What’s hot but secure in hotel investment?

It wasn’t quite a story of “déjà vu” at this year’s International Hotel Investment Forum in Berlin, but conversations with investors and operators alike had a familiar air to anyone who attended in 2018 and 2017: lots of money available to invest, and everybody trying to secure elusive sites in gateway cities with opportunities to add value. Similarly, the major operators continue to jostle to secure such sites and launch new sub-brands as points of differentiation. However, the rapid pace of such launches often seems to blur the overall positioning in the market.  Perhaps the big difference this year is that with Italian political instability and the French “yellow jacket” movement joining Brexit on the list of issues to consider, and demand for retail property diminishing in the face of the shift from bricks and mortar to online, more investor categories are now looking at hotel assets as a relatively safe investment.  Of course, those hotel investors and lenders that made hay in the frenetic days of 2006 and 2007 will be able to point to the risks of such a view, and for the first time this year, I was hearing regular references to “it being a bit like 2007 again”. Nevertheless, the majority view is that with leverage levels on deals still not having returned to pre-crash levels (although we would highlight wider increases in absolute Chinese debt, and in both UK and US debt as a percentage of GDP), interest rates remaining low and assuming the horror of a no-deal Brexit is avoided, there are no obvious triggers for an economic shock in the short term. Key concerns are around the ever-increasing complexity of financial structures being put in around deals and the general dissipation of financial covenants as lenders compete for a limited number of deals. Ground rents are back in fashion but continue to divide opinion as to their long-term sustainability. One prominent serial European investor expressed his frustration at deal multiples being driven up by “financial engineering”. Generally trading remains buoyant, although STR Global predicted slowing RevPAR growth rates compared with 2018 on account of new supply (Lodging Econometrics’ 2018 year-end report shows Europe’s total construction pipeline jumped to 1,569 hotels with 243,947 rooms, a 19% year-on-year increase) and slowing economic growth. Certainly, the fears in recent years of Airbnb and other disruptors making significant inroads into hoteliers’ base trading appear to have diminished, most likely having been absorbed by prevailing higher travel volumes, both through increased outbound tourism from China and other developing countries, and the greater propensity to spend discretionary income on experiences, having reached “peak stuff”. “Those hotel investors and lenders that made hay in the frenetic days of 2006 and 2007 will be able to point to the risks of such a view of the sector as safe, and for the first time this year, I was hearing regular references to ‘it being a bit like 2007 again’” Within the UK, London continues to trade strongly despite continuing high levels of new supply. On the other hand, it does seem that interest in the regional UK market is weaker. To some degree this reflects a Brexit-related slowdown in demand levels, but cities such as Manchester and Leeds are now considered by many to be over-supplied and shortage of labour continues to be the number-one operational challenge.  All of this is manifesting itself in comparatively flat RevPAR, an increasing cost base and falling gross operating profits – although of course well-invested properties with attractive brands in good locations will continue to outperform the market as a whole. Brand consolidation has been a major theme of the hospitality sector in recent years (examples include Hyatt acquiring Two Roads, IHG acquiring Sixth Sense and Accor acquiring Movenpick and SBE). One trend I noticed was the increasing number of extended stay/serviced apartment and hostel brands attending IHIF. Many seem to be chasing very similar UK locations, and some degree of consolidation in this increasingly popular segment seems inevitable. While not exactly negative, it was a slightly subdued mood at this year’s conference, despite a generally positive spin from the main stage. By the time we return in 2020, we should at least be post-Brexit (although I wouldn’t bet my house on it), and hopefully greater political and social certainty will boost both business and consumer confidence and demand.  Looking further ahead, all forecasts point to steadily increasing global travel volumes (the number of global air travellers is expected to rise from 4 billion trips annually to 8 billion in the next 20 years) and greater tourist spend, which the industry is well positioned to benefit from, and which should in turn drive continued investor interest – and more transactions. Christian Mole is head of hospitality and leisure for the UK and Ireland at EY