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Accor to share HotelInvest

The intelligence source for the hotel investment community

Volume 11 - Issue 5 Jul/Aug www.hotelanalyst.co.uk

The company said that the move would strengthenits financial position, in addition to allowing HotelInvest to expand.

AccorHotels said that the project would enable HotelInvest to “initiate a new phase of dynamic growth, by consolidating its existing asset portfolio through renovations, extensions and repositioning, expanding its network through acquisitions and hotel construction, and implementing an assertive asset turnover strategy”.

It added that the decision would give it “significant room for manoeuvre and greater financial flexibility to implement new initiatives, develop new products and services and, in doing so, capitalise on growth opportunities in the travel and digital spheres that would strengthen the group’s competitive edge”.

AccorHotels said that, between 2013 - when HotelInvest was created - and 2015, gross asset value increased from EUR5.5bn to EUR7bn and the profitability of the portfolio improved, with operating margin standing at 7.8% in 2015 (versus 4% in 2013). As a result, the company described HotelInvest as Europe’s leading hotel investor.

Sébastien Bazin, chairman & CEO, added: “By making it possible to bring in new investors for part of our business, this project will significantly increase the resources available to the group.

Each business will be able to continue to grow within the group based on a valuation that reflects its specific business model and growth outlook.”

It is thought that AccorHotels could sell up to 80% of the unit, with more details expected at the group’s October investor day. According to a note from Barclays, Bazin stated that it was too soon to be able to say who the external investors are likely to be but that the group has had significant interest over the last few years from ‘dozens of insurance companies / family offices etc’ and that he therefore had a good deal of confidence in the level of interest (with a plan to invite up to 12 investors in with stakes of EUR300m to EUR1bn each).

The news was welcomed by investors, with the company’s shares rising by 4.9% following the announcement.

The move came shortly after AccorHotels and Eurazeo launched Grape Hospitality, the hotel investment platform the pair hope will be a “major player” in Europe. It launched with 85 hotels, acquired from AccorHotels for EUR504, which will now undergo renovations.

Eurazeo said that it wanted to create “a major hotel investment player in the European market. The goal of Grape Hospitality is to revitalise this hotel portfolio, which features a solid positioning

and extensive presence within the various markets. Accordingly, Grape Hospitality will develop the entire hotel portfolio and add to its value by deploying an ambitious renovation programme, in addition to a marketing and sales strategy geared towards the local market of each hotel.”

The asset value of EUR504m includes: 28 hotels assets and the business interest of all 85 hotels, sold by AccorHotels for EUR146m and 57 hotel assets covered by the purchase agreements containing a substitution clause for the buyer signed with Foncière des Régions, Axa IM - Real Assets and Invesco, for a total of EUR358m. Grape Hospitality is owned 70% by Eurazeo and 30% by AccorHotels, with the pair having previously commented that they “may rapidly be joined by a third institutional investor”.

Inside04

NH CEO ousted

06 Asian investors’ Brexit bargains

09 Premier Inn out of India

24 Economic influences on supply

28 The loyalty landscape

Continued on page 3

hotelanalyst

THE HOTEL DISTRIBUTION EVENT 2016 28 SEP

2016DEBATING HOTEL DISTRIBUTION, CRM AND E-COMMERCE

AccorHotels, in a unique take on asset light, has confirmed plans to turn HotelInvest, its ownership arm, into a subsidiary that allows external investors.

Parts of the commercial real estate market in the UK have reacted in panic to the Brexit vote on June 23. The most visible example was probably the panic selling at open-ended property funds, many of which were forced to halt redemptions.

It is something of a moot point whether CRE is suitable for open-ended funds - short-term funding for large, illiquid assets is probably not a match made in heaven - but more than GBP18bn of investment funds were frozen within a fortnight of the vote according to Reuters.

Driving the fear was expectation that some sectors of CRE were now heading for the doldrums. In particular, London offices look vulnerable given a raft of new supply and now dampened demand from occupiers either pausing or pulling out altogether thanks to Brexit.

The bulk of the UK hotel industry, however, should have no such worries. Thanks to the crash in Sterling, leisure demand has soared. There are fears about demand from business travellers in the medium term but this is not an economic crash like 2009 and leisure travellers look set to fill any void.

Probably the most vulnerable are big boxes which have extensive conference and banqueting - like the Hilton Metropoles in London and Birmingham which are currently on the market - but even here Brexit, thanks to the shift in the exchange rate, will not have hit net operating income that badly.

Hotels should prove to be one of the most resilient CRE sectors to Brexit. And if anything, NOI should improve thanks to the move in currencies.

The last recession, which started in 2008, saw GDP drop by a total of 6.0%. The expectation then was for revpar to behave as it usually does and show a big drop. But the devaluation of Sterling meant hotel performance was much stronger than expected.

We’re not going to have a proper idea of how hotels in the UK are performing until close to the end of the year. It will need at least September’s numbers to get a useful picture of what the impact of Brexit is having on business traveller demand.

Right now, the signs are encouraging. There are reports of bumper increases in visitor numbers thanks to both more foreign visitors and more Britons taking their holidays in the UK.

If the trading outlook looks good, what about transactions and financing? After a few tales of deals crumbling, there is now a growing group of purchasers looking for bargains. The cheaper

pricing is coming partly through forced sellers (the previously mentioned open-ended funds are a key source of such properties) but mostly because if you are buying in dollars, euros or renminbi, UK property looks a bargain.

And financing, while slightly tighter, still looks incredibly cheap. Anecdotally there is talk of traditional debt financing being priced higher and terms made more demanding but with plenty of alternative sources of funding this does not look like it will cause transactions volumes to slow dramatically.

Within UK hotels, the main cause of transaction volumes slowing is because the data is comparing things to a bumper period in 2015 and there is simply not the stock available.

A prominent post-Brexit deal was the GBP75m loan bought by Starwood European Real Estate from Deutsche Bank and Bank of America Merrill Lynch. This junior debt was secured on the 47- strong Atlas portfolio which was bought by London & Regional for GBP550m.

The loan pricing is believed to have moved out by 75 basis points to 8.5%. Given this is a mezzanine piece the price still looks cheap. The senior tranche of GBP315m is still being sold down but the deal with Starwood Capital is likely to help the process.

Brexit has a long way to run. The current pain is merely the first stage, linked to uncertainty rather than any direct economic hit. The second stage, linked to the overall hit in UK GDP thanks to weaker trading prospects, is still very uncertain.

Ironically, while the second stage may prove more damaging in the long-term, it is unlikely to cause the same dislocation we are seeing right now. It will probably be the autumn when the next round of worries surface as the UK’s new finance minister delivers the Autumn Statement, the first official review of UK economic policy since the Referendum. The Chancellor’s outlook, likely to be late November or early December, will come just as the first solid figures appear on what is happening to the UK economy post-Referendum.

More caution and more uncertainty are likely in the wider economy and in hotels. But amongst this uncertainty lies opportunity and this is surely where investors should focus.

Contents News Review 3-22NH CEO ousted - Pandox faith in leases - Investors’ Brexit bargains - FdR German buy - PI out of India - Travelodge reports recovery - Patron eyes distress - Operating costs rocket - Choice ups direct ante - Austria attacks rate parity - GLH gets choosy - Rezidor leads Africa - Barcelo signs with Plateno - Google drives Deals - Qunar’s take-private bid

Analysis 24-28Economic influences on hotel supply - UK loyalty landscape

The Insider 32Excuses, excuses - Airbnb checking in? - Voting with your feet

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All enquiriest +44 (0)20 8870 6388Editorial director Andrew Sangstere [email protected] (HA Perspective and print newsletter) Katherine Doggrelle [email protected] (HA Daily and social media) Chris Bowne [email protected] Editor Dr Peter O’Connore [email protected] Sarah Sangstere [email protected] Anna Drabickae [email protected]

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UK hotels should be resilient to Brexit turmoil

Commentary by

Andrew Sangster

hotelanalyst

©This is copyright material. Strictly no photocopying or scanning - including sharing within your organisation

01...The announcement of AccorHotels’ plans to restructure HotelInvest came as the group completed the acquisition of FRHI Hotels & Resorts and with it the Fairmont, Raffles and Swissotel brands.

“The acquisition of these three emblematic luxury hotel brands is a historical milestone for AccorHotels. It will open up amazing growth prospects, lift our international presence to unprecedented heights, and build value over the long term,” said Bazin.

As part of AccorHotels’ larger strategy to strengthen its luxury and upscale business, the company has appointed Chris Cahill as the group’s CEO, Luxury Brands. In this newly-created role, Cahill will lead the FRHI integration process and be responsible for the strategy and global operations of AccorHotels Luxury Brands. This new structure will include Raffles, Fairmont, Sofitel Legend, So Sofitel, Sofitel, MGallery by Sofitel, Pullman and Swissôtel.

As a result of the deal, Qatar Investment Authority and Kingdom Holding Company now have respective stakes of 10.4% and 5.8% in Accor’s share capital. Ali Bouzarif and Aziz Aluthman Fakhroo from QIA and Sarmad Zok from KHC will now join AccorHotels’ board.

The meeting to approve the deal saw Bazin comment on discussions between the group and shareholder Jin Jiang International, which has been stakebuilding since the start of the year. Bazin said of the two: “We listen to each other. These discussions continue but we have not yet found the right solution to advance”.

Jin Jiang controls 15.06% of Accor’s capital and 13.15% of voting rights. In a statement to Reuters, the Chinese group said that “if two major hotel companies in Europe and Asia could join hands, our complimentary resources and advantages could be better leveraged to gain an edge in the fierce global competition”.

HA Perspective [by Katherine Doggrell]: As the SAS says, when you’re in a tight spot, the important thing to do is keep making decisions. And, with Jin Jiang breathing down his neck, Bazin cannot be accused of standing idly by.

How much of this decision was driven by Jin Jiang and how much was already in the planning is hard to say, but sources close to the company point to an acceleration, not a volte face.

The impact of the separation on Jin Jiang was raised in the note from Barclays, which pointed to the Chinese group having more interest in

AccorHotels’ market share/distribution/Asia exposure (all of which sits within HotelServices) than the assets.

With Jin Jiang possibly being distracted by the idea of a future move on HotelServices, Bazin is free to make the most of the proceeds from HotelInvest. Ahead of the investor day he would not be drawn, although a large acquisition is not thought to be likely. What is certain is that he is moving towards what the company’s previous incumbents at the top were not able to achieve - the greatest possible value for the group. Roll in the imminent sell-off of the digital division and the AccorHotels which Bazin will leave behind is a very different beast to the one he inherited from Denis Hennequin.

Additional comment [by Andrew Sangster]: The same week that the restructure at HotelInvest was announced, Hotel Analyst was invited to meet up with Steven Daines, CEO of HotelServices UK, Ireland, Benelux, Switzerland, Russia and CIS. The intended topic was the completion of the Raffles acquisition.

Daines had three simple messages about Raffles: the importance of adding luxury brands, the importance of the deal in forging a group capable of attracting the best talent, and the importance of Raffles providing an entry into North America for Accor.

But all of this is yesterday’s news. The key planks of this strategy were laid out by Bazin at the time the deal was announced.

The realignment of HotelInvest is, however, a new, new thing and, perhaps more importantly, is an approach that distinguishes Accor from its Anglo-Saxon competitors. It is a unique take on the asset-light model.

The expectation following what looked like a classic op-co and prop-co split was that the prop-co would be span-out. Accor has instead cleverly created a model that allows other investors in, while retaining some control. Focused real estate investors can now pump cash into the property wing without having direct exposure to the operations company.

Accor is taking a distinct path to the other global majors which are pursuing an exclusively asset light strategy (with the exception of Hyatt, a smaller player, which retains a property focus).

The current fly in the ointment is Jin Jiang. Daines claimed that the investment by the Chinese group did not change Accor’s strategy. This is true as long as Jin Jiang remains a passive presence. But Jin Jiang is unlikely to have taken the stake unless it had bigger plans. And these plans are unlikely to match what Bazin has in mind. It is very hard to see how the Chinese could succeed in a straightforward acquisition of Accor. But like Accor, Jin Jiang may well be unusually inventive.

01

3

News

©This is copyright material. Strictly no photocopying or scanning - including sharing within your organisation www.hotelanalyst.co.uk Volume 11 Issue 5

NH CEO ousted

The new board said that it would sell assets and pursue asset-light growth, seeking to cut costs and return a dividend by 2017.

Shareholder HNA Group responded by describing activist investor Oceanwood Capital as “seeking to realise short-term profits” by forcing a takeover offer, which it said it would “not be coerced” into doing.

NH Hoteles’ AGM saw four new board members after removed after the “overwhelming decision” of shareholders that there was a conflict of interest with HNA Group board members, amid concerns that they would push a merger with Rezidor Hotel Group, should HNA acquire it as a result of its deal to buy Carlson Hotels.

Oceanwood Capital has now taken control of the board of NH Hoteles, having previously called for co-chairman and chairman Charles Mobus to step down. It fargued that directors representing shareholder HNA - which has a 28.5% stake in NH - had a conflict following HNA’s purchase of Carlson Hotels. Mobus works for a company which advised HNA.

Oceanwood, which has an 11% stake in NH, combined its votes with fellow shareholder Grupo Inversor Hesperia, which has 9%, to oust the CEO. The pair have yet to propose a replacement.

The new board outlined a number of strategic moves. These included the “expedient” sale of the New York Jolly Madison Towers’ hotel, for which it said it had “a slate of interested buyers” and would aim to complete the transaction before year end. The executive team has also been charged with reducing overall debt and achieve a higher credit rating, as well as cutting capex.

The board said that “following a three-year period of significant capex” (EUR220m between 2014 and 2016) it was now in a position to generate “significant” cash flow and said that, for the foreseeable future, capex in the portfolio should be in the region of 4% to 5% of revenues. The reduction was in line with an estimate given by Fitch in April, which said that, with the repositioning of the estate likely to be completed by end-2016, capex was expected to drop 4% and 6% of revenues.

The new board added that “NH has a fantastic brand and the intellectual capacity within the

group to expand in an asset light fashion in its core markets”. It would also, it said, look to cost efficiency, with management to be set clear guidelines and incentives.

HNA Group replied by releasing an open letter, signed by Mobus, saying it was “disappointed to have been disenfranchised of our fundamental rights as a shareholder” and warning that it could not be forced into making an offer for the 71.5% of NH Hoteles’ outstanding shares that it doesn’t already own.

