing named by 25% of respondents their global ambitions. regularly outclass traditional as a likely investment target in commercial property. the coming year.
04/ Confidence in a recovering market Top ten highlights
5 Hotels have outperformed 6 69% believe that “traditional” commercial Given the tailwind, we investment will be property, according to 54% are currently seeing an focused on Western Respondents were confident Europe that investors would realise uptick of demand which Our research indicated that that the hotel sector offers is leading to a nice growth most investment in the coming potential rewards, with 54% in RevPar across almost year would be concentrated asserting that hotels in Europe all segments. in Western Europe - so 69% of had outperformed “traditional” respondents forecast. Second in commercial property over the Josh Wyatt Director, Hospitality and Leisure, line was China, closely followed last five years. Patron Capital Partners by Asia-Pacific, indicating how far these regions have come Some were defensive, in recent years in terms of pointing out that hotel development potential. performance had suffered disproportionately during The buoyancy of the Whilst the mature market the financial crisis due hotel market both in terms of Western Europe attracts to corporate and private of hotel operations and both commercial and leisure spending cutbacks. The deal activity demonstrates travellers, with the penetration European hotel sector’s of brands lagging behind the resilience and ability to the ability of hotels as an US, it is still seen as ripe for generate cash makes it asset class to weather development by the global attractive, with its increased economic downturns. operators. As travel becomes popularity to visitors from Andrew Little the norm, rather than the China and the Middle East Partner, BLP Hotels Group exception for many around making its long-term potential the globe, the need for quality ever more convincing. hotels across the price points will drive further expansion in the sector.
The BLP perspective
We have seen a surge of capital flows between Europe and the Middle East in the last year or so, both in terms of sovereign wealth fund investment in European hospitality assets and in Middle East hotels raising John Sipling Partner, BLP Hotels Group, funds, including through IPO, from the UK. Abu Dhabi Office
Confidence in a recovering market /05 Top ten highlights
Top ten highlights continued
7 Institutional investors There was work still to be done, with investors viewed as increasingly value the Since co-founding IHIF benefits of hotel property struggling to understand the concept of operational risk and with Questex Media Group as an attractive real estate how to balance this risk/ reward in 1998, we have seen asset class, according to dilemma. 80% of respondents a considerable shift in 61% of respondents felt that hotel property is The message that the hotel perceived by real estate attitudes towards hotel sector is a worthy asset class investors as more risky than investment. Investors today was felt to be spreading traditional commercial property, are much more likely to outside the sector. 61% such as retail and offices. of replies supported the have hotel assets as part of Respondents also felt that statement that institutional their property portfolio institutional investors still focus investors increasingly valued on fixed leases and would not and this has been brought the benefits of hotel property risk the benefit of variable about by, not only the as an attractive real estate income through owning a asset class. economic fundamentals, hotel with a management but greater knowledge, Institutional investors who may contract/ franchise. in the past have been solely transparency and growth of Operators came under attack driven by asset value are, it is the brands. The industry is from one respondent, who felt, starting to realise that where said that investors would be far more professional than the hotel operation is of good reassured by such a fixed when we first launched quality, the potential for better income structure and criticised cashflow can be highly valuable. IHIF 17 years ago. operators for being “reluctant Jonathan Worsley to smooth the cycle in this way”. Chairman, Bench Events
Hotel funding should not be viewed as corporate real estate transactions and can’t be funded as such.... some of the more traditional investors are beginning to realise that the managed hotel can represent a good opportunity, subject to getting the debt levels right. Tony Burnell, Relationship Director, Hotels, Lloyds Banking Group
06/ Confidence in a recovering market The hotel investment finance market is fully functioning again. It’s great to see that at all levels of the capital stack there is competition, at reducing margins, to finance good hotels for good sponsors in good locations. Andrew Flemming Partner, BLP Hotels Group Top ten highlights
Top ten highlights continued
