HOTEL ANALYST CONFERENCE COVERAGE 2017
Alternatives Match Hotels Funding
Alternative accommodation classes are increasingly securing funding at the same pricing as hotels, delegates at the Hotel Alternatives Event, held in London and organised by Hotel Analyst, were told.
A dearth of brands to provide reassurance meant that there was still caution, but a number of new entrants have invested over the past year, driving demand encouraged in part by the consumers’ adoption of Airbnb.
Andrew Hunter, director Europe, Adina Apartment Hotels, said: “Finding deals that you can invest it at an acceptable level is really tough, but the good thing is that it’s moved from the bank not understanding what it was, to where it’s priced as exactly the same as a mainstream hotel would be on the same site.”
The difficulty in measuring performance was seen as a sticking point for investors, with Erik Jacobs, partner, HORECA Investment Partners, adding: “There aren’t that many big operators which can’t give you the covenant that the hotel brands can – that’s the biggest issue.”
Helping to make alternative sectors more acceptable to investors was, the panellists said, Airbnb. Hunter said: “Airbnb is the best thing which has happened to the aparthotel sector. It really does help us from the consumer side and it has not cost us customers.”
Tina Yu, SVP, KSL Capital, added: “It’s causing hotels and hotel alternatives to provide experiences and services that Airbnb cannot provide. I don’t think Airbnb is going to bring around the death of hotels. It’s not DVDs replacing VHS, it’s helping innovation. However, there is a big discrepancy in quality and cost in Paris and NY in Airbnb as well as in hotels, so there has to be an effect on hotels.”
Richard Dawes, associate director, hotel investments, Savills, looked to the sharing platform to push investment in the serviced apartment sector, commenting: “Airbnb has been one of the greatest supports for the arena – Airbnb customers will come more to branded, consolidated serviced apartments. We are seeing growth of extended-stay customers – four-plus nights is showing the greatest growth. And supply is not keeping up with demand.”
While the traditional hotel sector continued to lead investor interest last year, Dawes said that, in serviced apartments: “We saw GBP200m of investment volumes trade last year – relative peanuts to the hotels. But we saw a sea change – 30% of were by new entrants and this drives new operators. All these deals had underbidders and there is a weight of pension fund business looking to come into the market. What is surprising about the investment space in serviced apartments is that it’s very immature.
“There is phenomenal income and demand growth from both corporate and leisure going forward into serviced apartments and there is going to be huge mix in real estate requirements going forward and serviced apartments are flexible properties.”
This flexibility of offering was seen as the most likely way to negate any competition created by Airbnb, with Will Dear, principal, Crosstree Real Estate Partners, telling the conference: “It’s a bit us and them with Airbnb and we’ll see a lot of new entrants blurring the lines, such as student accommodation.”
Merelina Monk, partner, student property, Knight Frank, described student accommodation as now being “an asset class in its own right” which, recently, had “attracted overseas investment and new entrants, not least because of the weak currency”. Funds are the most active investors, with 47% of the total investment, followed by PE with 24%, institutions (12%) then REITs. Monk said that yields were now 4.5% in London “and, since Brexit these yields have remained stable, unlike other traditional property”.
Commenting further on Brexit, Monk said that, while the exit of the UK from the EU was likely to limit movement, EU members currently only accounted for 5.5% of students, with 42.7% of non-UK undergrads come from Asia. Students from China are expected to increase, particularly, Monk said, with China/US relations being “fraught”.
The sector has evolved rapidly in over the past six years, with accommodation now including cinema rooms and gyms alongside bedrooms and studying rooms.
A further alternative sector to have evolved in recent years was the caravan park sector, championed by Tom King, specialist markets, CBRE, who said: “The rise in quality of holiday parks means that more of a premium can be charged and is attracting more people to staycations”.
The sector has seen a number of high-profile deals over the past year, with King reporting that, 10 – 12x Ebitda multiples were being seen in transactions, supported by debt at 4-5x Ebitda.
Brexit was expected to push the market higher, with 31% of all holidays in the UK pre-2009 in holiday parks, rising to 36% in 2016. King said: “People feeling they may not be getting value by going to Europe are driving growth and forward-booking numbers are far beyond what have been seen before.”
HA Perspective [by Katherine Doggrell]: With the hotel sector continuing to labour under the illusion that Airbnb and its pals are going to be legislated out of existence and getting left behind in the process, it is no great surprise that the upstarts in the accommodation sector who would challenge them are turning to the sharing economy for hope and inspiration. Evolution was ever thus.
For those on the edge, the pickings are promising but fall into the greater risk, greater reward profile and, as one delegate pointed out, the current political environment is having a greater-than-usual impact on potential.