The company said that a bid would only “meet the short-term return needs of an ‘event driven’ hedge fund at the expense of NH, its employees, and other shareholders.”

It added that, with the removal of Gonzalez, “they are confirming their intention to turn NH into the equivalent of a Liquidating Trust. They have no plan other than to sell off strategic assets, reduce costs by a magnitude dangerously in excess of the board approved five-year plan, gut the capital expenditures programme, and pay dividends out of proceeds from asset sales instead of from sustainable earnings.”

It concluded: “Now that Oceanwood has seized control of the NH board and taken the drastic step of firing a proven CEO, we encourage our fellow shareholders to join us in holding them accountable to ensure that the narrow interests of a minority do not supersede what is best for the majority. Continue asking Oceanwood and Hesperia tough questions. Demand honest answers.”

The AGM saw Alfredo Fernández Agras nominated chairman and co-chairman alongside José Antonio Castro, chairman of the delegated commission and vice-chairman of the board. The former is a representative of Oceanwood and partner at Everwood Capital, the latter president of Hesperia.

HNA’s purchase of Carlson gives it a 51% stake in NH rival Rezidor Hotel Group, with the Chinese company currently deciding on whether to acquire the remainder or sell down its stake.

Regarding a possible merger with Rezidor, NH’s Tejera had already said that he would “try to understand whether it would be beneficial to the shareholders of NH or not”, adding that the businesses complemented each other geographically.

Post-ousting, the company said of Tejera: “Since he joined, the company has made great strides in improving the brand. NH is in a much better place now than it was than when he joined. He leaves behind a strong, motivated and committed team.”

The board said that it was “willing to work with HNA to resolve the conflict of interest created by the Carlson Rezidor transaction and, if appropriate, will look for the mechanism to welcome them back to the board. We will explore any opportunities that are in the best interest of all shareholders.”

HA Perspective [by Katherine Doggrell]: Oceanwood claimed to be defending against conflicts of interest with HNA and yet HNA accused it of trying to push a takeover. One wonders why, if the merger with Rezidor was a state all parties wanted, there has been the kerfuffle. HNA had a theory, suggesting Hesperia president Castro wanted the sale of the hotel and its one-time dividend to cut debt.

The Chinese group also claimed that Hesperia was trying to negotiate its way out of its management contract with NH and “has clearly stated his preference for awarding the Hesperia Hotels management contract to an NH Hotel competitor”. Good-bye “millions of Euros in termination fees”, says HNA. ...

The CEO of NH Hoteles has been removed, in addition to four board members, including the chairman.

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04

...In the letter, HNA Group made much of having “rescued NH Hotel Group from the brink of failure.” Observers had suspected this was not mere altruism, but a takeover plan. HNA, piqued, is unlikely to move soon, but, with NH’s share price dropping after the AGM by, at the time of going to press, 9%, should anyone want to continue Europe’s M&A trend by picking up the what is now a more robust group, they would be doing so at a discount.

Additional comment [by Andrew Sangster]: It has become quite a stand-off between HNA and the hedge funds. The latter want to force a sale to realise a premium on their investment. HNA wants to hang on to avoid overpaying to get full control of the company.

The bigger picture piece for HNA is consolidating NH with Rezidor and Carlson. And this is of another order of complexity altogether.

First, HNA versus the hedge funds. It is likely that HNA would prove to have more patience than the hedge funds. The risk for HNA however is that the hedge funds may be able to obtain the return they want by breaking up NH now that they have control.

It is possible that a break-up will be stopped by political and regulatory interference. If not, HNA will have to calculate how much it is willing to pay to take control to stop the process.

Second is HNA and Carlson and Rezidor. This is the sort of complicated cross-border transaction that has lawyers and investment bankers salivating. When HNA completes on its deal to acquire

Carlson it has four weeks to launch an offer for Rezidor or sell-down its stake to 30% (Carlson currently holds 51.3%).

A unified Carlson is potentially a potent force. When combined with NH, it would be a true global major. The question is at what price does the creation of this global major make sense?

NH has been eyed by the majority of existing global majors but none liked the look of the chain enough to make a serious offer. HNA looks the best hope for NH to keep together in its current state but despite some claims to the contrary, the pockets of Chinese investors are not limitless nor are they minded to make value destroying investments.

Pandox renews faith in leasesScandic Hotels has renewed and extended leases on 19 hotels with landlord Pandox, including a SEK470m (USD56m) renovation plan, of which Pandox will pay around half.

The news came after Pandox’s capital market day, at which it said it would continue to back leases and that it needed a “proactive strategy to control its destiny” in the light of greater consolidation in the sector.

CEO Anders Nissen said that the strategy would see Pandox take the position in the value chain “that benefits the company the most in each individual case”.

Speaking at the group’s recent Capital Markets

Day, Nissen said: “Pandox’s strategy to own and lease hotel properties under long term revenue- based lease agreements remains intact. As an active hotel property owner Pandox also has long experience in operating hotels itself. It is a tool which creates opportunities across the hotel value chain, as well as minimises risk and increases the possibilities for favourable long term value growth in the company’s complete hotel property portfolio.”

Speaking to Hotel Analyst, Nissen added:

“There are two structural changes in the market - consolidation and the change of the business model from operator to brands. The number of traditional hotel operators is less than ever and this means that the circumstances of being an owner have changed. There is more risk now for the owner - if you look at a lease, management contract and a franchise the biggest risk you can take is with a management contract.

“The scary thing is they are not operators, the Hiltons and Marriotts. You are in the hands of someone who is willing to share the upside, but not the risk and has no knowledge of day-to-day operations.

This lack of knowledge extended, Nissen said, to distribution, adding: “The brands have lost a lot of their power. When people make reservations they go to Expedia and the rest. That has opened up a lot of opportunities for us - we can co-operate with the OTAs and you can control your cost side, you’re not being tied to the brands.

“As a large owner you have to have your own revenue management departments - we become very good at it, because we work with a lot of different brands. They [the department] can make a lot of comparisons and this is a valuable tool for us. If you have the knowledge, you can go independent. For us, distribution is an opportunity, not a problem.” ...

©This is copyright material. Strictly no photocopying or scanning - including sharing within your organisation www.hotelanalyst.co.uk Volume 11 Issue 5 5

News

05

Asian investors circle Brexit bargainsThe Travelodge London Kings Cross Royal Scot has been acquired by Hong Kong-listed Magnificent Real Estate for GBP70.3m.

...For the first quarter, Pandox said that it had seen “slight yield compression and strong cash flows”. At the end of March, average valuation yield for operating properties was 7.5, flat on the year, while investment properties were at 5.8, against 5.9 at the year-end. The total value of the portfolio was SKr31.3bn.

Nissen described the portfolio as “well diversified” with 80% on long-term lease agreements and 20% operated by the company. Of the 113 hotels, 94 were leased on a long-term basis to, the group said: “Well-known tenants with established brands providing income stability, lower capital expenditure and risk”.

The company continues to grow its operations business, which it described as having been “formed as a response to the change in risk profile between hotel owners and hotel operators”. As part of the restructuring and consolidation of the Nordic hotel market, in its operator activities, Pandox has taken over the operation of four hotels in Norway and Sweden, and has entered into agreements to take over a further two hotels. “By taking over and developing underperforming hotels, Pandox is laying the foundation for a higher risk-adjusted return over time,” said Nissen.

Operational activities took in 19 hotels, with a total value of SKr6.6bn. Belgium was the largest country for the group operationally, with 1,936 rooms and 41% of revenue in the first quarter of this year.

For the first quarter, the company reported a 1% increase in revenue from property management to SKR386m, with revenue from operator activities up 4% to SKr442m. Ebitda was up 21% to SKr350m.

Nissen said: “The driving forces were continued positive development of the hotel market and renovated hotels that returned to full capacity and gained market shares. Property management benefited from rising demand and higher average room rates. Pandox’s acquisition and partnership with Leonardo Hotels in Germany developed as planned and earnings by the hotels developed well in the quarter. Operator activities were negatively affected by Easter and by the terrorist attacks in Brussels.”

The lease extension with Scandic was announced after the end of the quarter, and includes 19 hotel properties in the Nordic region with Scandic Hotels as hotel operator, of which eight are in Sweden, six in Finland, three in Denmark and two in Norway with lease expirations particularly during 2017-2020. The total number of rooms amount to 3,437.

Included in the investment, which is expected to be made 2017 to 2020, is the creation of 73 new hotel rooms. The implementation follows the cooperation model established by Pandox and Scandic Hotels in the earlier completed Project Shark, which comprised renovation, upgrade and development of 40 hotels in the Nordic region.

“Scandic Hotels have successfully operated the hotels over a long period of time and we are pleased to be able to present an extension of the lease agreements. With renewed leases and joint investments we are strengthening both our strategic partnership and joint product offering in the Nordics”, said Erik Hvesser, VP & Area Manager Sweden & Finland, Pandox.

HA Perspective [by Katherine Doggrell]: Vertical integration is the current message from Pandox. The company has been focusing on larger full-service properties in strategic locations - seen with its sale of eight Swedish hotels to Midstar - and has also been building its knowledge in operations, as shown by Nissen’s comments around distribution.

It has been using its varied brands to build up its knowledge and is now feeling more competent when going it alone. The model looks increasingly familiar to those operating in southern Europe, where the rise of the third-party manager means that brand agnosticism is the name of the game. For Pandox, the recently-listed group can also reassure shareholders with its owned portfolio, which is looking strong going into the rest of the year.

Nissen is known for his outspoken comments and has previously told the IHIF conference in Berlin that removing brands and using OTAs would be cheaper for him than paying for brands who rely on the OTAs.

The brands are currently trying to pull back control, using loyalty programmes to sell rooms at a discount and drive direct bookings. Some have claimed this cost will be picked up by the owners. Nissen told us that the brands were always running some campaign and he had yet to see any particular effect. You can rely on him to tell us if it goes against him.

The hotel went as Shearings sold a site to an unnamed Malaysian investor and Kewk Leng Beng, Millennium & Copthorne chairman, said that he was looking for “fire sales” as the post- Brexit market offered opportunities from overseas.

The 408-room Travelodge London Kings Cross Royal Scot was sold by Henderson Global Investors. William Cheng Kai-man, chairman, Magnificent, told the local press: “We are probably the first company to buy a property in London amid the Brexit overhang.”

Magnificent said that the deal represented “an undervalued opportunity to acquire a substantial sized freehold hotel …in one of the most popular tourism cities”. The company said that the site’s net income was GBP3.14m pa, adding: “The management is confident the total floor area and number of rooms can be further

increased by extensions and redevelopment.”It said: “The management does not think

England leaving the EU may have any negative impact on its prosperous tourism industry, instead its cheaper currency may attract even more visitors. The hotel property was valued after the EU departure decision to be the same as the purchase price.”

Cheng was equally confident about Britain’s prospects, commenting: “I was educated in England and I appreciate the last 500 years of British success in every way. To be governed now under Brussels is just killing the British style, ...


hotelanalyst

…class which the world adored for centuries. I am confident that Britain can do things their way and be as successful as they were in the last two centuries.”

His enthusiasm, at least for a deal, was shared by Kwek, executive chairman of CDL, which includes Millennium & Copthorne. He told The Straits Times: “My exposure there is very limited. We have good cash flow in terms of pound sterling so it doesn’t matter. When people panic and start to sell hotels, I will come into the picture. In fact, I am looking.

“Overall I’m confident that the UK will be good in the medium term. Temporarily, it will face a lot of issues negotiating with EU. More importantly, the political leadership must be forthcoming. I’m confident that if there are fire sales, I will buy in the UK, whether real estate or hotels. I’m looking in Europe as well.

“Some people could panic and maybe I will come into the picture. My balance sheet is not very leveraged and I’ve got firepower.”

When asked about the operations of the Millennium & Copthorne sites, he added: “I’m not worried about our hotels for the time being because we have always faced (difficult) situations - such as during the Lehman Brothers crisis, September 11 attacks and Sars. We face these problems from time to time and we survive.”

An unnamed Malaysian investor has acquired the Bay Glenburn Hotel on the Isle of Bute. Currently trading as a Bay hotel, the business was marketed on both a branded or unbranded basis, and current operator Shearings Holidays has agreed to remain associated with the hotel in an ongoing sales and marketing capacity for the next three years, allowing a comfortable transition to the new owners.

Ken Sims, director, Christie & Co, which brokered the deal on behalf of the vendor, said: “The purchase of the Bay Glenburn Hotel is the first foray into the UK market for this investor. We have seen an increase in Asian investors entering the UK market in recent times, but now it looks like investors are moving away from the highly-sought after London market, beyond prime locations such as Stratford and Cambridge, and are looking to invest in areas further afield.”

Jeremy Jones, head of hotels brokerage at Christie & Co, told us: “We’re feeling OK, the regions should be fine. We’re seeing a few mischief- makers out there trying to re-negotiate, but if you’ve got a workaday regional hotel, sensibly priced, we have as many buyers, as strong.

Some buyers are saying that the banks are giving them a hard time, but I wouldn’t think that’s true - RBS, Santander, they’re all still out there.

“The Asians are back and knocking on doors. The most spooked are the North American buyers, the currency fall is not convincing them and they are struggling. What we’re hearing is that, if you can get a bargain, it will be between now and 1st September when the politicians go back.”

HA Perspective [by Katherine Doggrell]: Every cloud, as they say, and finding the silvery lining down the back of the sofa after the decision to leave the European Union are Asia’s real estate investors.

Talking to us, Will Hawkley, UK head of leisure, KPMG UK, said: “We are seeing a large amount of interest since Brexit from Asian investors focused on prime hotel and residential assets in central London. They have been poised to take advantage of what they see to be a window of opportunity caused by the weakness of the pound. Assets have suddenly become cheaper for them, especially compared to pricing and levels of competition in their home markets.

“The interest isn’t necessarily new, i.e. deal processes have been ongoing in the run up to the

referendum, but whereas other competitors are pausing to consider options these investors, often new entrants, are forging ahead with the strategic plans that they have been developing in recent years, because recent activity was dampened by the scale of competition, they are now seeking to take advantage of the shift in the competitive landscape and the weaker pound.”

Also with an opinion, Anders Nissen, CEO, Pandox, told us: “You have more yield compression in properties in the UK than in the rest of Europe. The weaker Sterling brings more tourists in, which is what London needs with so much extra capacity.”