8 64% expect less 9 69% think that we will While the returns may be traditional forms of see an increase in brands smaller than those they would lending, such as insurers franchising in 2014 see through ownership, and the ability to control standards With demand rising from both providing senior debt is more limited, getting the the corporate and leisure or engaging in sale and brand out there and having markets, operators are eager a consistent revenue stream leaseback transactions, to plant their flags in as many remained important to the to increase this year locations as possible, with global brands. Whilst banks are still wary franchising one of the fastest of the sector and Basel rules methods of staking their Wariness seen in lenders was are forcing them to hold claim. 69% of respondents felt also felt to be contributing onto capital, the majority of that 2014 was likely to see an to the growth in franchising, survey respondents (64%) increase in franchising. with the reassurance of a believed that there would be recognised flag over the door As owners continue to seek an increase in less traditional still required by many. For comfort in the brands, several forms of lending over the next those with limited funding, operators have reported 12 months, such as insurers franchising remains the seeing a rise in conversions, providing senior debt or a inexpensive choice. move back towards sale and often to their franchise leaseback transactions. brands, as a quick and easy switch is sought. Several This has already been respondents commented that seen to be the case with the large chains were risk- For us, the fact that there Marriott International’s sale averse and would look instead will be more debt and and manageback of three to franchisees to face the equity available means Edition hotels, a deal which potential hazards of growth. also served to underline the that there will be more importance of operators bidders. This will be a taking on some of the risk in their expansion strategies. challenge for us! Philippe Bijaoui VP, Development Europe, IHG
The BLP perspective
Generally, owners want a brand, but increasingly not a brand running hotel operations. This is driving franchising with both owners and white label operators.
Nick Skea-Strachan Partner, BLP Hotels Group
08/ Confidence in a recovering market Top ten highlights
10 Online comparison sites Comments were mixed on the issue, with one respondent saying Private equity is chasing such as TripAdvisor are not troubling profitability - that “as much as brand reputation opportunities to invest at management is key and we take it 21% saw profits increase discounted prices, often very seriously, I believe profitability as a result of appearing below replacement is much more influenced by other on such sites factors”. Respondents appreciate, costs where banks are It is now crucial for a hotel however, that customer feedback de-leveraging. to be on TripAdvisor and for is important to their businesses and the operator to manage how that TripAdvisor and other social comments from customers are media are important sources for monitored, increasingly so since this. What this means for comment the social media site moved into cards and post-stay surveys Banks are leaving hotel metasearch. The sector will remain to be seen, as hotels the market and there has realised this and now sees work to decide how to use the is opportunity for TripAdvisor as a potential ally information TripAdvisor gives them. rather than enemy. As one respondent commented: refinancing with “Quality will out”. new lenders. When asked to what extent online comparison sites such as TripAdvisor impacted on profitability in 2013, 63% of In one of our properties respondents said that they were not affected at all, TripAdvisor is more than with 21% seeing profits likely generating 40% increase as a result. to 70% of our revenue. Customer comments are the only true believable source of information at this time.
Due to recent competition law developments in the UK, Germany and other countries we may very well start to see a fundamental reshaping of the relationship between OTAs and operators in 2014, with “best rate guarantee” policies becoming meaningless and an increased investment by operators with a view to shifting business to cheaper brand.com distribution channels. Jonathon Grech SVP, Group General Counsel and Company Secretary, Millennium & Copthorne Hotels plc
Confidence in a recovering market /09 Current trends in the hotel sector
Current trends in the hotel sector
The Personal Experience The Millennial Bug The demands of global travellers Respondents were also asked have changed more in the past Guest loyalty is absolutely whether they believed they needed decade than at any time in the critical as is providing to adapt business to appeal to the hotel sector’s history, with brands Millennials (generation born from struggling to keep up with what the a guest with a stay 1980’s to the early 2000’s), with consumer wants in the room and on his/ her terms. The many feeling this to be true. how that room is booked. importance of a robust Our survey asked what steps We asked respondents what they e-commerce platform were being taken to attract the believed was essential to win future and the explosion in Millennials, with the majority (60%) guests and the majority named ‘mobile’ will dominate the taking no specific steps and only the delivery of the “personal 7% of respondents saying that their experience” followed by increased industry going forward. brands were specifically geared availability of technology to towards the Millennials. guests, then constant innovation and effective management of 32% stated that they were interaction with social media sites. It’s said that the Millennials taking steps to appeal to the Millennials. These steps have Respondents reiterated the make up 50% of hotel included implementing social frequent cry of “free WiFi”, with bookings, so we can expect media strategies and positioning one describing it as “massively to see more brands squarely themselves in responsible important” and another calling aimed at that group. destinations, combined with for it to be easy to connect and technologically advanced travel David Battiscombe at a reasonable rate. With recent Partner, BLP Hotels Group information and experiences. studies suggesting that it is more important than a good night’s sleep to some guests, WiFi will continue to dominate debate in 2014.
