Hotel franchising set to increase by 50 percent over next five years

Well over 50 percent of all new ‘4-star,’ full service hotel deals taking place over the next five years will be under franchise rather than traditional management agreements with branded operators. This is a result of owners wishing to retain operational control, maximise returns and hotel companies continuing to focus on asset light strategy and increased brand distribution across Europe, predicts commercial real estate advisor, CBRE.

Figure 1The majority of key European hotel markets are currently experiencing solid growth in revenues and profitability (Figure 1 above); opportunistic investors appear to have confidence in continued performance growth and their ability to convert this into increased returns on investment. As a result there is a greater appetite for unencumbered assets in comparison to those under a less-flexible management agreement. This has put increasing pressure on yields for assets under vacant possession and the yield spread between the two operating structures has reached 75bps in some European markets (Figure 2 below).

Figure 2Owen Pritchard, Head of Development EMEA at CBRE said, “We are going to see more and hotel companies offering franchises for their full service ‘4*’ brands as well as continue to push their limited service franchise brands. We understand from Hilton that franchises in Europe over the last two years accounted for nearly 57% of total openings whilst the pipeline (as at the end of May 2015) shows this rising to just over 61% of the total planned openings (in rooms), including conversions.

“The predominance of the asset light strategy from major hotel brands combined with pressure to increase distribution of their portfolio is providing the momentum for the franchise model. There is also an increasing preference from owners to have operational control and an increase in the size and capabilities of third party operators.”

A recent notable example of franchising is the Conrad St James which is a franchise from Hilton and operated by Supreme Hospitality. CBRE Hotels advised on the deal.

The limited service sector has responded with a considerable pipeline of new hotels coming to the market. In London alone, there are currently 3,705 rooms scheduled to open in the next three years under a franchise agreement and 4,479 scheduled to open in regional UK. Notable examples include the planned Hampton by Hilton at Bristol airport and the planned Courtyard by Marriott in Edinburgh to be operated by Redefine BDL.

New brands continue to emerge, either as additions to existing brand portfolios or from new entrants to the hotel industry. A number of these are targeted at the Franchise market and include Tribute from Starwood Hotels & Resorts and Curio by Hilton.

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