The transactions merry-go-round continues.

Additional comment [by Andrew Sangster]: The consensus view prior to the EU referendum was that economically the UK would be worse off, both in the short-term and the long-term. It is now clear that there will be a significant short-term impact to the UK economy (and indeed globally) even if the full effects are still manifesting themselves.

As I remarked immediately following the result, this is not politics as usual. The economy is now no longer the dominant driver for voters.

An interesting piece of research was recently...

06


News

FdR buys in GermanyThe deal, with NH Hotel Group, was the latest in a series in Germany, which has been identified as a haven for investors.

The assets will be leased by NH for 20 years under a variable lease. The deal, on hotels in Düsseldorf, Frankfurt, Nuremberg, Oberhausen and Stuttgart, is expected to close in 2017.

At the end of the first half, FdR had an EUR18.3bn portfolio, of which 14% was made up of hotels in Europe - the remainder being offices and residential. In the hotels segment, the half-year was marked by a further increase in the group’s stake in the subsidiary Foncière des Murs, taking it from 43.1% to 49.6%.

The group also strengthened its hotel exposure in Europe with secured acquisitions totalling EUR1.1bn, mainly in Berlin, Dresden and Leipzig, illustrating its faith in Germany.

Following the terrorist attacks in Paris at the end of 2015 and in Brussels in March 2016, rental income was down 2.1% like-for-like due to the drop in AccorHotels rents (-4.8%, variable according to the hotels’ revenue). In Germany, hotel rent was up by 6.8%.

The group said that the geographic diversity of the portfolio and the large share of indexed

fixed rents “nevertheless mitigated this impact”. The value of the portfolio increased 2.8% like-for-like, supported by the 7% increase in hotels held as premises and businesses and by the 25% margin on the sale of its Healthcare portfolio.

May saw the FdM subsidiary acquire two portfolios of hotels - the nine-strong Interhotel portfolio in Germany and a second in Germany and Belgium. The group paid EUR936m for the two, taking its total assets to over EUR1.1bn, as it looked to establish itself as “a major player in hotel investments”.

The fund is to continue looking to Germany for further acquisitions and said that the latest deal consolidated its exposure “in the particularly strong and dynamic German market, which posted revpar growth of 7.6% in 2015” according to STR.

The view has been shared by, amongst others, Whitbread, which has purchased sites to build its Premier Inn brand. The lease model the company favours is in line with the German market and the company, which recently decided to pull out of India and South East Asia, is looking to accelerate its growth in the country.

It is not alone in the budget sector. A report from PKF comparing the market to that in 2011...

Foncière des Régions has signed a sale-and-leaseback deal for a portfolio of five NH hotels across Germany for EUR125m.

07...published by Eric Kaufmann, Professor of Politics at Birkbeck College, University of London. He argued that the referendum result was driven by the personal values of voters. The correlation between a voter’s attitude towards say capital punishment and how they voted in the referendum was much stronger than for what the voter’s social economic status was and how they voted.

The economy will of course remain important but it is no longer going to trump everything else under consideration. Brexit voters seem pretty sanguine despite damaging their own wealth and economic position.

For corporates, a new era of tighter regulation looks set to be ushered in. The new UK government, led by Theresa May, could well be generous in terms of taxation but it is going to enforce what it considers are higher standards of corporate behaviour, however ill-defined these concepts might be.

A key requirement for the UK hospitality industry is to raise its lobbying game. The big

corporates in UK hospitality stood aside from the arguments during the referendum. Whether that was wise remains a moot point. They now need to invest time and money in ensuring that the industry’s voice is heard loud and clear. As the creator of one in three new jobs in the UK in recent years, politicians should be paying far more attention to us than they are.

There are many unknowns in the coming months and years. This uncertainty is, on an aggregate level, bad for business. But the disruption is going to create a lot of opportunities for those smart enough and lucky enough to be in a position to exploit the changing circumstances.

The devaluation of Sterling is one such opportunity. Back in 2009, Sterling crashed by a similar level (although other currencies fell soon after to eliminate any comparative advantage the devaluation brought).

This devaluation proved a boon to the UK hospitality industry and business was much more robust than forecast even in the face of the severe

recession (GDP went down 4.2% in 2009). This coming year, 2017, GDP is not expected to turn negative for the year (at least that is the current consensus). But there has been a similar drop in Sterling since the referendum to that experienced after the collapse of Lehman Brothers in the autumn of 2008. All other things equal, this should provide a big boost to hotel trading.

In addition, real estate in the UK now looks like a relative bargain. Given that monetary policy is set to provide further stimulus to asset prices (through interest rate cuts and more quantitative easing), the push on yields to move out in the face of business uncertainty should be held in check.

This is not to claim that we are better off following the vote for Brexit. Far from it. But the vote has happened and any attempts to back away from Brexit are likely to cause even more disruption than going forward and negotiating the best possible way out for the UK and the EU.


hotelanalyst

...described the classic budget hotel as having “all but vanished”, while the segment has become highly diversified and individual.

PKF hotelexperts said that, among the contractual models preferred by budget hotels for expansion, lease agreements were the most popular, and had seen rise in popularity from 2011. Around 62% of hotels surveyed prefer fixed lease agreements, with 38% choosing percentage leases. Franchising was also on the rise, being the chosen option for around half the respondents.

Ulrike Schüler managing partner, PKF hotelexpert, told Hotel Analyst: “As the budget hotels show the highest growth rates in the hotel industry in Germany and as international hotel companies are not willing to conclude lease contracts due to accounting reasons, there are quite a lot of new franchises entering the market.

“Budget hotels are becoming increasingly attractive among investors’ investments. In recent years hotel properties have undergone a positive change of image and are today recognised as an asset class in the category of specialised operator- run properties.

“This can be attributed to factors including growing professionalisation of market players,

but also to innovations in the industry. One of these is the rise of budget hotels in Germany.

Budget hotels provide relief with advantages on the cost side such as area efficiency through smaller rooms, no full-service restaurant or function rooms, which can increase profitability altogether.

“Budget hotels are more resistant to crisis; also a proportional higher GOP results in a higher lease potential per room in combination with area efficiency.”

Growth is pushing ahead. PKF said that branded budget hotels made up around 13% of the overall hotel market (hotels and bed-and-breakfast hotels) in Germany and accounted for 24% of beds. Moreover, a comparison to the PKF Budget Report from 2010 showed that a high proportion of budget brands increased the number of their hotels, with average growth at around 32%.

HA Perspective [by Katherine Doggrell]: At the time of going to press, Germany had suffered from three violent, public assaults within the space of a week. The focus of concern over security shifted from France towards the previously- stable Germany and with it fears over performance, given the drop in revpar seen in Paris after the November attacks.

There may be some trepidation for those looking at the country. For those already in the sector, there are additional issues. PKF told us that competition would “simultaneously grow fiercer in the budget hotel industry and there is a high risk that the battle for market share will be fought with the weapon of price in the future”.

Indeed, the news came as EasyHotel announced a new franchise hotel under development in Bernkastel-Kues, Germany, with CEO Guy Parsons commenting he believed there was “significant opportunity for further franchise hotels expansion in Europe and the Middle East, enabling us to leverage our brand presence without direct capital investment”. The company also announced a deal in Turkey. Clearly terror fears are only in the short-term for EasyHotel.

08

Premier Inn pulls out of India, SE Asia

The news came as fresh calls for the company to spin off its owned hotels drove its share price higher.

Whitbread said that it would concentrate Premier Inn’s international growth strategy on a smaller number of specific markets “where it can generate good long term sustainable returns and where there is the greatest long term opportunity to build scale”.

It said it would begin a “phased withdrawal” from its operations in India and South East Asia, with the cost of the withdrawal not considered “material”.

Premier Inn currently has one hotel in Singapore, one in Thailand and two in Indonesia, with three in India. It has six in the UAE.

Alison Brittain, CEO, said: “In April I laid out a three-point plan to build a bigger and better Whitbread. I reiterated the strong growth prospects for Whitbread in the UK, where we have laid out bold milestones for Premier Inn and Costa and confirmed that Whitbread also has an exciting future beyond the UK.

“A key strategic theme is to focus on our strengths internationally and that means identifying those opportunities to invest our

capital and management time wisely to generate the best and most sustainable returns. To build a successful future for Premier Inn overseas, we must focus on those markets where we can grow scale and where our brand proposition is most compelling for our customers.”

The group is maintaining its target of 85,000 UK Premier Inn rooms by 2020, up from around 64,920 currently.

In May Brittain described the company’s joint venture in the Middle East as “growing and profitable” while in India and South East Asia the market was said to be “promising”, but operationally “challenging”.

For the full year, International hotel losses reduced to GBP4.6m, against a loss of GBP5.2m in the previous year. During the year, the group acquired a 50% interest in PT. Tasland Indonesia, ...

Whitbread has announced that it will pull out of India and South East Asia to focus its international growth in the Middle East and Germany.

13%of the overall German hotel market (hotels and bed-and-breakfast hotels) is made up of branded budget hotels- accounting for 24% of beds.


News

...its Indonesia joint venture. The news was followed by a call from Morgan

Stanley for the company to follow the asset-light trend in the rest of the sector and sell some of its assets. The broker looked to AccorHotels’ decision to set up a property spin-off and said that peer valuations suggested such a model could deliver 50% upside. The company’s share price rose by 1% following the comments.

Earlier this year saw Whitbread look to accelerate its expansion in Germany with the purchase of two hotels for conversion, in Leipzig and Hamburg. In October last year, Premier Inn completed a deal on a new 200-bedroom site in Munich, due to open in late 2018. Whitbread has now secured four Premier Inn sites and 760 bedrooms in Germany as it targets six to eight hotels open and trading by 2020. It has one property open, in Frankfurt.

Whitbread’s most-recent results saw it confirm plans to continue using its balance sheet to back growth. The company described acquiring commercial property, “particularly in London” as “expensive, so we’re looking at the best use of our investment capital to grow the business”.

Group finance director Nicholas Cadbury said that the company was “looking to raise between GBP100m and GBP150m through sale-and-lease-backs this year. And that’s making good progress”.

This progress has, most recently, seen it agree the sale to Legal and General of its 389-room Hub by Premier Inn hotel in Kings Cross, due to open in 2017, in exchange for a 25-year lease agreement.

Legal and General will pay GBP84.5m in

cash for the property, with an initial payment of GBP46.5m on exchange. Further staged payments will be made during the construction period with a final balancing payment being made on completion of the hotel in June 2017. The total sale price of GBP84.5m produces a net initial yield of just under 4% against an annual rent of GBP3.5m.

Cadbury said: “This transaction shows the strength of Whitbread’s covenant and the strong asset backing to our balance sheet as well as our ability to recycle the value we create from our freehold developments into new opportunities.”

Observers are hoping that some of those new opportunities would come under an AccorHotels’- style model.

HA Perspective [by Katherine Doggrell]: Whitbread’s last results saw analysts half-reassured, half bored by Brittain and her safe pair of hands. As she mentions above, onwards with the original plan. This latest move, however, marks a deviation from the plan and the first big step for the group under her leadership.

Calls for Whitbread to chop itself up are nothing new - but historically it has been along brand lines, with a focus on hotels and coffee (Costa, meanwhile, will not be pulling out of India). Now Premier Inn seeks sanctuary in Germany, along with every other budget brand. As we saw mere weeks ago, the company is prepared to commit cash to assess the potential in the country and is likely to continue down this road.

Whitbread’s house broker has now joined the call for change to the company’s structure.

The mood of the UK’s property agents post-EU Referendum has been mixed to say the least, with some stoical and some panicked. The sale of the Kings Cross Royal Scot Travelodge was a reassurance to many, with the buyer claiming the same valuation pre-and-post-vote (as they would) but many would like to get their teeth into the estate of one of the UK’s most bankable brands.

Mark Brumby, analyst at Langton Capital, described it as: “Opco propco version 1.2”. He added: “It’s always possible but I would have thought the numbers have been run a number of times over the last few years and nothing’s happened. Brexit might hang a question mark over UK assets for a while, too. There’s a lot of smoke out there and little clarity. Deals that have been started (and are nearly finished) might complete but that’s not the point. It’s more a question of will new deals be initiated into the two years-plus plus of uncertainty out there.

“The Brexiteers seem to be trying to talk the market up. They’re being brave with other people’s money. It remains to be seen what the money itself will want to do. The high-fiving drunks are confident but the Bank of England is very nervous.”

09


hotelanalyst

The company also made its first debt repayment since 2012’s restructuring, as it continued to expand, identifying a further 250 UK locations which it said were suitable for the brand.

Travelodge said that it expected to open at least 19 hotels this year, with sites in London, Bristol and Glasgow a key focus. Its secure development pipeline continues to grow and now stands at c. 3,000 rooms.

Peter Gowers, CEO, said: “We are delighted to announce a record year for Travelodge. Our investment in the customer experience is delivering excellent results and our new-look rooms are driving substantial improvements in guest satisfaction. We are seeing significant growth from business customers and like for like sales growth was again substantially ahead of the UK hotel market.”

The group said that there continued to be “strong underlying growth potential for value hotels, with growing customer demand and relative under-supply compared to other key international market. Significant further growth from business customers remained one of the principal drivers of our improved performance, with direct business sales up 45% on the prior year”.

It described itself as having made “strong progress over the past three years, resulting in strong revenue and profit growth, improved customer scores, a powerful direct distribution model and an accelerating development pipeline”.

In the short term, the group said that, while its overall performance would reflect trends in market growth, it expected to outperform the wider market.

According to results filed with Companies House, for the year to 31 December 2015, the company reported 12.7% growth in revenue to GBP552.1m for the UK business and a 2.7% increase to GBP7.5m for the international business, which includes Spain and Ireland. The group moved into profit, seeing a pre-tax profit of GBP5.9m, against a loss of GBP25.5m in the same period last year.

UK like-for-like revpar rose by 11.7% to GBP38.44, against a 7.2% increase over the same period for the midscale and economy sector, according to STR. The end of the year saw the group complete its three-year GBP100m modernisation programme, which it said had

driven improvements in its TripAdvisor scores which, it said now averaged four out of five stars.

The group said: “The investment we have made in upgrading our guest rooms led to UK like-for-like occupancy rising 1.0 percentage point, to 76.6% like-for-like average room rate, supported by effective yield management was up 10.2% to GBP50.19.