10/ Confidence in a recovering market Current trends in the hotel sector
Home from Home threat to certain categories of hotels Last year saw a rise in prominence of - especially in leisure destinations” websites which allow any individual and another warning that they As an exemplar of the opportunity to rent his or her appealed to the coveted Millennial Collaborative Consumption home out to travellers, for a fee. guest. One respondent commented Airbnb challenges the We asked respondents whether “not that the threat is zero but entire business model of they considered holiday we operate full service hotels and rental online booking sites HouseTrip and Airbnb are not truly the hospitality sector. Users such HouseTrip, Homeaway, substitute products in my view”. are eschewing traditional Couchsurfing! and Airbnb to Airbnb has found itself coming hotel “service” for a more be a threat to their businesses. under increasing attack from personal, adventurous, and The majority of respondents legislators around the world in social experience as they dismissed the threat, with 59% the cities it has launched in, amid seek greater meaning in replying ‘no’, 22% saying ‘yes’ and concerns over health and safety the remainder voting for ‘I don’t in unregulated properties, as their travel. This explosive know’. Although Airbnb and its well as income bypassing the new trend is valid not just like were not viewed with concern, tax authorities. Cities including for leisure travelers but Amsterdam and Paris have acted to some respondents did concede that business travel too, as new these sites were having an impact clarify the position of home rentals on the sector, with one respondent and, at the time of going to press, technology and office describing them as a “short-term New York was investigating the tax services make it easier implications for renters in its city. to be on the go without access to the traditional hotel “office suite”. Roo Rogers Whilst most hotel operators who Co-author with Rachel Botsman of “What’s mine is Yours: How Collaborative responded to our survey didn’t Consumption is Changing the Way We Live” feel that these sites posed any significant threat to their business, they were very vocal about the need for them to be properly regulated – and without delay. Karen Friebe Partner, BLP Hotels Group
Confidence in a recovering market /11 Industry leader’s insights: Josh Wyatt
Industry leader’s insights Josh Wyatt
Q What is your prediction for Rather, existing hotels need the European hotel industry renovation and defensive over the next 12 months – capex. Accordingly, in most do you believe that we will markets (again exceptions see an increase in REVPAR apply here for +80% across the board? occupancy markets such as London, Paris, etc), Patron’s A The current buzz word in strategy would be to buy the hotel sector is “tailwind”; under-renovated hotels there is a macro tailwind and refurbish them. This is with GDP growth - albeit at exactly what we have done Josh Wyatt a 1-2% level. Specific to the in our acquisition of the Director, Hospitality and Leisure, hotel sector, we are seeing a Patron Capital Partners Luxury Family Hotels Group “micro” tailwind in the hotel and also in our acquisition space based on a supply of the Clarion Hotel in Dublin and demand imbalance at the beginning of 2014. Josh Wyatt leads all aspects generated by the lack of of origination, acquisition and development in the past From a cyclical perspective, management of hospitality six years (in most markets we can look forward to sector investments for Patron, – exceptions such as Berlin, a 12-24 month cycle of and is a founder of Generator London, etc exist). This positive REVPAR growth as Hostels, the world’s largest demand imbalance is now corporate spend recovers, designer hostel brand. in the favour of hotel owners consumer confidence and investors. Given the returns, and overall demand His main responsibilities tailwind, we are currently increases. However, include origination, seeing an uptick of demand whereas in the 2003 cycle underwriting, execution and which is leading to a nice we saw a good five years of asset management for his growth in REVPAR across REVPAR growth, the trough portfolio companies as well almost all segments. Hotel to peak, with a return to the as new business deals. operators and investors median, will be a shorter Josh currently manages can ride this tailwind in period, with likely a two year approximately €500m of favour of the supplier for – window. The underpinnings equity with the primary focus I would say – the next 12 to of the economic recovery, being Generator Hostels - 24 months – until supply is this time around, appear to he completed the MBO of delivered into the market. have a bit more volatility the business in 2007 and and uncertainty. Thus A number of dead or subsequently set about to whilst we are long term “zombie” development refashion the business into positive, we want to be projects are re-emerging a global platform. conservative in our thinking and coming back to life and approach to how we given the more favourable manage our hotels and topline dynamics coupled prepare the hotels for with increasing liquidity in success in a less certain the debt markets. The snag economic environment. here is that technically, in most markets, we do not need more hotel supply.
