Hotel Investors Are Optimistic About the Mid-term Future of the Hospitality Industry

12 years ago

An overwhelming majority (83%) of hotel investors are optimistic about the mid-term future of the hospitality industry. That's according to a survey of top hotel sector investors and operators polled at an Ernst & Young hospitality sector workshop held in London recently.

Approximately 60% of respondents to the survey believed that hotel transaction activity in the Eurozone would increase "significantly" this year with the overwhelming emphasis being on gateway cities such as London, Frankfurt, Paris and Brussels.

And, according to Ernst & Young's recent report Global Hospitality Insights: Top thoughts for 2013 (GHI), while access to financing is still difficult in many markets around the world, new project announcements have risen to their highest level in 18 months. This reflects the cautious but growing optimism among investors and hotel brands in the trajectory of the global economy.

Delving further into the financial aspects of the industry, GHI says the hospitality industry will be shaped by an emphasis on controlling costs at all levels of the business as well as optimizing capital. This could mean continued scrutiny of maintenance spending and the re-evaluation of capital improvement projects, as owners decide where best to invest limited resources.

Global Hospitality Insights — summary:

Tax

Globally, tax and structuring issues affecting hospitality companies continue to be driven by the hotel operating model.
Tax matters, such as reductions in corporate tax rates and the tax deductibility of interest on debt, have gained significance in hospitality transactions.
Hotel companies are restructuring and repositioning in unique ways for tax purposes and to unlock value in their real estate, including as REITs and "OpCo-PropCo" spinoffs (separation of operating companies from real property assets).

Performance / outlook

The current macroeconomic performance and outlook for the global lodging industry continues to be mixed; political, economic and weather-related events have dented both the hospitality sector and investor confidence.
With the exception of Europe, most global lodging markets have experienced steady year-to-date RevPAR growth.
The luxury and upper tier segments are expected to have the highest RevPAR gains in 2012.

Valuation

Despite global economic uncertainties, lodging fundamentals in much of the world continue to improve, with many investors anticipating hotel values to remain either stable or increase.
While the discounted cash flow analysis remains the primary valuation methodology, methodologies utilized vary by region, particularly in areas of decreased market activity and/or impacted by external factors (e.g. economic, political).

Capital agenda

Hospitality executives remain cautious despite some renewed growth and investment.
An unfavorable M&A environment has shifted strategic focus to maximize capital by controlling costs, improving performance, and focusing on bottom-line improvements.
Hotel companies are refocusing on the basics: maintaining stability, operational efficiency, and cost reduction initiatives.

Emerging markets: spotlight on Africa

The opportunity for development in Africa has caught the attention of multinational hotel players; major companies have targeted Africa as a strategic area for expansion
South Africa has received the largest investment to date; however, other countries rich in natural resources, including Nigeria, Ghana and Gabon, have seen a considerable rise in development.

Development

Hotel development is rebounding as investors slowly regain lost confidence in the economy. New project announcements have grown to the highest level in 18 months.
Development in emerging markets is on the rise, but investors in search of financing continue to face stringent lending standards from financial institutions.

Segmentation

Increasingly health-conscious lifestyles are creating a traveler segment that demands lodging that can accommodate healthy choices and personal wellness.
A new class of trendy travelers is flocking to urban hotels that make a statement for their guests.
The recession has resulted in a wave of value-conscious travelers that recognize the benefit of select-service hotels, resulting in select-service offerings further catching the attention of major hotel players in 2012.

International brands

As major hotel companies expand abroad, new efforts have been made to connect to local guests; some companies have partnered with local operators, while others have adopted slogans in the local language.
Fostering partnerships in local markets is a critical element of a global expansion strategy.

Transactions / capital markets

In continued global and economy uncertainty, a divergence in the global real estate market persists; investors continue to seek high quality assets in stable locations, while investment in smaller markets remains challenging.
CMBS deals are slowing coming back to life, with overall issuances estimated at between US$75 and US$90 million over the next several years.
Major hotel companies are exploring the opportunity to form IPOs over the next 24 months as a possible exit strategy.

New ways of communicating with guests

As technology revolutionizes the way customers interact with brands, products and each other, each owner/operator/brand must evaluate the role of technology in its business to stay relevant.
Social media, mobile distribution, and in-room technology offerings have significantly changed the traditional guest experience.

Strategic tourism

With overall trends predicting heightened travel activity, destination marketing organizations are looking to re-invent their destinations in an effort to capture the returning leisure and group traveler.
Destination marketing organizations are identifying new marketing strategies to reach consumers, including the use of social media and third-party experts/consultants for support (e.g. benchmarking analyses).

Global real estate funds

Private equity funds in the hospitality sector face a period of significant structural and cultural change, with cautious investors, large-scale regulatory overhauls and the ongoing illiquidity of the capital markets all driving the change.
Despite uncertainties, creative investors can thrive, devising and offering solutions to invest in the hotel space (e.g. refinancing opportunities).

Infrastructure

Major cities have recognized mass transportation as a gateway to the city, and have increasingly invested in infrastructure to facilitate travel (e.g. railway from airports to city centers).

Hybrid contracts

Hotel management takes many forms across the globe; while franchising is common in the US, hybrid contracts are gaining momentum in EMEA and Asia, given the broad mix of leasing, ownership, franchising and management contracts.
Hybrid contracts enable each party to balance the risks and benefits associated with operating a hotel.

Capital expenditures

Maintaining an appropriate level of capital expenditure remains crucial to the successful operation of a hotel. However, hotel owners continue to face tight budgets, often resulting in deferral of both maintenance and capital expenditure projects which are already overdue.
Investors with limited funds should prioritize smaller scale projects that directly impact the guest experience (e.g. guest bathrooms, wireless internet capacity, soft goods replacements) over larger expenditures (e.g. spa facilities), which will take a long time to generate returns.

About Ernst & Young's Global Real Estate Center

Today's real estate industry must adopt new approaches to address regulatory requirements and financial risks, while meeting the challenges of expanding globally and achieving sustainable growth. Ernst & Young's Global Real Estate Center brings together a worldwide team of professionals to help you achieve your potential – a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It's how Ernst & Young makes a difference.

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Source: Hotel News Resource

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Matthew Stephens

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