The group cut its net bank debt to GBP304.7m from GBP355.4m and said that it had made its first debt repayment since the restructuring of GBP10m, with a further GBP12.6m repaid in March 2016. Total funding rose to GBP527.4m from 521.3m, as unsecured funding increased by GBP16.1m to GBP143.1m. Travelodge said that it had no requirement for debt repayment until June 2017 and only a minimum cash liquidity test until September this year.

May saw Travelodge’s inaugural GBP390m high yield bond offering, comprising GBP290m 8.50% senior secured fixed rate notes due 2023 and GBP100m senior secured floating rate notes due 2023 issued by TVL Finance plc (a Jersey incorporated company), an affiliate of Travelodge Hotels Limited. The proceeds of the offering were used to refinance existing indebtedness of the Travelodge group and make a distribution to its shareholders.

During the year the company launched its mobile app which, it said, had been downloaded by an average of 200,000 customers and had an average booking conversion rate of almost twice that of the website. Web sales were up almost 12% on the year. The group drives 85% of its sales through its brand and direct distribution channels.

Travelodge is owned by funds managed by GoldenTree Asset Management, Avenue Capital Group and Goldman Sachs. Earlier this year saw plans by the trio for a GBP1bn sale of the

525-strong group paused amid rumours that the company had difficulties attracting the required price. Sources now comment that the owners are happy to stick with the budget group while performance continues to recover.

HA Perspective [by Katherine Doggrell]: Travelodge has all the makings of being a Brexit bellwether. It takes 98.7% of its revenue from the UK and the bond commanded a healthy premium as investors twitched at the impending referendum.

But while investors looked for reassurance, the customer looks for a bargain and Travelodge has spent enthusiastically on advertising which gets its simple message of value across. There was cheery news from Begbies Traynor at the time of writing, reporting that the British tourism industry would be one of only a handful of sectors to immediately benefit from the Referendum decision.

Julie Palmer, partner at Begbies Traynor, said: “The significantly weaker pound has already made international travel for British families so much more expensive, which should encourage more to favour staycations on home soil. Meanwhile currency fluctuations have also made travel to the UK from Europe and the US in particular more affordable, helping incoming tourists to get a lot more bang for their buck.”

If the company can turn its UK focus into a bonus, for the owners, strong performance may ignite hopes of a sale after all. Gowers has previously admitted that they were not naturally long-term holders for the business and Brexit has put the kibosh on the selling ambitions of many US funds in the UK. However, a more adventurous exit than a simple pass-the-parcel may be required.

Travelodge saw Ebitda rise by 58.8% in 2015, crediting tight costs and growth in the corporate market.

Travelodge reports recovery

85%of Travelodge sales driven through its brand and direct distribution channels.


News

News of the fund came as CBRE released a post-EU Referendum study in which it described the hotel sector as “exit-resilient in the short term” and pointed to the UK continuing to experience “strong investment volumes”.

Patron Capital said the fund had exceeded its original target of EUR750m, attracting investors from nine countries, with the majority of commitments coming from North America, followed by Europe, Asia Pacific and the Middle East. Investors included pension funds, sovereign wealth funds, endowments, foundations and asset managers.

The fund will opportunistically be targeting distressed and undervalued investments, directly or indirectly related to property, across Western Europe. The fund will invest across a range of sectors in property-backed corporate investments as well as individual properties.

Around EUR164m has already been deployed, with investments to date across office, residential and retail properties and corporate entities in the UK, France, Germany, Ireland, Portugal and Spain.

Keith Breslauer, Patron Capital’s founder & managing director, said: “With returns over our 17-year history averaging around 15%, we have

proven experience of identifying opportunities and maximising value. The fact that we closed this fund in the lead up to and immediate aftermath of Brexit - and were significantly oversubscribed - highlights investors’ confidence in our ability to deliver strong returns in any economic environment.

“Our new fund alone gives us the financial firepower to invest in around EUR3bn of assets and our experienced and hands-on team means we are very well placed to make the most of the significant distressed opportunities that exist in Western Europe. Having already made a number of investments across various countries and sectors, we are actively looking to deploy capital, and have several further opportunities currently under consideration.”

CBRE’s “The Long Goodbye”- so entitled because the company argues that exit will not be as dramatic as some commentators claim - the group warned that “Imaginations will no doubt run wild”, but sought to reassure that “We are in the EU until we are not - and it will take some years to achieve an exit. It may not happen at all. The implications will take time to emerge and there will be inertia in the decisions businesses take, on a ‘look before you leap’ basis”.

The study acknowledged that this uncertainty was likely to affect UK investment prospects, because the UK (and London in particular) is an open economy with significant exposure to international capital flows. However, it said that the magnitude of the effect was very difficult to predict.

It also pointed to some investors having no choice but to invest in the UK, particularly smaller investors or pension funds with significant UK liabilities that they need to match against UKassets performing in a similar way. The study described some sectors as “exit-resilient in the short term (such as infrastructure, student housing, public sector, hotels and the mass residential market).

Elaborating on hotels, the company told us: “The referendum result will prolong a period of unusual uncertainty for the UK economy and the hotels market more generally, and inevitably it will take some time for the full impact to be understood. In the short term, it is likely that some investors will defer decisions until they perceive

greater stability; however, the slowing in UK hotel transaction volumes can also be attributed to the change in types of buyer and lower stock availability that has been evident in the market since the beginning of the year. The falling Pound relative to the Dollar and Euro is likely to make UK investment opportunities seem particularly attractive to overseas investors.

“Dollar and Euro denominated funds which have seen the value of their current UK property assets fall due to weakening exchange rates may be reluctant to sell. But cash buyers or those with secured debt are already expressing great interest in UK hotel acquisition. The low value of the Pound may also make the UK more competitive, driving a ‘staycation’ trend and causing an increase in inbound travellers to the UK resulting in greater overseas demand for hotel accommodation.”

For Patron Capital, which has long shown an interest in the hotel sector, the uncertainty identified by CBRE could well be the smell of distress.

HA Perspective [by Katherine Doggrell]: The only known impact of the Brexit vote thus far has been a rapid change of leadership at Number 10 and some insular wranglings and brick-throwing amongst the opposition. We are - at the time of writing - no closer to knowing what to expect from the exit than we were on the Friday morning after the vote.

What has become clear is that an exit is now accepted, with the only online petition still doing the rounds one to press Bank of England governor Mark Carney to take over at PM. The people want someone who knows money and, with his reassuring talk and push to drive lending, Carney has been the voice of stability so far.

The view from the property agents we have spoken to so far has been mixed. Opportunity is said to be knocking, from buyers looking not only for a bargain, but also for a less-hectic bidding process with some investors pulling away.

CBRE had a note of caution as it warned to expect an increase in yields “to reflect the perceived risk of holding UK property, which could in some cases look alarming”. This, it felt, may well be temporary, and in any case would be at least partly offset by the continuing relative attractiveness of property compared with other global asset classes or ‘safe haven’ assets.

What had been certain from the start of the year, back before anyone thought Brexit was...

Patron Capital has raised a EUR949m fund to target “distressed and undervalued investments” in Europe.

Patron looks to distress in Europe


hotelanalyst

...likely, was that the transactions market in the UK was slowing down, as supply dropped off and the portfolios, particularly in the regions, just weren’t there. The ever-rising prices in

London were also putting investors off from putting all their eggs in one basket. One agent noted that the rest of this year would be ruled by single-asset transactions, which was no change

from the forecasts made in January. The concern remains what the exit picture looks like for those who bought at the peak.

Operating costs in the UK rocket

The study pointed to the rising cost of acquiring rooms, with online travel agents dominating during the period, in addition to growing wage costs, which are set to rise further after the National Living Wage was introduced this year.

A 53% increase in operating costs has reduced rooms profit conversion to 70.9% in 2015 from 75.9% in 2000.

The report found that, over the last 15 years, rooms cost of sales saw growth of 1,300% in the regional UK and 900% in London on a per available room basis. While revpar across the UK rose by 29.4%, at the same time, goppar was recorded at GBP27.12 in 2015, dropping from GBP35.82 in 2000, with profit conversion dropping to 29.6% of total revenue in 2015 from 44.2% in 2000.

The study said: “The evolution of the industry over the last 15 years means that it is now critical that operators, owners, lenders and investors gain a true appreciation of how acquisition cost creep is cancelling out growth in rooms revenue.”

It called for hotels to give greater focus to profitability with detailed data now available on cost lines throughout the profit and loss account.

In 2000, regional hoteliers recorded a net revpar of GBP47.12. In 2015, the same sample of branded hotels achieved a net revpar of GBP47.14, a GBP0.02 increase over 15 years. The growth in selling costs completely cancelled out the 20.6% increase in revpar.

‘Benchmarking beyond revpar’ said: “The growth in OTAs, which has fuelled the increase in rooms cost of sales has been well documented. Within the last year alone, 285 million guests stayed in properties booked through Booking.com. Whilst OTAs have been successfully used to leverage many hotel markets out of the deepest and longest recession in history, market evidence suggests that hoteliers are still unsure of how to correctly manage the third party resource.”

Less well publicised has been the upward trajectory of sales and marketing expenses, which has increased by 285% in the regions and 230% in London over the last 15 years. This was attributed to the need to keep pace with the OTAs across a growing number of marketing platforms; leveraging loyalty schemes to drive direct bookings and greater digital marketing.

While costs have risen, so too has revpar, but the study found that this had not translated to growth in profit in the rooms department.

In London, where revpar rose by 37% over the period, profit conversion fell from its peak of 54.6% of total revenue in 2000 to 47.2% in 2003 as hoteliers raised expenditure “in an attempt to stop the rot caused by plummeting headline performance”. Rooms cost of sales grew by more than 225% on a per available room basis in the three years to 2003, as well as sales and marketing expenses, which increased by 60% during the same three-year period.

The regions illustrated a further impact on the cost of selling rooms - the changing methods of booking corporate stays. The study found that whilst commercial demand in the regions peaked in 2001 at 58.8% of total demand, this figure has declined to 41.2% in 2015.

The report said that, in the wake of the global financial crisis, many companies commissioned corporate travel agents “to negotiate hard on contracts, securing the best value for their client’s money. In addition, there was an increasing propensity for corporates to book via online channels, affording a company greater flexibility in unpredictable times and removing obligations associated with rigid contracts”.

Growth in payroll was a key cost. The adult hourly rate of the minimum wage has increased by approximately 80% in the last 15 years, to

GBP6.70 in 2015 from GBP3.70 in 2000. The challenges in managing payroll are likely to continue following the introduction of the Living Wage in April 2016, which means all workers aged 25 or above will be entitled to earn a minimum of GBP7.20 per hour, a 7.5% increase on current pay in this rate bracket.

The report came as STR Global gave some hope to London hotels, which have seen performance drop this year. The company said that recovery would be driven by rising domestic demand, driven by GDP growth, as well as an increase in the consumer price index and renewed investment activity.

Hotstats offered less comfort, describing hotels as having gone through “a dramatic evolution” over the past 15 years, with the next 15 years being undoubtedly “as volatile”. They have no excuse, however, for not looking ahead with open eyes.

HA Perspective [by Andrew Sangster]: It is a business cliché that it is the bottom line that counts and yet the hotel industry spends much of its time obsessing on the top line, with revpar as the metric considered to be the one that matters.

Owners know different, of course. A good operator and brand is not necessarily the one that maximises the topline. Delivering profit is what counts and sometimes sales performance may apparently lag rivals to deliver a better return.

The focus for the past couple of decades has understandably been on distribution costs. Even if the current book direct campaigns do turn around these inexorably rising costs (which Hotel Analyst has repeatedly warned is unlikely), another big area of cost pressure is set to intensify: payroll.

Whatever the final outcome of Brexit talks, it seems unlikely that the UK will be allowing in cheap migrant labour at the previous quantities.

The best hotel operators have been looking at improving productivity. But this is all too rare. Now that payroll costs look certain to be an issue the ability to deliver higher value through smarter operating practices is going to be an important differentiator.

Hotels in the UK have seen rooms profit fall over the past 15 years as operating costs have risen by 53%, according to a new study from Hotstats.

12

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hotelanalyst | distribution&technology

The company is the latest operator to make the discount move, joining companies including Hilton Worldwide, Marriott International and Starwood Hotels & Resorts in attempting to wrest the consumer away from the online travel agents.

Choice said that if a guest found a lower price elsewhere online it would match the price and give the guest a USD50 Visa gift card. “Too often consumers feel the need to scour the internet for the best hotel price. We want our members to have confidence that when they book their rooms directly with Choice Hotels they have exclusive access to the best prices, the best service and the best rewards,” said Robert McDowell, chief commercial officer.

At the group’s first quarter results, the group said that choicehotels.com continued to grow “significantly and generated the largest share of revenue on its distribution channels. The direct online channels, choicehotels.com and mobile had 39 days with over USD5m in bookings in Q1 2016 compared to USD27m last year.

Bookings via mobile applications yielded an increase of 17% in revenue for the first quarter compared to last year. In the first quarter, the company announced a series of enhancements to the Choice Privileges programme and the company said that those changes were already driving “considerable” lift in enrolments by new members, which were up 63% versus Q1 2015, with activity among existing members up 17% versus last year.

Choice said that, in the first quarter, it registered a 400 basis points increase in loyalty programme revenue contribution.

CEO Steve Joyce told analysts: “Our distribution strategy is delivering great results. We’re staying ahead of the guest booking needs and we are leveraging our distribution channels to deliver an increasing number of customers to our franchises hotels.”

The comments were made ahead of the decision to offer a direct booking discount, but Joyce flagged the move up, commenting: “We are very encouraged by what the other brand companies are doing in terms of the marketing activities and everything else that they’re doing to drive customers back to proprietary sites, because

that’s good for the industry, it’s good for our owners or franchisees and all the hotel companies.”

On the same call, CFO Dave White said that the company had “never been happy” with the pricing on the OTAs, adding: “We think it’s overrated for what they provide”. He said: “The OTAs continued to grow as a part of our business. While we are certainly welcoming of the OTA as a channel to utilise, we are not happy with the price points that they want. And so you’re going to continue to see us try to drive business to our channels simply because they’re dramatically more profitable than an OTA trying to suck 15% to 20% out of the deal.

“One of our sole missions is to try to limit the amount of activity going from the OTAs and coming from into our primary channels. And if you look around the industry, everybody else is doing the same thing.