12/ Confidence in a recovering market Industry leader’s insights: Josh Wyatt
Specific to London, asset still has a challenge with Q What do you perceive values across the board topline dynamics – i.e. very to be the key challenges have risen to incredible challenging to drive ADR in that hotel operators and levels, driven partially most markets. In Madrid for investors will face in 2014? by fundamentals, but example, asset prices are largely by inbound capital entering a period where it A There is obviously the flows chasing security. may make sense to transact Eurozone issue, which is Accordingly, for many if one has a proper business still very much with us, micro areas in London, plan and conservative along with likely inflationary we view the market as a approach. In sum, I would threats in the Eurozone. tad overheated. It is a very say Spain is interesting but From an operator’s point of competitive landscape, and challenging longer term. view, they have the tailwind, we cannot see how you But we are looking as are REVPAR is growing and can expect opportunistic many other smart and well inflation is low. However, returns on new build capitalized firms. inflation is robust in certain hotels in London. The land Do you believe there areas as the cost of labour cost in itself is prohibitive Q and food is increasing - £150,000 per key on will be more debt/ equity available for investment whereas REVPAR may not average. A hotel would grow at the same rate. need to grow its EBITDA in Europe in 2014? by 5-10% per annum to In terms of European A I believe there will be a sustain this, which creates lot of money available investors, they will need an immense amount of at all levels of the capital to run a tight ship in 2014 pressure on the operator. structure as the “wall” of to keep abreast of market challenges; a focus on However, if you already capital continues to build and is now making finance strong asset management own a hotel in London and will be very important. And, especially if you bought it available in hotels again. In some ways it feels like 2005 be ready for interest rate in the last 2-3 years with a increases. This will be a circa 2012 cost base, I think – not the peak, but a lot of action and momentum. If defining challenge of 2015 you will make money in the and beyond. medium to long term. you combine this liquidity with the upcoming 12-24 Q In which European countries month cycle, then I think do you think will receive the we are going to see a lot of biggest growth in REVPAR? transaction activity during this period. We are seeing a “micro” A France is interesting, tailwind in the hotel despite the labour and tax issues there. Germany is space based on a another interesting market supply and demand – we would definitely be imbalance generated by interested in looking at the lack of development opportunities there in select markets. We are also in the past six years. looking at Spain, which appears to offer value opportunities, although it
Confidence in a recovering market /13 Industry leader’s insights: Josh Wyatt
Q What are your key in a boutique hotel. They 2. Experience vs Repetition: strategies for growth in are on a budget and want brands and owners who respect of the brands you the cheapest, best value devote time to constant have invested in? accommodation available. innovation, engagement They are not looking at with customers to create a A We will be focussing on TripAdvisor per se, rather lasting, unique hospitality refurbishment and running going for one of the value experience, and those a very tight plan with brands based on price. The who avoid the clichés of cost structure discipline. second is the corporate the past will build lasting Investment in technology will and leisure traveller – the brands and businesses. be important to customer Millennials included – who acquisition. We want to work do use their own data points 3. Direct Relationships: at reducing the impact of the such as TripAdvisor, broader hotels who work with OTAs and push our brands to social media challenges, and their customers to acquire customers directly. real time reviews to assist create a relationship We should also be