David Smith, Economics editor of the Sunday Times opened up two days of intense industry networking at the Annual Hotel Conference (held this last week in Manchester). His overview provided some encouraging economic forecasts that put doom and gloom in the shadows and delegates in a positive mood at the outset of the event. Our brief article picks up some of the soundbites from the event and explores selected themes on Market, Trading, Finance, Development and Environmental issues.
Image: Courtesy of Eswaran Arulkumar of Unsplash* Stacked rocks are often used for guiding people to the correct trails.
MARKET: The Current (economic and political) fiasco
‘Inflation and interest rates will continue to be at new and higher levels but perhaps not as high as some have feared’.
It seems that despite the various ‘dark clouds’ on the horizon there is a degree of ‘catastrophising’ in much of the recent press analysis. In Andrew Sangster of hotelanalyst ‘s view this hopefully may have overstated the extent of the inflationary, interest rate and utility cost issues that dominate the headlines. This isn’t to belittle the many and significant challenges facing many businesses in the sector but maybe to put a little context to them in a more positive light.
TRADING: All is rosy in the garden
Recovery in 2022 has been faster than expected, corporate demand is on the rebound, staycations are on the up and record average rates are being achieved …business is back !
Or is it?
The positive market picture presented is undoubtedly true in certain situations particularly in larger branded hotels capable of driving volumes and supported by distribution engines and marketing support.
However, there is a war, inflation at close to 10%, a government in disarray and record operating costs filtering through, so money must be tight.
A deeper dive reveals that sweeping generalities about ‘recovering markets’ hide the specific challenges faced by many businesses. This applies particularly to smaller players, those in some more seasonal locations and hotels reliant on more price sensitive markets . Elements of their customer base is rethinking their leisure/saving priorities and holding back, hoping for a higher degree of certainty before splashing the cash.
The challenges include:
- Last minute bookings are rife and have become the norm: this pattern of booking alone is helping to push up average rates as people are not confident enough to book preferential /discounted rates in advance due to uncertainty and doomster headlines. They prefer to buy when their minds are made up (despite the additional cost).
- Events, normally booked as much as a year or more in advance are also being scheduled in short timeframes – more uncertainty.
- Corporate demand is recovering – but the extent to which work from home will shrink this segment of demand is as yet untested.
- Pricing: A key element of attracting customers has always been to ensure quality and value for money . During the last year this ethos was interpreted fairly loosely in some cases as hoteliers sought to maximise price in the staycation boom. As a more ‘normal’ market returns (and one which in many ways may be more challenging), pricing will have to adapt again to meet more realistic expectations.
On the bright side, key tourist cities now see a rebound with inbound tourism returning…which will continue to grow.
Its all about the People
The most valuable resource the hospitality industry has, its staff, has been under fire as the pandemic has encouraged people to seek alternative careers, lifestyles and geographies. New business models seek to cut back payroll costs and maximise use of technology and whilst robot hotels do exist, at the end of the day people are at the heart of the hospitality offer and need careful managing and plenty of TLC.
Thankfully some genuinely positive initiatives valuing this critical element of our business were on show:
- One operator described their forward thinking approach of investing in two properties to provide staff housing.
- This investment in a good ‘home from home’ provides quality living conditions as opposed to an ‘un-refurbished hotel room’ and both recognises staff value but also engenders loyalty.
- Another example was the win win of providing a high quality fresh food offer. This not only drew customers back but also required skilled jobs that encourage a longer term career view (rather than the ‘microwave technicians’ churning out standardised product that can be here today and gone tomorrow).
FINANCE: On the money
There has been, as one banker put it, ‘unbelievable liquidity in the market over the last few years’. This is about to change.
- Major banks are (apparently) ‘still open for business’ …but underlying comments suggest a degree of withdrawal from new lending. Lower Loans to value, tighter lending criteria and as one banker put it a more ‘careful granular analysis of assumptions in their due diligence of proposals’ . All of the above will lead to challenges in refinancing and in assessing new development proposals.
- Refinancing needs in some businesses are likely to lead to some uncomfortable conversations between lenders and their customers within the next year as loan rates increase, operating profits tighten and alternative structures remain limited.
- Bankers expressed a desire for ‘as few variables as possible’ including a distinct aversion to complex structures and ground rent solutions.
One positive on the horizon seems to be that despite the many ‘headwinds’ and post pandemic fall outs there is a distinct lack of ‘visible’ distress. Whilst this was good news, where pressure exists (and it does) solutions may involve banks accepting that restructuring, extending and/or injecting new investment is preferable to withdrawing support. ‘Treatment rather than hospitalisation’ is seen as a preferred way forward.
DEVELOPMENT: How green is the valley? How big is your EUI?
The last year has been a period in which Quantity Surveyors calculators have been on fire… construction costs have varied daily, raw materials have been scarce and supply pipelines disrupted. Despite this:
- many projects are already underway or still in the development pipeline.
- whilst investors may favour acquiring cash flow producing assets over new build economics at least in the short term, supply is still going to increase in certain locations.
- ‘Greenwashing’ was a theme touched upon by many commentators – the practice of presenting sustainable credentials with little substance behind them (simply ticking the environmental box’).
- Going forward there will be a need to use Energy Use Intensity measures for the efficiency of heating & cooling a building. ‘Know your EUI’ as Tim Wheeldon of Zeal Projects puts it from the perspective of a highly experienced developer in our sector. Environmental, Social and Governance (ESG) criteria will undoubtedly toughen and continually be a mantra for major investors. However, even amongst hardened converts to the cause there was some frank and genuine scepticism expressed over a lack of clear definitions, available benchmarks and means of measurement. This also impacted on older less well invested properties where the practical feasibility of imposing these criteria affordably is hard to justify or implement, despite its desirability.
Best laid plans and all that…
The restrictive nature of existing UK Planning classes which hamper development was challenged by Dexter Moren of Moren Studio whose extensive architectural experience of hotel development provides another insight into where the evolution of the sector is being held back:
- Even where growth is desirable, current planning criteria restrains entrepreneurial drive.
- The restrictive nature of existing UK Planning classes hamper development. In an age of mixed use, varied schemes, broader based leisure and business concepts, aren’t many terms and classifications ‘office use’ ‘commercial use’ now redundant or simply not relevant in todays market place and should be rethought together with a case for extending Class E made.
MOVING ON: No one answer fits all
Significant challenges exist – inflation, interest rates, limited human resources and rising operating costs and a client base whose patterns of demand will change so no one solution fits all. In every case there is a need to look at specific business situations before drawing conclusions as to the best way to move businesses in our sector forward.
One thing is certain and that is that uncertainty is the name of the game…but this is still set against a vibrant and entrepreneurial industry and a customer mind set in which people need people, people need and want to travel, and people want and increasingly demand, new experiences.
These are only a selection of themes plucked from a vibrant and complex business which offers both challenge and opportunity depending on specific project circumstances. We would be pleased to help interpret industry trends to help you move your business objectives forward. We have recently worked for a range of clients and in support of market, investment and asset management specialists such as Hotel Solutions, Wallgate Group, Cushman & Wakefield.
Do contact Arc Consulting Partners on 07785 514831 for an initial view on any proposals you may be considering.
Note: Credits: To all those who attended the Annual Hotel Conference in Manchester in October 2022 and who shared views with me. Image: Courtesy of Eswaran Arulkumar of Unsplash – Stacked rocks have been part of our culture for a long time. They are generally a sign to travelers or passers-by who see the stacks on the side of a path or road. Stacked rocks are often used for guiding people to the correct trails.