“We openly welcome them as a channel. We just want it to be priced appropriately and with a business relationship that makes sense for us, but we are going to continue to drive our business and our proprietary channels, because that creates the strongest loyalty loop with the customer and because that they’re most profitable for us.”

Charlie Osmond, Triptease’s chief tease, told us: “I think this is marvellous. For years online distribution has been developing a beer gut. A network of sub-brands now controlled by a pair of OTAs have driven up advertising and distribution costs for the industry. Hotels are calling time and going on a detox in a race to get back in shape.

“The key battle ground is the consumer fallacy that it is cheaper to book via OTA. These new cheaper-direct loyalty discounts will help address that issue. And the chief beneficiary will be the guest. The middleman’s take will be redistributed into improved services and lower costs.

“This does not mean OTAs are the losers. A leaner, fitter distribution relationship will force reductions in advertising spend. Hotels will demand the end to competitive auctions where five OTA sub-brands artificially inflate acquisition costs for all. Fighting the flab is going to feel like hard work for a couple of years but the whole industry will be better for it in the end.”

HA Perspective [by Katherine Doggrell]: Choice Hotels International, which has made a name for itself as something of a technological innovator, was relatively late to the leverage-your- loyalty direct booking game.

Possibly because this is less innovation and more good old distribution. Make it cheaper and they will come. The customer has been trained, in part by the OTAs, to look for bargains online and now they are being led all the more clearly to them.

For the operators, the benefits are clear - proof to owners that they can deliver customers. For the owners, who will, in the main, be picking up the tab, it may be less appealing. As for the long-term implications over commoditisation of rooms, there are concerns that operators may be further imprinting the price-above-all message.

Research by Koddi found that if the hotel price was the same price as the OTA, 65% of consumers would choose to book directly with the hotel and that even when it wasn’t, consumers still prefer to book direct. Only when there was a 10% difference in price did the selection rate begin to even out.

The assumption was that booking direct would lead to better treatment, better customer service, and more upgrades. As we report else-where in this issue, the customer is getting more demanding. Getting them through the door is just the beginning.

Choice ups direct anteChoice Hotels International is to offer members of its Choice Privileges reward scheme an exclusive discount of up to 7% off room rates in return for booking direct.


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The government has followed similar moves by France and Germany, and came as the CMA in the UK reopened its investigation into the clauses.

In Austria, the government has submitted to parliament plans to ban rate parity clauses. Vice Chancellor and economy minister Reinhold Mitterlehner, said: “At issue is that companies do not have to offer the same price as they currently do on the (online) platform but have the opportunity to make other arrangements, which increases hoteliers’ room for manoeuvre.”

Peter Verhoeven, Booking.com’s managing director for Europe, the Middle East and Africa, responded: “If you want to be sure to get the cheapest hotel price you would be forced to comb through countless home pages to in the end only be able to compare a fraction of the possible offers.”

The proposal will be reviewed after the summer recess. If successful, Austria would join France and Germany in outlawing the clauses.

August last year saw the Macron Law became effective in France, making price parity agreements illegal, including the “narrow” price parity agreements agreed to by the French NCA in April 2015. Similar legislation prohibiting “narrow” price parity agreements has been proposed in Italy and currently is awaiting action by the Italian Senate.

The most striking decision to date has been that in Germany which saw the authorities rule that so-called Most Favoured Nation clauses violated German and European competition law. At the beginning of this year the country’s Bundeskartellamt ruled that Booking must change

best price clauses in its contracts in German, labelling them “uncompetitive”.

In the UK, the CMA has confirmed that it had sent a questionnaire to a “large sample of hotels in the UK” as part of a joint monitoring project, in partnership with the European Commission and nine other competition agencies in the EU.

This project is looking at how changes to room pricing terms, and other recent developments, have affected the market. In particular, whether the Europe-wide removal by online travel agents Expedia and Booking.com of certain rate parity or ‘most-favoured nation’ clauses in their standard contracts with hotels in July 2015 has affected the market.

Ann Pope, CMA senior director for Antitrust, said: “Consumers benefit from lower prices and better service in a truly competitive market in which hotels and online travel agents compete for their business.

“The CMA is aware of concerns raised by a number of hotels about how this market is operating. This project is part of the CMA’s ongoing commitment to watch this market closely in order to ensure that consumers are benefitting from effective competition and we welcome responses to this survey, so that we can see how the market is developing in light of recent changes.”

The CMA said that hotels in the UK that had not been directly contacted by the CMA were also welcome to complete the questionnaire. The deadline for responses was 8 August 2016.

Neil Baylis, competition partner, K&L Gates, told Hotel Analyst: “Rate parity - everyone seemed to assume this would fizzle out with the European Commission’s remedy preventing restrictions on rival OTAs’ pricing but still allowing the major OTAs to prevent hotels themselves undercutting them. From what I have read, the impact so far of this remedy really hasn’t been very effective and so further work is now going on by all the relevant national competition authorities to seek further information from hotels - the UK’s CMA being one of those authorities.

“Some countries such as France and Austria and to some extent Germany are cutting to the quick and banning rate parity clauses outright. That does seem to be where the market is heading, but the major OTAs will hold out for as long as they can. It will clearly be a rather messy situation if different rules apply in different countries… especially given the internet is no respecter of boundaries.”

The noose tightens on rate parity, but the lever has yet to be pulled on the trapdoor.

HA Perspective [by Katherine Doggrell]: While the Austrian hotel market is likely to hold distinctly less interest than the French, the grind of legislation is starting to catch up with rate parity. With the CMA having yet another bite at the cherry - you may remember the CMA from last year when it ended its rate parity investigation because it had other things to do - it’s not looking good for those clauses.

For the hotels being surveyed by the CMA, it’s unlikely that the response will be anything other than negative when it comes to price parity. The CMA, however, is tasked with protecting the consumer and there is an argument that rate parity makes things easier for the consumer.

But this is to ignore the elephant, which is that legislation lags reality. The operators are pushing direct bookings by leveraging loyalty programmes - using previous changes to the law which allow for discounted rates for closed user groups. They would have you believe they are having some success too, although we wait for results season for the full picture.

The issue now is education, education, education. The marketing budget of The Priceline Group and Expedia keeps everyone in Google in gold cars and caviar. Hotels must use those loyalty programmes to drive not only bookings but also…loyalty. The kind that spreads the word, not the kind which wants a discount.

Austria moves on rate parityAustria’s government has submitted a change in legislation to ban rate parity clauses in contracts between hotels and online travel agents.

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The move is expected to further commoditise hotel rooms, as customers are driven ever-more by price.

The ‘Deal’ tag also shows hotels where a partner is offering a discount compared to the current market price for that hotel, with the savings amount shown. The deal option is one of a number of features which the search engine has added to its hotel and flights search.

Jonathan Alferness, vice president of product management at Google, wrote in a blog post: “To help with planning and booking travel ahead of the busy holiday season, we’re making it easier for people to find the right flight or the right hotel, in their price range, and in turn, help connect our partners with potential customers.”

This includes Hotel Smart Filters, giving people the option to filter hotel search results based on specific needs. For example, travellers can filter based on rating or price with one tap on their phones. Alferness said: “We’ll make it easy to search for exactly what people want, like ‘Pet-friendly hotels in San Francisco under USD200’ to find the perfect hotel for them”. This feature is available in the US and will roll out globally later this year.

He added: “When it comes to booking their trip, 69% of leisure travellers worry that they’re not finding the best price or making the best decision. To help users feel more confident about making a booking, we’re working on making it easier for people to filter to find the right flight or the right hotel - at the right price - using our technology and real-time analysis”.

Now, he said: “When searching for a hotel, you may now see a ‘Deal’ label calling out when a hotel’s price is lower than usual compared to historical pricing or when there are discounts to the normal rate for those dates. These deals are automatically identified by our algorithms when

we see a significant reduction in price. In our early tests, we’ve seen that hotels marked as deals receive about twice as many bookings as other hotels.

“Tips are another way we’re using real-time analysis to help users find the best hotels for their needs. Tips provide just the right information at the right moments when users are searching for hotels. We may show Tips to people when they could save money or find better availability by moving their dates slightly. For example, you may see a Tip like, “Save USD105 if you stay Wed, Jul 13 - Fri, Jul 15”. We’ll be rolling Hotel Deals and Tips out globally beginning now and over the coming months.”

There is good news for hotels which has been pushing their loyalty programmes, the Tips section will also reveal special deals for loyalty- programme members and offer an opportunity to enrol.

The changes are available on desktop as well as mobile, but the focus for Google is on mobile. The company said that visits to mobile travel sites made up 40% of total travel web traffic in the first quarter of this year. At the same time, it said, individual travel web sessions were becoming shorter and travel mobile conversion rates have grown 10% as users are increasingly ready to book on mobile.

In a study from the group - Micro-moments Reshaping Travel Customers’ Journey - Google looks more closely at the role of mobile in booking, commenting: “Seventy-two percent of travellers with smartphones agree that when researching on their smartphones, they look for the most relevant information regardless of the travel company providing the information. In other words, they’re more loyal to their need than to any particular brand.”

And how to do this? The search engine used

the example of Red Roof Inn. Realising that flight cancellations leave an average of 90,000 US passengers stranded every day, the Red Roof Inn marketing team developed a way to track flight delays in real time and trigger targeted search ads for their hotels near airports. These ads said, in essence, “Stranded at the airport? Come stay with us!”. The result: a 60% increase in bookings across non-branded search campaigns.

HA Perspective [Katherine Doggrell]: Google is not a travel agent. Repeat: Google is not a travel agent. Just because it helps you find your hotel, find the best deal for your hotel and let you sign up for your hotel loyalty scheme, it is not a travel agent. The booking part is, after all, taken care of by one of the site’s partners.

Agent or no, Google is now all over the - horrifying term - booking funnel. And if you want to join it, it’s time to dig out those deals. As Alferness pointed out, hotels marked as deals received about twice as many bookings as other hotels.

The likely result of this initiative? Even-greater loyalty to Google from consumers. Which will mean ever-greater loyalty from Google for those who pay its fees.

Google drives DealsGoogle has added a hotel ‘Deal’ tag, which guides consumers to hotels which are priced below their normal rate or below the rates of similar hotels nearby.

Tips are another way we’re using real-time analysis to help users find the best hotels for their needs. Tips provide just the right information at the right moments when users are searching for hotels.”Jonathan Alferness, vice president of product management at Google

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The launch is aimed at driving direct bookings by giving guests ever-greater choice and comes as part of the group’s “strategic reset”.

The company said that Choose Your Own Room was the world’s first online booking site to let guests choose the exact room they want to stay in, before making a reservation and would put guests in control with an “making do with the room they get allocated at check-in”.

The new service is available across all 14 of the group’s hotels in central London portfolio including the Thistle, Guoman Hotels and Amba Hotels brands.

Features include the ability to view, compare and book the specific room that guests want to stay in; a search facility that allows users to filter results based on location, price, amenities as well as room layout and even floor plan. Categories include: For Families, For Business, On A Budget, With A View and Suite Stays.

Guest reviews are captured for specific rooms,

not just the hotel - so users can also check out what other people have said before they book. There will also be an individual host to answer all questions during the booking process.

The latest development of Choose Your Own Room is the next phase in GLH’s room booking strategy. The company was the first to offer guests a room selection service - the new service was described as “a significant evolution, giving even more control, choice and convenience to guests at the point of booking”.

Mike DeNoma, CEO, GLH, said: “Finally no more room roulette with our new Choose Your Own Room service. Avoid the booking angst of not knowing what floor, view, layout or size you’re getting by seeing multiple pictures of the actual room and even specific room by room guest reviews before you book. We’ve already had great feedback with 97% of our initial users saying they would use the service again.”

The move is not the only innovation by GLH. Speaking at the recent Hotel Operations Conference, hosted by Hotel Analyst, Alastair Campbell, strategy director, described the company’s Value Centre General Manager programme, which he said, has ended “the fatal conceit of the central controller”.

Campbell said that in 2012, when Guoman was moving towards its relaunch as GLH: “We felt the industry itself was on something of a treadmill - with the value chain competition turning increasingly into a squabble between intermediaries - at the expense of those at the ends of the chain - namely the guests, and the employees. The major asset-light hotel chains who were distribution giants in the industry have suddenly found themselves dwarfed by even bigger giants from the online travel agent sector.

“As the world of travel booking has moved online we see an ‘attention arms race’ underway between intermediaries trying to secure your hotel booking - none of whom actually run the hotels themselves - and those who welcome the guests or employ the staff.”

Campbell said that, in the industry standard management model, the property owner and the traditional chain’s interests were not aligned and the GM was forced to try and seek balance between conflicting interests, rather than focusing on the guest.

He said: “If you put GMs back into the hotel, their first task is end-to-end guest experience. We created a layer below the GMs, and created a series of P&Ls. There’s a huge appetite for improving productivity. As soon as the hotel can multi-skill its staff, you can get double digit growth in productivity.” At GLH, this is measured as revpar per GBP of labour cost.

He added: “The results so far have been more initiative and proactivity at the hotels, more ideas and ideation everywhere, a 75% reduction in head office headcount, and a whole new runway for business improvement through decision science.”

The group is also focused on its TripAdvisor scores, with Campbell adding: “Rightly or wrongly, we view reviews as a new global currency.” Many guests use TripAdvisor to validate their choice, before booking; and, noted Campbell, there is a direct linkage to business. “As we went up on TripAdvisor at Charing Cross, our direct bookings went up.”

Campbell said the room selection service was used more by “meticulous Marks” rather than “last minute Lucys”. So far, it appeared to be technically straightforward to deliver, but he added: “I’m confident we’re going to face issues we haven’t thought of yet.”

Campbell said that the infrastructure decisions taken by the company would allow GLH to “personalise every step of the journey, without being creepy.”

HA Perspective [by Katherine Doggrell]: When Campbell spoke at our Hotel Operations Conference, he was quick to decry scale as the answer to the sector’s problems. Not what you want to hear if you’re Marriott International.

Instead, the company is looking to choice, service and the wisdom of the crowds to deliver what those Meticulous Marks want, inspired by Airbnb, which is as niche an offering as anyone could wish for. With this latest launch, GLH is set to find out whether the consumer really has been reprogrammed to go for price after location.