working them in selecting a hotel will lead to gathering with industry colleagues that provides them with data to help them serve to fight the impact of more of an experience. their customers better, these agencies. including weaning the Q Please can you share customer from the OTAs. Q How important do you with us your vision for the see the Millennials to be in successful hotel model of Q Do you believe there terms of that strategy and the future. Please can you will be an increase in what steps are you taking to name three key ingredients joint venturing between attract them? of this success? operators and investors? Patron has invested €150m I think there will actually A A 1. Asset Right: hotel A on a macro bet with companies and the hotel be a decrease in this trend. Millennials as we own the model will increasingly There was a slight increase Generator Hostel product, move towards a when the economy was in which is a very technology balanced portfolio. The a more challenging space driven product. Also, the move to pure Asset – for example Ian Schrager Clarion in Ireland will be a Lite has hindered some becoming Marriott’s brand boutique hotel focused on businesses and brands. partner. In the current the working environment Using a balance sheet, market, operators are yet with a strong leisure in a targeted and smart offering to put money angle to the public space. way, will differentiate the into the deal and are also All of our products are winners from the losers. more inclined to promote differentiated whether it’s themselves by selling their the Clarion, the Luxury experience of managing Family Hotels or Generators. successful hotels or There are two mind sets resorts, and this will likely that you need to cater for. increase in trend as the The first is the business economy returns. traveller on a budget who doesn’t care about having the experience of being
14/ Confidence in a recovering market Industry leader’s insights: Josh Wyatt
Q How do you feel about my primary concern with the growth of holiday these sites is that they pay online booking sites such no taxes and they are not Using a balance sheet, as HouseTrip, Homeaway, regulated – they do not have in a targeted and smart Couchsurfing!, Airbnb to comply with health and way, will differentiate and Onefinestay. To what safety rules. They add no degree do you believe that economic benefit to the local the winners from they pose a threat to more community and ultimately the losers. traditional hotel businesses? are a negative impact on cities as they are a substitute A I think OneFineStay is a and not an additive, reducing good product that could the pot of private and public achieve considerable money that would otherwise success as it fills a need be available to fund for customers to find more infrastructure and the like. I stable, long term stays in hope that public authorities a residential environment. will wake up to this pretty This is a complement to the quickly – it is not hard to industry, not a threat. do the maths and see how As for the other sites – such much is being lost in terms as Airbnb - I believe that of public benefit by allowing they do pose a threat right these businesses to operate now to the traditional hotel tax free and without proper operators. These sites drop health and safety adherence. their rates to fill beds and It would be naive to say often do not understand the they have no impact on strategy of longer term yield the hotel industry. management. Additionally,
My primary concern with these sites is that they pay no taxes and they are not regulated – they do not have to comply with health and safety rules. They add no economic benefit to the local community and ultimately are a negative impact on cities... reducing the pot of private and public money that would otherwise be available to fund infrastructure and the like.
Confidence in a recovering market /15 Industry leader’s insights: Philippe Bijaoui
Industry leader’s insights Philippe Bijaoui
Q Which European countries Q Do you believe there will and cities in the UK will be be more debt/ equity the main focus for growth available for investment for IHG in 2014? in Europe in 2014?
