No Zoom in sight
The energy and enthusiasm of being back at a ‘real’ person to person conference was palpable as professionals from all parts of the hotel investment community gathered in Berlin for the International Hotel Investment Forum known as IHIF.
For all the benefits it offered during lockdown we were glad to escape the Zoom option…meetings through a screen. The networking buzz was back and views on a range of issues exchanged. We are all moving forward after the challenges of the last few years.
Here are some thoughts and observations with thanks to the various presenters including STR, Hotstats, Eastdil and Google.
Bouncing Back. Blue Skies ahead!
After the doom and gloom of lockdowns, pandemics and travel bans, an upbeat message fed through:
- ‘It’s different this time’ message – Europe’s occupancy levels are recovering to 2019 levels, up to c. 70%
- ‘Recovery far exceeds expectations’ – Leisure demand in particular is back, driven by the need to experience ‘ski, sea and tea’ (as nicely described by Robin Rossman of STR) with weekends favoured over mid week trips
- ‘Achieved rates (ADRs) have benefitted by the staycation boom’ – Top revenue lines are healthy
- ‘US recovery and international tourism will help boost inbound travel’ – After a period in which domestic markets were the only show in town
- ‘Liquidity is being replaced by new sources of finance’ – Providing a degree of certainty in uncertain times
Yes but..a new reality kicks in
Despite the buzz, a harsh set of realities was recognised too with many bumps still possible in the road ahead:
- Gone are the government subsidies that provided – in some markets at least- support through furlough payments to staff, VAT reductions and grant subsidies
- Hoteliers have had to cut back on operating costs wherever possible and reinvent their offerings and/or business models
- Staffing is an issue in many markets with a flight from hospitality apparent. To redress this careers in the industry need to be better promoted and incentives provided to both management and their teams
- Increasing revenues are being counterbalanced by soaring operating and fixed costs – reducing profitability (as clearly outlined by Michael Grove of Hotstats). Costs per available room are affected by utility prices, limited supplies, and use of agency staff
- Landlords and bankers, having largely recognised the uniqueness of the downturn and taken a considerate approach to rental and loan payments, are beginning to harden their positions to the new reality
- Business travel – is adapting a ‘less is more’ approach with face to face meetings taking place but with less scheduled events and prioritising client interactions over internal meetings
- Environmental, Social and Governance (ESG) criteria has a very firm place on the agenda. Investors and consumers are driving ESG policies to measure sustainability and social impact that now influence investment, operations and consumer behaviour
Clouds on the Horizon darken the mood
Despite the optimism there were some rather large ‘elephants in the room’ that cloud the horizon.
No one ignored them completely but they will affect demand patterns, costs of operation and development:
- War – a detrimental effect on supply lines, investor sentiment, tourism to neighbouring countries…and more
- Inflation – higher than for many years and influencing investor returns
- Construction costs – rapidly rising and impacting potential yields. This is also influencing decisions on ‘develop or acquire’ being considered by investors
- Interest rates – affecting both consumer attitudes to spending and investor sentiment. Rent cover and other return ratios are also being impacted
The ‘R word’ (recession) poured a little cold water on some of the more optimistic theories and hung over some conversations as delegates tried to identify other potential challenges that might come down the line.
Buzz words that also tell the tale
No conference is worth its salt without a few classic quotes and those selected below illustrate some other serious issues that will shape the industry:
- ‘Stress not distress‘ – On the surface there are few casualties in the sector but shorter term (and behind the scenes), recalibration of business models and financing structures is taking place. Visible changes are coming down the road in the next year
- ‘There is a lot of dry power out there’ – plenty of investment appetite but few deals to chase
- ‘The yield curve is not our friend‘ – values are being impacted and refinancing early is being recommended (as set out by Eastdil)
- ‘Augmented hospitality’ …. and mixed use schemes are ‘the next best thing’ …as space is used differently in new schemes (in which hospitality still plays an important part)
- ‘The unencumbered premium is widening’ – choice of investment type and flexibility of exit are impacting structures and business models
- ‘The landlord tenant relationship has changed’ -as above, flexibility is key – with new break clause provisions and other changes being considered after this uncertain period
- ‘A (temporary) labour pool no longer exists‘ – Short, but also long term challenges are ahead in attracting and retaining relevant skills
The Road Ahead
As already identified above there are a few obvious challenges in the road ahead. The hospitality industry – people focused, capital intensive, subject to economic and political events – has faced major upheaval before: it has had to deal with financial crashes, 9/11, economic downturns…and more. As with any resilient industry it has survived and adapted.
Arguably it has never played such a front line role nor been so much in the limelight and recent events will no doubt force more change. At its most basic, people will meet, travel, visit friends, work away from home and entertain … and our industry provides the bedrock of being able to cater for all of those needs.
Anything here to bet on?
The full impact of a global pandemic on demand and supply in the hospitality sector is yet to be fully assessed. In truth, the jury is still out but as with any market disruption there must be cause and effect.
Both opportunities and casualties are yet to emerge in the post crisis period.
On the consumer side, behaviour will change for those who now prioritise privacy and space criteria and who may choose lodges, self catering options and private rentals over a more traditional serviced hotel accommodation offering. For investors, focus may change to those segments that have fared best in the downturn in their respective markets (economy, luxury or alternatives such as extended stay). For operators, differentiation with competitors will continue to be sought by exploiting new niches of demand such as ‘workations’ .
What is clear is that accommodation trends will change, new brands and concepts will emerge, mergers and acquisitions will take place, portfolios will be rationalised and rebranded, new product will replace old and new players will enter the game. No one size will fit all.
Fundamentally however the sector has core demand drivers that will remain long into the night. Amongst them are:
- a growing global tourism and travel market both internationally and domestically (the staycation has reinvented some old destinations and led to the discovery of new ones)
- a need for corporations to expand their businesses in new locations and meet with international suppliers and clients
- a desire for people to meet friends, experience new environments and cultures.
Hospitality still presents a genuine investment opportunity with core demand fundamentals together with the ability to flex prices as an inflationary hedge. When set against a backdrop of declining retail and uncertain office markets, there are plenty of opportunities yet to be explored. Bring it on.
Douglas Grant and the Arc team of Associates in the UK and Europe have been involved in a range of projects covering hotels surveys and appraisals, lodge development, and resort concept development and can be contacted on 0044 7785 514831.