Of course in London, scale is what the company does have. Talking to us after signing GLH for London’s first Hard Rock, the US group said why wouldn’t they choose GLH, they had the largest footprint in London? The deal, which will see the conversion of the 1,015-room Cumberland, to then be operated by GLH under a franchise agreement, a sign of faith in their operating abilities. Our pity now goes out to whoever has to bring those 1,015 rooms online for the choosy consumer. ...

GLH gets choosyGLH Hotels has launched Choose Your Own Room, a service which allows guests to view, compare and book a specific room within their chosen hotel.

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The company said that it would continue to provide sliver equity to developments in the region, despite its asset-light strategy.

The group has opened five Radisson Blu hotels in the first six months of 2016 and signed four new hotels including the first Quorvus Collection in Africa. The group is also entering its 28th country in Africa and taking the Park Inn by Radisson brand to the Indian Ocean islands.

It has long targeted growth in developing markets, including Africa and has been rewarded, with first-quarter revpar in the continent rising by 15.2%. The company said that it had seen Egypt and Tunisia continue to suffer from recent attacks

in Northern Africa, while Southern Africa saw good rate development in South Africa.

Rezidor’s EVP & CDO, Elie Younes told us: “We have had Africa as a key focus market for the past three to four years for the simple reasons you see on the news every day.

“Africa pays off if you are efficient and you are nimble. The overall strategy is asset-light - 100% of our hotels are management contracts. We do have some stimulus vehicles, financial instruments that we have put together to help owners finish their hotels. We set up a vehicle to provide that service, up to a certain amount - not more than 10%.”

Younes said that, 18 months after setting up

the EUR40m vehicle, known as Afrinord, with a group of Nordic government funds, “we changed the nature of it, from a loan-providing service to equity. The banks in Africa were becoming more active, so there was less need for loans, people needed an investor. We have a commitment to the continent.”

He added: “We have created a whole operating infrastructure based in Cape Town with development resources to help owners. It’s about a mindset. To go into Africa you don’t just need the right technical skills, you need the right corporate behaviour. It’s about relationships, how to approach different owners, it’s what differentiates us. Owners are individual investors or families, so your behaviour is different and you need to understand that.”

Speaking at the opening of the Africa Hotel Investment Forum, Wolfgang Neumann, president & CEO, Rezidor Hotel Group said: “Africa is Rezidor’s biggest growth market. Our group’s total portfolio comprises 69 hotels in 28 countries, with over 15,000 rooms in operation or under development. Radisson Blu leads the way with more hotel rooms under development than any of the other 85-plus hotel brands active in Africa today. Our ambition is to be the leading player in the travel and tourism sector across the continent.”

Carlson Rezidor also announced the signing of its first Quorvus Collection in Africa: the five-star, 244-room luxury Emerald Grand Hotel & Spa in Lagos, Nigeria. The group also signed a new Radisson Blu Hotel Harare in Zimbabwe (245 rooms), a Radisson Blu Hotel in Durban Umhlanga...

Rezidor leads in AfricaCarlson Rezidor announced plans to accelerate its growth strategy in Africa, after announcing a deal to enter its 28th country in the continent.

Additional comment [by Andrew Sangster]: Mike DeNoma has chosen this point in the evolution of GLH to step down from his role as CEO and seek other challenges. After four years in the job he is leaving Neil Gallagher, currently CFO, to step up and complete the 10-year plan put in place.

The plan comprises three cycles with the first cycle being no less than 397 separate projects. These, DeNoma said, are now complete and cycle two is underway which is largely concerned with

implementing the new Hard Rock franchise.“We’ve now pulled through the gravitational

force and the first stage has fallen away. I’m a first stage guy,” said DeNoma to Hotel Analyst.

DeNoma has a lot to proud of at GLH. As he says himself, the company has done things many in the industry thought were impossible. In particular, he has turned a mid-sized hotel group into a profitable operation that is creating value.

Among the many innovations are to increase productivity within hotel operations in a meaningful

way while improving guest satisfaction scores. For DeNoma, the value in GLH is in the culture of operational excellence that has been created.

Choose-your-own-room is part of that process. Introducing innovations like that are not going to deliver significant value creation on their own. Rather, it has been the shift in culture at the company that is creating value by creating the space for innovation. The hotel industry needs more of this.

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hotelanalyst | emergingmarkets

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The deal is the latest in a series for Plateno, which also has a franchise agreement with Hilton Worldwide, which saw the first opening, of a Hampton by Hilton, earlier this year.

The hotels will be operated by Plateno. “Our aim is to reach a minimum of 100 properties within 10 years, in tourist areas and urban areas alike. Negotiation procedures are underway and agreements with the first franchisee could be confirmed during the second half of 2016,” said Raul Gonzalez, CEO EMOA, Barcelo Hotels.

The CEO told the local press that the deal may be extended to Australia, the Philippines, Thailand and Malaysia. As part of the agreement, guests will have access to Plateno’s customer loyalty programme, which has more than 80 million members (98% of Plateno customers) and is the largest in China.

The deal is Barcelo’s second move on China. In 2013 the company signed a deal with Chongqing Kangde Industrial to look at strategic options together, which resulted in, not development, ...

Barcelo latest for Plateno dealBarcelo Hotels & Resorts has signed a franchise agreement with Plateno to add 100 properties across China over the next decade.

...(207 rooms) and a Park Inn by Radisson in Quatre Bornes, the new commercial hub of Mauritius.

Younes added: “In the last 24 months, we have signed a new hotel deal in Africa every 37 days. And it’s not just about signing hotels; we are delivering our pipeline. We have opened a hotel in Africa every 60 days. In South Africa alone, we now have 14 hotels. In 2016 and beyond, we aim to maintain this great momentum by opening four more hotels in the second half of 2016.

“The African continent is a powerhouse of exponential growth of the hotel industry. Rapid urbanisation and economic growth, combined with favourable demographics, has resulted in a shortage of quality internationally branded hotels. This means there are huge opportunities for sustainable and quality growth for world-class international hotel operators like Carlson Rezidor Hotel Group.”

Rezidor is not alone in its enthusiasm. Marriott International recently announced the rebranding of Protea Hotels, adding ‘by Marriott’ more than two years after acquiring the company.

Marriott International said that move would strengthen the Protea brand, as it looked to

expand in its domestic market in Africa. Over the next five years, the company expects the Marriott International brands, including the Protea brand, will expand from 10 African countries to 18, involving the development of an additional 38 properties across seven brands.

Last year also saw UK-based private equity firm Duet sign a partnership agreement with Bouygues Bâtiment International to form Duet Africa Hotels. The company said that it saw opportunities to develop and sell hotels in sub-Saharan Africa, where the region had seen sustained economic growth but hotel development remains limited. It is thought that the group, having found an additional investor, is on the verge of announcing its first purchase.

HA Perspective [by Katherine Doggrell]: Rezidor has played a similar hand in Africa as it has in Russia, a country where it is the market leader. North of its HQ, it has made a point of having feet on the ground and being prepared to take risks. However, while in Russia the company has no exposure, in Africa it has some skin in the game.

In Africa, the key issues are around construction and funding. The former hard to complete and the latter hard to come by in volume because of the uncertain exit. Speculation suggests that the party working with Duet’s Africa fund is a government -backed fund from outside the region, where a three-year exit strategy is less of a factor.

There is no doubting the potential in some of Africa’s countries - the World Bank was very chipper about Ghana, for example - but the continent is not a bubble to hide in when developed markets are suffering. As the World Bank pointed out in its annual assessment of development strategies by African governments, which saw weakened global economic performance hit a number of countries.

The market is still somewhere before nascent, with the largest players yet to reach 100 hotels for the entire continent. But you have to start somewhere and one of the many reasons why it is likely HNA Group will choose to acquire Rezidor once it has completed on Carlson is that it fills in those global gaps.

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20...but the sale-and-manageback of a hotel in Tenerife.

The deal sees Barcelo follow domestic rival NH Hoteles which, together with its major shareholder HNA, has created a joint venture based in Beijing through which they intend to manage between 120 and 150 hotels in China by 2020. Meliá has two hotels in China: the Meliá Jinan and the Gran Melia Xian and a pipeline of six more due this year.

Plateno is controlled by Jin Jiang, which acquired 81% of Keystone Lodging Holdings for USD1.3bn in September last year. Keystone owned Plateno, which itself owns Chinese budget hotel group 7 Days, having taken it private in 2013. The deal gave Jin Jiang over 2,000 hotels and, including Barcelo, 15 brands, with Maison Albar, Portofino, H12 Hotels, and Ameron which provide full service luxury lodging, ZMAX, James Joyce Coffetel, Lavande Hotels, Xana Hotelle, Pin Hotel and Lohap Hotel all providing a midscale select service lodging experience; and 7 Days Premium, 7 Days Inns, IU Hotel and Pai Hotel.

The end of 2014 saw Plateno sign a joint venture agreement with Paris Inn Group, the investor and asset manager, to launched the first franco-chinese luxury hotel brand, Albar, inspired by the Champs Elysees Mac Mahon, five-star boutique-hotel located at the foot of the Arc de Triomphe and the flagship of the collection.

The JV plans to add 50 hotels in China and 20 overseas hotels by 2020, and 200 hotels around the world by 2025. At the time of writing the pair had a pipeline of two hotels in Paris and four in Asia.

Plateno Group also has a franchise agreement with Hilton Worldwide, which plans to add 400 Hampton by Hilton hotels in China as part of a five-year deal. The end of March saw the first property open, with 10 more due by the end of the year.

The deal with Hilton Worldwide has allowed it to claim the largest pipeline of the all the global operators, according to a note from Jefferies, with 114,272 rooms targeted over the next five years, moving it up from having had one of the smallest portfolios.

The investment bank noted that the expansion of the midscale sector in the country was helping to drive a move towards greater franchising, commenting: “As the main growth opportunities move into the midscale we expect the industry will see a marked shift towards the franchised model and the hybrid “manchised” approach.

The manchised model is where the hotel company manages the hotel with a view to switching into a pure franchise at a later point. It helps guarantee a level of operational performance and customer care that establishing a franchise immediately might not.

Ensuring locally-based operators maintain international midscale standards while making the transition into the midscale will, Jefferies said, be a critical determinant of brand success. Both Hilton and Barcelo (and, before them, AccorHotels) are collaborating with domestic partners to bring their ambitions to fruition.

For Hilton Worldwide, the franchising deal will put rooms on the map, but the majority of

its earnings will come from its organic high-end rooms growth. For Barcelo, the deal should add much-needed flags on this must-have sector of the globe.

HA Perspective [by Katherine Doggrell]: Franchising is rapidly turning into the commitment- free model of choice for those fancying a spot of expansion into China. As one observer, who declined to be named, said to us: “It’s like a summer barbecue. It might happen, it might rain, but it doesn’t matter because another one will be along next week with different people who you might like more.”

For Barcelo, this gives them a pipeline to show off to investors and prove that they are doing something in China and all very reassuring it is too. For Plateno, it’s another option in an extensive stable should a suitable property come up and, with the luxury market in China eager for European brands, it is a rounding-out of the offering for them.

Plateno is run separately from parent Jin Jiang, which saw the company as a chance to slot more brands into its mid-market and upscale offering and to expand outside its domestic market and balance out any slowdown in China. So far Jin Jiang is working hard to do that itself, with the acquisition of Louvre Hotels. It has also been building a stake in AccorHotels, which could yet lead to takeover and addition of more luxury to its stable. What then for Barcelo?

Qunar gets take-private bidQunar, the Chinese online travel agent listed in the US, has received a take-private offer from Ocean Management.The deal could bring the OTA closer together with rival eLong, as China’s online market continues to consolidate.

The OTA is part-owned by Ctrip, with the pair estimated to control 80% of China’s online travel market. The offer of USD30.39 per American depositary share represented a premium of 15% to the share price the day prior to the offer.

Ocean said that it would seek the support of the majority shareholders. The end of last year saw Ctrip acquire 45% of Qunar’s voting interests from Baidu. At the time of writing, Ctrip owned about 43.8% of Qunar’s ordinary shares. Analysts believe it will accept the offer.

At Qunar’s first-quarter earnings call, the company hailed its mobile business, one of its key

attractions. In the first quarter mobile revenues were up 88% year-on-year to CHY753m (USD113m) and represented over 75% of total revenues, compared to less than 60% in the corresponding period in 2015.

Accommodation reservation revenues were CHY300m, an increase of 134% year-on-year. Excluding revenues generated from the merchant...

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...model programme, accommodation reservation revenues were CHY293m. The company also announced that it would be ending its merchant model offering.

China’s OTA market is seeing a period of stabilisation, with a number of OTAs, including Ctrip, cutting back on deep discounting through coupons to drive business. The group’s CFO Xiaolu Zhu told analysts that the company had “started to reduce coupon intensity and other consumer incentives, especially on the high end”, giving it an opportunity to increase net revenue for its accommodation services.

For lower-end hotels, the group said that it would till apply “a certain level of coupons and also offer incentives”, such as offline programmes, “to further penetrate our hotel business into more cities and to enlarge our mobile user base”. Zhu added: “There are potentials in further reduction of coupons and an increase in gross commission we can get from our hotel partners. Overall, the average gross commission level for our hotel business is still low compared to both domestic and international peers”.

Zhu added: “Our plan is still to extend our hotel business as fast as we can. We cannot comment on other people’s numbers or volumes. But so far our hotel business continues to be very strong, with very robust volume growth even with less coupons.”

Ocean Management is part of Ocean Imagination, a private equity fund dedicated to investing in travel-related industries in China. It was also involved in the take-private of eLong in February, alongside Ctrip, which had previously

acquired a 37.6% stake in eLong from Expedia and fellow digital operator Tencent.

Chinese parties are not the only participants in the complex web. While Expedia has made its exit, The Priceline Group has been building its stake in Ctrip, announcing a further USD500m investment at the end of last year, on top of USD750m and taking it to a 15% stake. Ctrip used its most-recent earnings call to talk of its overseas ambition, in which The Priceline Group is expected to play a key role.

Ctrip is not limited its efforts to the OTA market, it was also involved in the take-private of Homeinns, the largest economy operator in China, which was completed in April. The deal saw the group merge with BTG Hotels, a tourism and hotel management company, which is currently listed in Shanghai and operates over 100 hotels.