A IHG has a presence in over A My experience tells me there 100 countries and territories will be. This view is driven by worldwide. Looking the fact that there are lots of specifically at Europe, there bidders for every property are key cities and markets including bidders from the where we believe there is private equity sector. Philippe Bijaoui potential for growth. Our VP, Development, Europe focus markets include UK Q What do you perceive to be InterContinental Hotels Group and Ireland, Germany, the key challenges that IHG’s Russia and the CIS countries. business will face in 2014? For us, the fact that there Philippe Bijaoui, Vice Which European cities do A Q will be more debt and equity President Development you see as having the most available means that there Europe, is responsible for growth potential in 2014? will be more bidders. This development for IHG’s Germany is a key focus will be a challenge for us! six brands in the region. A for us. IHG has the perfect Reporting to IHG’s Chief product for Germany in Q What are IHG’s key Development Officer Europe, the Holiday Inn Express® strategies for growth and Bijaoui leads a pan-European Hotels brand. The German how important to you team of Developers with market is value driven and perceive the Millennials to accountability for growth the brand offers value for be in terms of that strategy? across the continent. money thanks to the low A We have just published the Philippe has over 20 years construction costs and the IHG Trends Report 2014 unparalleled international high quality of the product. which highlights how hotel experience in hotel Russia is another key market brands must adapt and development and real estate, for us. Our ambition is to be change to keep pace with and has held senior positions number one in Russia and the needs of future guests with a number of globally we believe we can achieve – this is focused on recognised companies. Prior to this. Our first Holiday Inn delivering localised and joining IHG in November 2012, Express hotel is due to open personalised experiences Philippe worked for Carlson in June, in Voronezh. enabled by technology. Rezidor as Vice President Business Development. Turkey is also growing well and is a very active market
with great potential for a Our ambition is to be range of IHG brands, from Crowne Plaza to Holiday Inn number one in Russia and Holiday Inn Express. and we believe we can achieve this.
16/ Confidence in a recovering market Industry leader’s insights: Philippe Bijaoui
Millennials – people aged IHG will continue to pursue Q Do you think there will between 18 and 34 – are a mixture of franchising and be an increase in joint particularly interested in management agreement venturing between access to personal content, models. Franchising will operators and investors? such as movies or music always be a key focus area while travellers over 65 are for IHG and we will only A I do not see an increase in most interested in healthy propose a management joint venturing as a trend. food and beverage choices. contract where we believe I think that we will see more Also three in four of these we can truly add value. one-off joint ventures for Millennial travellers believe We believe we are unique specific sites. that global hotel brands in the way we support our Q What is your view of do a better job at being franchisees from pre- TripAdvisor and similar sites? innovative in comparison opening right throughout to local hotel brands. the life of the agreement. A It is important that guests We know and understand are given the opportunity However a successful global the franchising model to share their experiences. operator has to be able to and know how to make it In 2012, IHG was one of the adapt to meet the needs perform, as well as having first hotel companies to of all its customers. At IHG the tools in place to improve launch Guest Ratings and there has been a continuous the bottom line. Reviews on our branded focus on delivering a higher websites, giving our degree of localisation and Q Do you think we will see guests the opportunity to personalisation across more operators prepared to read authentic customer our portfolio of trusted put some “skin in the game”? feedback while booking global brands. This is a good way their stays. In fact, in 2013, A we’ve collected more Q Do you think that most of creating a better hotel operators will continue partnership with an owner, reviews on our sites from to focus on an assset light but can’t apply to every our hotels than TripAdvisor strategy and will this remain deal – the operator needs to has for all IHG hotels. a key drive for IHG? be strategic.
A Our asset light strategy Q What is your current has been proven to be view on non-disturbance the right strategy for IHG. agreements – good or bad? Our asset light We demonstrated our strategy has been You need to find a middle commitment to this in A proven to be the right 2013 with the sale of the ground whereby the InterContinental London operator is protected but strategy for IHG. Park Lane, one of two the bank is not stuck with remaining hotels owned an operator to the detriment by IHG in Europe. Having of the value of the business. said that, we use capital Having said that, we invest investment on a strategic long term and we need basis as required. Being commensurate protection. asset light doesn’t mean we don’t use capital.
Confidence in a recovering market /17 Industry leaders’ insights: Diane Scott and Tony Burnell
Industry leaders’ insights Diane Scott and Tony Burnell
Q Can you comment on the Q Do you believe that you amount of new lending will see a marked increase generated by your team in new business enquiries last year? in 2014?