With Ctrip, Qunar and eLong drawing closer, Alibaba’s nascent Alitrip is one of the major lone players left in China. Hotels’ listing options are shrinking. According to China Internet Watch, in the third quarter last year, Ctrip had 43.1% of China’s online travel market, with Qunar at 22.5%, eLong at 9.9% and Alitrip with 8.4%.

China’s online travel market reached CHY122.23bn, an increase of 45.9% year-on-year in the third quarter of 2015 according to iResearch. The OTA market in China reached CHY5.96bn in the same period, with an increase of 48.8% compared to the same period last year. China’s online travel market will more than triple to USD200bn by 2020, according to Goldman Sachs, providing much potential for which to play.

HA Perspective [by Katherine Doggrell]: The consolidation in China’s hotel sector - OTA and operator - has been gearing up over the past two years and, with Ctrip, eLong and Qunar already in each other’s pockets, the result of this deal is not likely to mean much of a change - although the comments from Qunar’s CFO that the group’s commission level was low and could increase will give suppliers concern.

For Ocean, greater exposure to the market has its obvious benefits. Observers have suggested that this may not be the only upside and that the deal is part of a take-private trend which the Chinese government is trying to cut back on, where overseas companies have gone private, only to re-list in China at higher valuations.

The Chinese government has been trying to calm volatility in its stock market by limiting these deals, which are being viewed as quick money-making efforts, and has put curbs on IPOs. One way to dodge these limits is to merge with small, listed companies, a route Ocean could pursue. And while it does, enjoy the heft of its enlarged holdings.

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The economic influences on hotel supply 2000 - 2015

IntroductionIn our last note for Hotel Analyst, volume 11 issue 3, “The economic influences on hotel demand 2010 - 2015” we argued that from the demand perspective there were good reasons to accept that for the hotel business in any country the more that is known about the sources of demand, the less that the idea of hotel cyclicality can be sustained. We illustrated that the micro-economic structure of countries: the patterns of employment and of employment growth in the five economic segments - agriculture, industry, public services, service businesses and experience businesses - were a more effective indicator of domestic hotel demand than economic cyclicality. We also illustrated that one of the fastest growth markets in the world, international travel, is driving the significance of foreign demand into hotels and further weakening the relationship between hotel demand and GDP. In this note we will turn our attention to the economic influences on hotel supply. We will show that conceptually, economic cyclicality is not an effective indicator of hotel supply and we will illustrate empirically, over the period from 2000 to 2015 for France, Germany, UK and USA that economic cyclicality was uncoupled from the developments in hotel supply.

The idea of hotel supply and economic cyclesThe cocktail party economists of the hotel business who cling to the notion that hotel demand is determined by economic cycles also adhere to its bed fellow that economic cycles must also determine hotel supply. They refer to the bygone notion from classical economics that supply equals demand. The demand and supply

components of hotel cyclicality taken together pass as conventional wisdom about the hotel business. We do not accept the conventional wisdom for four reasons.

First, decisions to build new hotels cannot be determined by annual changes in GDP/capita. Typically, to acquire land, to get planning permission to build a hotel and to get its performance to reach cruising speed can take five years, which is a significant part of most economic cycles. It is just not practical to identify the most effective year in an economic cycle to start this process or to predict where in five years’ time the economic cycle might be so that a new build hotel cruising performance can be synchronised.

Second, because the changes in supply year on year are actually quite small, and the impact of any one decision (e.g. to build a new hotel or not) is relatively large compared to the decision

whether or not to spend one night in one hotel, one should not expect any correlation between this year’s economic activity and supply changes today, next year or longer when measured in aggregate.

Third, hotels rarely have a life of less than 30 years, most last for a century and many last for longer. Thus, hotel supply builds in aggregate over the long-term. In each of the economies under consideration, the changes in total room supply are created by a myriad of demand and supply calculations for the medium-term and long-term rather than the short-term. Investment in new hotels are made to produce returns in the medium-term and long-term rather than on current economic performance. The outcome is diverse patterns of change in room supply over the 15 years from 2000 as Table 1 illustrates.

Otus & Co argues that economic cyclicality is not an effective indicator of hotel supply

Table 1: Total Rooms 2000 - 2015 annual changes Sources: Otus Analytics, National Statistics, STR

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

France 200 200 200 200 200 200 -1,400 2,100 -1,400 -600 -900 1,400 1,000 - 500

Germany 3,000 4,000 5,000 6,000 5,000 5,000 5,000 5,000 6,000 7,000 7,000 7,000 6,000 5,000 5,000

UK 6,000 6,000 6,000 8,000 11,000 8,000 7,000 8,000 8,000 6,000 5,000 6,000 2,000 3,000 10,000

USA 110,000 157,534 18,162 -3,788 -9,462 -13,003 86,748 150,157 135,747 39,795 72,947 25,805 25,901 52,162 81,295


hotelanalyst

Between 2000 and 2015, France added only 1,900 rooms, Germany added 81,000 rooms, the UK added 100,000 rooms and the USA 930,000 rooms. France and the UK have similar populations.

In 2000, the UK had 9% less GDP/capita than France, by 2015, the gap had closed. Over the period, the net addition to hotel rooms in the UK was 50 times more than in France. Other dynamics

than economic performance are at play and can be seen in the differences in the population per room in each country over the period in Table 2.

In 2000, there were 28% more citizens per room in the UK than in France, by 2015 the gap had closed to 7%. Economic performance in the two countries was not the driver of the change.

Fourth, it is not just the change in rooms

quantity over any period that is of interest. We need to be mindful of changes in the pattern of market level of hotels in each country and to find ways to link these to the patterns of demand in order to make sense of the supply profile of

hotels in each country. The European economies are significantly different not only in the quantity of chain hotel rooms, its growth and its structure, but also in the market level profile of the hotels and their development as Table 3 shows.

Germany had a 31% higher GDP/capita than the UK in 2010 and 2015 and a population one third larger, but its population per hotel room in 2015 was 129 against 113 for the UK, that is, there were 12% more Germans per hotel room than Britons. Chain affiliation in Germany was only 40% in 2015 compared to 62% in the UK.

Germany had a 40% higher GDP/capita than France in 2010 and rose to 45% in 2015. Germany also has a population one third more than France, but its population per room in 2015 was 105 compared to 129 in Germany, that is there are 19% more Germans per hotel room than French. Chain affiliation in France in 2015 was 50%, 10 percentage points higher than in Germany.

Chain economy hotel rooms in Germany rose from 14% of all chain rooms in 2010 to 15% in 2015 with the addition of 6,000 economy rooms. In contrast, chain economy hotel rooms in the UK rose form 34% in 2010 to 39% in 2015 with the addition of 26,000 economy rooms. Similarly, chain economy rooms in France rose from 35% in 2010 to 39% in 2015 with the addition of 19,000 economy rooms. Clearly, the proportion of German and foreign customers staying in chain economy

hotels in Germany is materially smaller than in the UK or France. Moreover, hotel chains and hotel owners in the UK and France have been able to see demand for economy hotels growing significantly faster than in Germany to the extent that, irrespective of the pattern of growth in the economies, they have been willing to invest in accelerating the chain economy room stock in the UK and France at a much faster pace than in Germany.

Similar differences are present in the up market segment. Chain up market rooms in France remained unchanged at 11% of all chain rooms between 2010 and 2015 with the addition of only 1,000 rooms. In contrast, chain upmarket rooms accounted for 30% in Germany in 2010, but fell to 28% with the addition of 4,000 up market rooms. In the UK, the share of up market chain rooms was the same as in Germany and the UK also added 4,000 up market rooms. The result was that the UK has three times the number of chain up market rooms than France and 40% more than Germany.

The proportion of French and foreign customers staying in chain up market hotels in France is materially smaller than in the UK or Germany.

Moreover, hotel chains and hotel owners in the UK and Germany have been able to see demand for up market hotels growing significantly faster than in France to the extent that irrespective of the pattern of growth in the economies they have been willing to invest in accelerating the chain up market room stock in the UK and Germany at a much faster pace than in France.

The market level profile of chains in France, Germany and the UK and their developments over the 15 year period from 2000 illustrate the differences in the hotel market for each country more than it illustrates the differences in their economic performance. For those who continue to rely on the idea that hotel supply is cyclical, that is, short-term and medium-term changes in economic performance determine changes in hotel room supply we now present a detailed analysis of the annual changes in GDP/capita, total rooms supply and chain rooms supply to illustrate that the belief in short-term and medium-term economic performance as an indicator of changes in hotel supply does not match the reality of the hotel business or of economies. ...

24

Table 2: Population/room Source: United Nations Population Division, National Statistics, STR, Otus Analytics

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

France 97 97 98 99 99 100 100 101 101 102 103 103 104 104 104 105

Germany 151 150 148 147 145 143 142 140 139 137 135 134 132 131 130 129

UK 124 123 122 121 119 118 117 116 115 115 114 114 114 114 114 113

USA 68 67 66 66 67 67 68 67 66 65 65 64 64 64 64 64

Table 3: Chain Rooms Market Level Profile 2010 and 2015 Source: Otus Analytics

Luxury Up market Mid-market Economy Budget Total

2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015

France 4,000 3,000 32,000 33,000 73,000 76,000 99,000 118,000 75,000 75,000 282,000 306,000

Germany 4,000 5,000 68,000 72,000 115,000 128,000 33,000 39,000 8,000 9,000 229,000 253,000

UK 7,000 8,000 96,000 100,000 106,000 103,000 111,000 137,000 4,000 6,000 323,000 355,000


Analysis

The German economy and hotel supply growthThe chart above illustrates the annual percentage changes in: German GDP/capita, chain rooms and total rooms from 2000 to 2015.

Over the 15 year period GDP/capita in Germany fluctuated more widely than any of the other economies. In the pre-Great Recession period the annual growth in German GDP/capita peaked in 2006 at 7% before declining into the recession and bottoming at minus 5% in 2009. The German recovery was sharper than France reaching 5% in 2010 and 6% in 2011. After 2011, GDP/capita fell to the “new normal” average growth of less than 3%.

Over the same period, the pattern of annual growth in total room supply in Germany was significantly different from the pattern of annual

growth in GDP/capita. The total room stock over the 15 year period grew by 15% adding 81,000 rooms. In 14 out of the 15 years that GDP/capita rose, its growth comfortably outstripped the growth in total rooms. In 2009, when the Great Recession was at its most severe and GDP/capita registered minus 5%, total rooms grew by 1%. The only conclusion to be drawn is that in Germany as well as France, over the period from 2000 - 2015, there was no co-relation between annual growth in GDP/capita and annual growth in total room supply.

The pattern of annual growth in chain rooms supply presented a very different pattern in Germany from both GDP/capita and total rooms supply. Chain rooms supply growth was consistently and

significantly greater in every year over the period than growth in total rooms. Over the fifteen year period, the annual growth in chain rooms supply ranged from a high of 8% in 2001 to a low of 2% in 2015. In 2009, when the Great Recession was at its most severe, chain room supply in Germany grew by 6% against minus 5% for GDP/capita.

During the nine years from 2001 to the pit of the Great Recession in 2009, chain room supply in Germany grew by more than GDP/capita in seven years. Yet, in the post-recession period from 2010 to 2015, the rate of chain room supply growth never exceeded GDP/capita growth. Over the entire period in Germany, the data illustrates, as it did for France that economic growth rate was not an effective indicator of growth in chain room supply.

The French economy and hotel supply growth In charts 1, 2 3 and 4, data for France, Germany, UK and USA on GDP/capita is drawn from the International Monetary Fund. Total room supply data is drawn from national statistics for the European economies and STR for the USA. Hotel chain data is drawn from Otus Analytics.

The chart above illustrates the annual percentage changes in: French GDP/capita, chain rooms and total rooms from 2000 to 2015. The annual growth rate in French GDP/capita peaked in 2004 at almost 6% and its decline into the Great Recession began in 2006. It bottomed at minus 2% in 2009, the most severe time of the recession. Thereafter, the rate of growth did not reach the pre-recession levels and only in 2011 did it exceed the “new normal” range of 1% to 3%.

Over the same period, the pattern of annual growth in total room supply in France was significantly different from the pattern of annual growth in GDP/capita. The total room stock over the 15 year period grew by less than 1% adding only 1,900 rooms. In 14 out of the 15 years that GDP/capita rose, its growth far outstripped the growth in total rooms. In 2009, when the Great Recession was at its most severe and GDP/capita registered minus 2%, but total rooms shrank only by a trace. The only conclusion to be drawn is that in France over the period from 2000 - 2015 there was no co-relation between annual growth in GDP/capita and annual growth in total room supply.

The pattern of annual growth in chain rooms supply presented a different pattern than both GDP/capita and total rooms supply. Chain rooms

supply growth was consistently and significantly greater in every year over the period than growth in total rooms. Over the fifteen year period, the annual growth in chain rooms supply ranged from a high of 5% in 2005 to a low of 1% in 2007. In 2009, when the Great Recession was at its most severe, chain room supply in France grew by 1% against minus 2% for GDP/capita.

During the nine years from 2001 to the pit of the Great Recession in 2009, chain room supply in France grew by more than GDP/capita in six years. Yet, in the post-recession period from 2010 to 2015, the rate of chain room supply growth only exceeded GDP/capita growth in 2014 and then only marginally. Over the entire period in France, the data illustrates that economic growth rate was not an effective indicator of growth in chain room supply.

The UK economy and hotel supply growthThe chart (next page) illustrates the annual percentage changes in: UK GDP/capita, chain rooms and total rooms from 2000 to 2015.

In the pre-Great Recession period, the UK annual

growth in GDP/capita peaked at 6% in 2003. It began its decline into recession in 2006 and bottomed at minus 4% in 2009. Post-Great Recession, annual growth in GDP/capita has been consistently greater than 3% in every year

except 2012.Over the same period, the pattern of annual

growth in total room supply in the UK was significantly different from the pattern of annual growth in GDP/capita. The total room stock over...

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Chart 2: Germany change % p.a. in GDP/capita, chain rooms and total rooms

GDP/capita growth p.a. % Chain rooms growth p.a. % Total rooms growth p.a. %


hotelanalyst-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%

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-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%

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Chart 1: France change % p.a. in GDP/capita, chain rooms and total rooms

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Chart 4: USA change % p.a. in GDP/capita, chain rooms and total rooms

...the 15 year period grew by 20% adding 100,000 rooms. In 14 out of the 15 years that GDP/capita rose, its growth comfortably outstripped the growth in total rooms. In 2009 when the Great Recession was at its most severe and GDP/capita registered minus 4%, total rooms supply grew by 2%. The only conclusion to be drawn is that in the UK as well as in France and Germany, over the period from 2000 - 2015, there was no co-relation between annual growth in GDP/capita and annual growth in total room supply.

The pattern of annual growth in chain rooms supply presented a very different pattern in the UK from both GDP/capita and total rooms supply.

Chain rooms supply growth was significantly greater in every year over the period than growth in total rooms except in 2014 and then only marginally. Over the fifteen year period, the annual growth in chain rooms supply ranged from a high of 11% in 2001 to a low of less than 1% in 2013. In 2009, when the Great Recession was at its most severe, chain room supply in the UK grew by 4% against minus 4% for GDP/capita. In the post-Great Recession period chain room supply growth rate fell noticeably from 2012.

During the nine years from 2001 to the pit of the Great Recession in 2009, chain room supply in the UK grew by more than GDP/capita in six years.

Yet, in the post-recession period from 2010 to 2015, the rate of chain room supply growth exceeded GDP/capita growth in only one year, 2012. Over the entire period in the UK the data illustrates, as it did for France and Germany that economic growth rate was not an effective indicator of growth in chain room supply.

The USA economy and hotel supply growth The chart below illustrates the annual percentage changes in: USA GDP/capita, chain rooms and total rooms from 2000 to 2015.

In the pre-Great Recession period, the USA annual growth in GDP/capita peaked at 7% in 2005 and

thereafter declined and bottomed at minus 2% in 2009. Post-Great Recession, annual growth in GDP/capita exceeded 3% in every year to 2015.

Over the 15 year period, the pattern of annual growth in total room supply in the USA fluctuated more than in any of the other countries. The total room stock over the 15 year period grew by 23% adding 930,000 rooms. In 12 out of the 15 years that GDP/capita rose, its growth comfortably outstripped the growth in total rooms. In 2009, when the Great Recession was at its most severe and GDP/capita registered minus 2.0%, total rooms supply grew by 3%. In the post-recession period there was less fluctuation and total rooms growth returned to low annual rates of between 1% and 2%. The only conclusion to be drawn is that in the USA over the period from 2000 - 2015 there was no co-relation between annual growth in GDP/capita and annual growth in total room supply.

The pattern of annual growth in chain rooms supply presented a different pattern in the USA from both GDP/capita and total rooms supply. Chain rooms supply growth was greater than total rooms growth in only nine years over the period. Over the fifteen year period, the annual growth in chain rooms supply ranged from a high of 4% in

2007 to a low of 1% in 2006. In 2009, when the Great Recession was at its most severe, chain room supply in the USA grew by 2% against minus 2% for GDP/capita. From a post-Great Recession peak of 2% growth in chain rooms in 2010, annual supply growth rate declined to 2015.

During the nine years from 2001 to the pit of the Great Recession in 2009, chain room supply in the USA grew by more than GDP/capita only in 2008 and 2009. Yet, in the post-recession period from 2010 to 2015, the rate of chain room supply growth never exceeded GDP/capita growth. Over the entire period in the USA, the data illustrates, as it did for France, Germany and the UK that economic growth rate was not an effective indicator of growth in chain room supply.

ConclusionsWe have shown that conceptually there are good reasons to accept that the conventional hotel wisdom of the relationship between short-term and medium term economic performance and hotel room supply growth does not match the reality of the hotel business or of economies.

We have also shown that the evidence from France, Germany, UK and USA from 2000 to 2015

is that there is no co-relation between the annual rate of growth in GDP/capita and changes in total rooms supply. Although the patterns of chain room supply growth fluctuated more than the rate of total rooms growth and was higher than total rooms supply growth there was no indication over the period as a whole that change in GDP/capita was an effective pointer to changes in chain room supply. We would argue further that given the conceptual concerns there cannot be an effective relationship between short-term and medium-term change in GDP/capita and changes in hotel supply.

Hotel supply grows to a different rhythm than hotel demand. Hotel demand changes at a much faster rate than hotel supply not only in quantity, but also in quality. Much more complex analysis of the dynamics of the changes in demand and supply are necessary to make sense of the business in each country than merely relying on short-term metrics of economic performance. Perhaps then we will have a better chance of achieving better hotel performance and better returns on investment in hotels.

Otus & Co Ltd Ian Gamse: [email protected] Paul Slattery: [email protected]

27©This is copyright material. Strictly no photocopying or scanning - including sharing within your organisation www.hotelanalyst.co.uk Volume 11 Issue 5

Analysis-4

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Chart 3: UK change % p.a. in GDP/capita, chain rooms and total rooms

The UK Loyalty Programme LandscapeBDRC Continental’s Matt Costin, MD, On the Move, investigates the direct drive

Loyalty programmes have been in the spotlight recently. Marriott International CEO, Arne Sorenson has said that their potential is the most exciting aspect of the company’s deal with Starwood, anticipating huge revenue growth from the scale of the consolidated business. Meanwhile, at a more tactical level, several leading hotel groups have apparently driven a coach and horses through rate parity, taking on the OTAs by using their loyalty programmes as the vehicle through which to offer discounts to drive (more profitable) direct bookings.

As a large and effective loyalty programme is increasingly viewed as a differentiating factor by owners looking to evaluate brand partnerships, what are the recent trends and longer term outlook for participation in these programmes?

For hotel chains, the good news is that loyalty programmes have a strong recent track record of growth. In the UK, an estimated 6 million travellers are members of a hotel brand-operated loyalty programme (or are at least able to identify themselves as such) - a 40% increase since the start of the decade. Underlying growth in the number of UK citizens staying in hotels over the same period (powered by the leisure market) is clearly an enabling factor here, but not the sole explanation, given the faster rate of programme membership growth. The British have demonstrated an appetite for a closer, more convenient relationship with their hotels and, yes, one which also gives them a better deal.

For a bit of international context, the incidence of loyalty programme membership among the

U.S. traveller population is almost twice as high as in the UK. While the dynamics of that market are different, it suggests that there is still significant growth potential on this side of the pond. Moreover, today’s channel proliferation and near-universal rates of smartphone adoption make omni-channel loyalty initiatives which track and reward incremental guest spend, while also offering a genuinely personalised experience, a viable reality.

However, for hotel brands determining how much to invest in loyalty marketing, and those which need to evidence their programme’s value to owners and investors, a key question inevitably is, to what extent do they actually drive loyalty?

The answer depends on how you define ‘loyalty’. If we use the marital analogy of forsaking all others, few loyalty programme members give all their love to one brand and many sign up to multiple programmes. Observers of the Marriott / Starwood deal may speculate about how SPG members may take to a merger with Marriott Rewards - but in the US, approximately 3 in 5 SPG members are already members of Marriott Rewards, so the majority will know what to expect! In the UK, lower membership numbers generally mean fewer travellers taking out multiple scheme memberships, but the overlap across the leading programmes is still significant. If we take Hilton Hhonors, the largest scheme by membership in the UK, 23% of members claim also to participate in Marriott Rewards, the same proportion in IHG Rewards, 18% in Le Club Accorhotels, and 13% in SPG and Best Western Rewards.

On other measures of loyalty, the prognosis is more promising. Across the leading schemes there is clear evidence that they drive front-of-mind brand awareness, brand preference and ‘share of wallet’, albeit with varying degrees of impact from programme to programme. Latest BDRC British Hotel Guest Survey data (based on a nationally- representative sample of 5,000 business and leisure traveller interviews) shows that members of leading loyalty programmes in the UK are 3.5 times as likely to have used a brand affiliated to that programme compared to non-members. They are 2.9 times more likely to cite a brand within their portfolio as their leading choice, compared to non-members. Although the incidence of membership and frequency of travel is higher among corporate travellers, it is in the leisure market where loyalty programmes create the greatest uplift in percentage terms, reinforcing their value in the battle to capitalise on the long term growth in leisure travel demand.

A challenge for brands, as ever, is to keep their programme members engaged - and here it is not just about the range and value of rewards on offer. Loyalty programme members have higher expectations from their hotels and a different hierarchy of needs from the market as a whole - so understanding what this hierarchy is and delivering upon it in guest experience terms is fundamental. Among the stronger performing programmes there is evidence of a stronger emotional connection with brands affiliated to their programmes, with higher levels of agreement on attributes such as ‘a brand that I love’ and ‘a brand that is ahead of the rest’, reinforcing the point that it is not purely a transactional relationship.

To learn more about the performance of specific loyalty programmes, contact Matt Costin or James Bland at BDRC Continental: www.bdrc-continental.com

BDRC Continental collects data and produces insight on guest priorities all over the world, with its findings available to subscribers either

as part of their Hotel Guest Survey programme, as a stand-alone report or on very specific segments to aid tactical decision making and planning.


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Barcelo Hotels & Resorts

20,21

Barclays 1,3BDRC Continental 28Begbies Traynor 11Carlson Hotels 4,5Carlson Rezidor 19,20CBRE 12Choice Hotels International

15

Christie & Co 7Ctrip 22Deutsche Bank 2EasyHotel 9eLong 21Eurazeo 1Expedia 16Foncière des Régions 1,8Foursquare 32FRHI Hotels & Resorts 3GLH Hotels 18,19GoldenTree Asset Management

11

Goldman Sachs 11,22Google 17Grape Hospitality 1,3Hard Rock 17Henderson Global Investors

6

Hilton Worldwide 15,20HNA Group 4,5Hotstats 13Invesco 1Jin Jiang International 3,21K&L Gates 16Kingdom Holding Company

3

KPMG 7Langton Capital 10London & Regional 2Magnificent Real Estate

6

Marriott International 28Midstar 6Millennium & Copthorne

7

NH Hoteles 4,5,8Ocean Management 21,22Oceanwood Capital 4Otus & Co 24,25,

26,27Pandox 5,6,7Patron Capital 12PKF 9Plateno 20,21Qatar Investment Authority

3

Qunar 21,22RBS 7Rezidor Hotel Group 4,5Santander 7Scandic Hotels 5,6Shearings 6Starwood Capital 2Starwood European Real Estate

2

Starwood Hotels & Resorts

28

STR 11The Priceline Group 16,22Travelodge 11TripAdvisor 11Triptease 15Trump Hotels 32Whitbread 9,10

Excuses, excuses Here at Hotel Analyst we have been greatly enjoying Loneliness of Leadership, the tome bought to us by Aethos Consulting Group’s Keith Kefgen and Dr James Houran.

We know what you’re thinking, sounds a bit gloomy. But no, this pocket-sized book - future leadership book writers, take note of this convenient sizing - is full of handy, cheery tips. As masters of “the dog ate my homework” we enjoyed the chapter on excuses, featuring Famous Excuses in History. Amongst them we have Lance Armstrong, with his “everyone did it” response to being accused of doping. Mel Gibson with “I was drunk” to excuse his racist ranting and Olympic figure skater Tanya Harding with “my lace was broken” when tackled about attacking a fellow competitor.

For us, the winner can only be Adam and Eve, with “the serpent made us do it” response to managing to get mankind cast out of the Garden of Eden (cheers for

that). Of course, Adam blamed Eve and the current CEO of Yahoo can certainly identify with a certain anti-female bias which has lingered somewhat.

For Kefgen and Houran excuses are not recommended as a management technique. They say: “In each instance, the correct response to the mistake should have been ‘I made a mistake’…excuses are expressions of unawareness; they are cover-ups for laziness, self-doubt, or incompetence.

“The next time you attempt to explain your failure to someone else, or someone is explaining a shortfall to you, the best question to pose is: ‘why shouldn’t I consider this an excuse?’. That gets to the heart of the matter of who is acting responsibly as a leader and who is a well-practiced player in the blame game.”

Duly armed, we are looking forward to the next results season. Brexit, Brexit, Brexit?

Airbnb checking in?Airbnb has a terrible habit of getting the jump on the hotel sector. Just when budget hotels were congratulating themselves on snaffling those guests who otherwise would have crashed on a friend’s sofa, along came the sharing platform to lure them away and tempt everyone into monetising their own sofas.

Then the global operators decided they weren’t worried, they were all about the business traveller. So Airbnb did a deal with Concur and a stack of other deals to lure away the road warrior and now attendees to IHIF compare notes on their party flats.

Bur if there’s one thing you can’t replicate, it’s that classic hotel experience. In steps Airbnb, with Samara, a design studio, which “builds hardware and software” that purports to explore “new attitudes towards sharing and trust”.

No, we have no idea either. In a blog post, Joe Gebbia, one of Airbnb’s founders, says: “We’re already

at work asking a lot of questions and exploring a wide range of concepts, each threaded together by how it might serve the future of our community. How might community impact what it means to be displaced in the world, and does technology play a role in that? How can visitors positively interact with shrinking communities? What makes a home truly smart, and how is that meaningful to those who interact with it? While we’re interested in designing services, we don’t want to lose sight of what really drives us, and we definitely don’t want to stop asking questions. I’m super excited for what comes next.”

No, still no clearer, but the picture illustrating the post looks an awful lot like a large communal space, possibly with a bar. Airbnb’s own hotels? Those seeking to defeat the brand through legislation were unlikely to have seen that coming. Well played.

Voting with your feet After the Brexit shock, the year is as yet politically long, with the US election looming like something dark and predatory.

At the time of writing, The Donald was leading the polls, despite a number of people calling to attention his wide variety of character flaws. Hotel Analyst points out that other candidates may also have a wide variety of character flaws.

Latest to the melee is Foursquare, with proof that the Trump magic is having a detrimental effect on his hotels, with people physically avoiding them. To analyse foot traffic patterns to the dozens of Trump-branded hotels, casinos and golf courses in its study, Foursquare looked at explicit check-ins as well as implicit visits from Foursquare and Swarm app users who enabled back-ground location and visit these locations in the US.

And what did they find? It turns out the data is fairly clear: since Donald Trump announced his candidacy in June 2015, foot traffic to Trump-branded hotels, casinos and golf courses in the U.S. has been down. Since Spring, it’s fallen more. In July, Trump properties’ share of visits fell 14% year-on-year. Previously it had been rising.

Foursquare said: “Whether the loss in visits is coming from sightseers versus paying hotel guests is unclear. Traffic does not always equate with revenue. We do not claim to know the relationship between reduced walk-in visitors and reduced revenue to the properties, especially since these Trump properties do not publish their historical financials to establish correlations over time.”

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