A DS & TB - Our London Hotel A DS - We certainly hope so team wrote about £250m in - the market has started to new loans last year. We are pick up nicely with London effectively the “hub” for hotel as always leading the way lending within Lloyds Bank however we are seeing a for mid-market deals – our great deal of interest now sweet spot being the upper in the regional marketplace end of the market in central which has started to perform London. We look at deals with much better, especially in a minimum debt level of £10m the “go to” locations such and/ or a minimum asset as York, Bath, Edinburgh, value of £25m. We are also Oxford and Cambridge. able to provide advice and assistance to our colleagues TB - There is a definite in other parts of the Bank appetite to lend from the who are looking at doing Bank’s perspective. Lloyds Diane Scott hotel deals in the UK regions. is committed to lending into Business Development Director the hotel market, particularly Hotels, Lloyds Banking Group Q How do you believe that the SME market for the right Tony Burnell level of activity compares property/ operators. Relationship Director, Hotels, to your competitors? London is interesting; in a Lloyds Banking Group A DS - I really do think that number of cases owners we have benchmarked well have become comfortable against our competitors; and with the operational side Diane - Over the past eight we are doing new lending, of a hotel business and years Diane has built up a niche as well as some refinancing. have therefore decided to specialism within the Hotel sector Having said that, there has hang onto the asset. This and is one of the Lloyds Banking not been a great deal of has arguably cut down the Group’s London team members refinancing/ acquisitions in number of transactions in who focuses on this area. Diane the marketplace in the last the market. has been instrumental in many of 12-24 months although this is their hotel transactions to date, somewhat improving. In respect of the UK and regularly speaks at Hotel regional hotel market, the Sector conferences. TB - I would be surprised if Bank is keen to be more our team had not been one proactive. Our colleagues Tony - Working closely with of the best performers in the in the regions are being Diane since 2004, Tony focuses market last year. encouraged to seek out exclusively on the Hotel Sector potential deals in the hotel for the Bank and is very pleased sector and we are very to have worked with many of the happy to help where we can. key owner/operators, helping them to complete acquisitions, refinancing and redevelopments.
18/ Confidence in a recovering market Industry leaders’ insights: Diane Scott and Tony Burnell
Q Do you think there will be Generally speaking, hotel Q Are you seeing hotel more competition between funding deals should not operators more prepared banks in 2014 in terms of in our view be viewed to put money into a deal? hotel business? as corporate real estate transactions. They can’t A TB - A lot of operators are A DS - Over the last 12 months be funded as such - unless talking about doing this and or so we have already seen you are looking at the likes about offering minimum more variation in terms and of Premier Inn who will income guarantees. a lot more competition, with take leases on a more However, we see very few owners/ acquirers “shopping traditional and predictable of these deals. The key around”, unfortunately we rental pattern. for us is the management are also seeing borrowers ability and track record of “pitting” one bank against When you have a hotel with the management team – the other to get the best deal, a management agreement, but equally they will need and this is something that we which is the case with to be backed with equity. have not seen for quite some many hotels operating in Generally, strong managers time. Insurance companies London, you have a variable do not own all of the equity and pension funds are now income stream in spite of but they have strong also coming into the hotel relying on a third party to backers, predominantly lending space potentially service the payment. That recently from overseas. structuring loans in slightly kind of investment is more different formats. challenging for an insurance DS - We are not seeing company for example, operators putting substantial TB - Even with a decent which is likely to be looking sums of cash into a hotel level of transaction volume at 20-25 year returns. deal, however its true to say in London, if there are more that there has been a shift, banks pitching to lend However, even these more along with both overseas than previously – including traditional investors are and existing UK operators non-UK banks – this cuts realising that there is a accepting the need to put down deal availability. The big demand for hotels, equity into a transaction. PE houses are also in the particularly in central market, as are pension London. Also that if the funds; they will look at deal is structured at the longer term loans than right level, there are hotels The key for us is the most banks, particularly in that will be there for – and Europe. Some banks are stay open for - the longer management ability taking higher hold levels term. In other words, some and track record of the than they would have done of the more traditional management team – but in the past, which brings investors are beginning to them into deals they would realise that the managed equally they will need to not have been in before. You hotel can represent a good be backed with equity. have to be competitive and opportunity, subject to relationship-driven to get getting the debt levels right. the best deals.
Confidence in a recovering market /19 We are not seeing operators putting substantial sums of cash into a hotel deal, however its true to say that there has been a shift, along with both overseas and existing UK operators accepting the need to put equity into a transaction. Diane Scott Business Development Director Hotels, Lloyds Banking Group Industry leaders’ insights: Diane Scott and Tony Burnell
Q Do you think the Bank will Q Are non-disturbance Q Are you looking at new be prepared to contemplate agreements (NDA’s) – a types of business or are lending for development benefit or a burden to you? you focused on historic in 2014? relationships and more A DS - We have not signed traditional formats? A DS - The Bank would do so an NDA for some time and in the right circumstances, operators are now much A TB - Both, but with a though for us it would be more accepting of this. leaning to the more via our corporate real estate That’s not to say that in traditional operation. We team. However, both the the right circumstances we have been following the operator and location wouldn’t, however they progress of businesses like would need to be of can be restricting from Airbnb and HouseTrip. I think the highest quality. a Bank’s perspective. that some of the traditional hotel businesses are worried TB - The Bank would be TB - NDA’s are certainly by them and I am sure there more inclined to do this not automatic anymore, will be a market for this type with an existing client as they were in the past. It of business at the lower end. with a track record. You depends who the operator However it would be difficult need someone who can is. The major operators are for us to lend to that sort of demonstrate that they can still looking for these to be operation using our normal develop, and at the same signed but in the deals we criteria. It is also difficult time can manage the have done, we have not had for us to lend to hotels that hotel operationally to sign an NDA. That’s not to might not have an alternative on completion. say that we wouldn’t do so in use if a particular concept certain situations if it’s right were to fail – for example Q Have you found yourselves for the parties. Ideally we faced with any novel issues in capsule hotels where none are likely to want to have the of the rooms have windows. deals you have been handling ability to retain the operator in the last few months? You would need to factor in if we wish to do so which the conversion cost if you might on occasion require us A TB - Every time we do a deal had to sell the asset and something different comes to enter into an NDA as part this would impact on the up! What is important to one of this negotiation. loan size. person can be unimportant to someone else. DS - As Tony has already alluded to its both. It’s What we really do find The market has started definitely more difficult to concerning however is that to pick up nicely with fund a new hotel concept some funders that we know London as always which is untried in the UK- – and have high regard for - leading the way. conversely we would also are starting to talk about LTV find it a challenge to fund rather than leverage, because a non-traditional concept of what is happening in the at the same level as we market and the prices that would say a freehold asset are being achieved. We - bricks and mortar in an shouldn’t be going back to established location. that mindset.
Confidence in a recovering market /21 Getting in touch BLP Hotels Group When you need a practical legal solution for For 12 consecutive years, Berwin Leighton Paisner your next business opportunity or challenge, has been the top-tier ranked law firm in advising please get in touch. hotel clients. Our international Hotels Team advises on deals in every sector of the market, including London management agreements, franchising and licensing Adelaide House, London Bridge and M&A operations. London EC4R 9HA England About BLP Karen Friebe Berwin Leighton Paisner is an award-winning, Tel: +44 (0)20 3400 3355 international law firm. Our clients include over [email protected] 50 Global Fortune 500 or FTSE 100 companies. Our global footprint of 11 offices has delivered more than 650 major cross-border projects in recent years, involving up to 48 separate jurisdictions in a single case. The Firm has won five Law Firm of the Year titles, is independently ranked by Chambers and the Legal 500 in over 65 legal disciplines and the FT currently ranks us in the top 10 law firm innovators in Europe.
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