In the realm of holiday parks, much is being made of the expected rise of staycations, but the latest data from the ONS indicates that appetite for overseas travel is unabated and that although the tourism deficit has narrowed since the summer, it remains, with the volume of spending flat on the year for overseas visitors for the fourth quarter and spending on visits overseas up.
Brexit also looms over student housing. At the time of going to press the ONS reported that the year to September saw 41,000 fewer students come to the UK and, although 31,000 of these were non-EU nationals, according to UCAS, there were 9% fewer EU student applications to enrol in 2017, which will have an impact on 2018’s figures.
Evening out these concerns are the brands, of which speakers complained that there were too few. With financing approaching the same terms as hotels for some alternatives, this is not likely to remain the case for long.
Additional comment [by Andrew Sangster]: The stand-out fact from our conference for me was a slide presented by Simon Mallinson from Real Capital Analytics. This slide compared the transaction yields of some of the property alternatives segments for the year to date to Q4 2016 with more mainstream sectors such as offices, retail and industrial.
What this slide showed, for the first time I know of, was hotel yields at the same level (5.5%) as retail. As Mallinson commented, hotels were no longer an alternative asset class but truly part of the mainstream.
And here is a key reason for the rise and rise of alternatives: yield. A spectacular example is student accommodation which, despite clearly being an institutionally acceptable asset class (witness three REITs focused on the segment), it still offers very compelling yields relative to other property asset classes (albeit at 6% which is only 50 BPS above hotels and retail).
Slightly more compelling were senior housing and social care and even more so for data centres. The trick, clearly, for property investors is to get in quick to an emerging segment before yields start heading south. Arguably hostels look the strongest bet right now given the paucity of data on the segment but the strong fundamentals.
Serviced apartments are already well on their way to becoming a specialised sub set of the hotel market. Hostels, which will soon have some topline performance data benchmarking which serviced apartments got a couple of years back, are not far behind.
Adding to the strength of the case for investing in hotel alternatives is the lack of legacy technology which has impeded the advance of many chains in the hotel sector. The absence of established systems, some of which are decades old, means hostels, serviced apartments and similar new emerging segments are able to focus on delivering a different customer service experience that means they stand out on the shelves of the internet booking engine retailers.
Franchising and management contracts are rare in hotel alternatives: the focus is on direct ownership or leases. This has created a tight focus on delivering returns, regardless of distribution system. The big hoteliers, in contrast, are caught up in the quandary of whether to sacrifice brand building for immediate returns or vice versa.
There is no doubt that having established brands is an advantage but sometimes the purity of thought that can come with a fresh start can outweigh this. Hotel alternatives are disrupting existing hotels at the product end while the internet giants are playing havoc with brand and distribution. The hotel industry is a challenging place right now.
Hostels Go For Growth
Within a sector that is still dominated by single unit operators, hostel brands are jostling to find the right route for growth. And at the Hotel Alternatives conference, leading players revealed how they have aligned with partners to accelerate their businesses.
Both A&O Hostels and Meininger are expanding across Europe, having established a successful operating base in Germany and recently selected investment partners. In contrast, UK-based Safestay used a stock listing to provide cash for expansion, something CEO Philip Houghton admitted “hasn’t been all plain sailing”.
Philip Winter, director of marketing at A&O Hostels, said their recent deal with investor TPG was down to their partner’s readiness to accept “not just the propco but the opco”.
A&O launched in 2000, and today has 34 properties in six European markets. Growth is about taking on the competition, and building brand awareness in a market where it remains low. “Customers are looking for the price and the location, with the brand third,” said Winter, but noted his key targets remained loyal. “Our main business is school and university groups – and these customers return. The most important thing for our target group is to have a safe, clean place to stay, then great wifi.” Typically, the company looks for 7-800 beds per property, with its largest property in Hamburg having 2,000 beds.
A&O has used a pragmatic approach to grow, combining leased, converted and owned properties. Having typically added 2-3 properties a year to date, the TPG investment should accelerate growth to 5-8 additions annually, with a target size of 60 units across Europe.
“It’s hard to get them on the beds focus,” said Winter of the new partner, contrasting with A&O’s focus on revenue per available bed, rather than revpar. “But we’re trying to speak their language.”
At Meininger, there are plans to grow the company’s current portfolio of 8,000 beds to 24,000 beds over the next three years, in partnership with French investor and landlord Fonciere Des Murs. Meininger chairman Navneet Bali said the company knew it needed a partner to rekindle its growth track, with parent company Cox & Kings apparently not interested in making capital investments to grow the business.
“We asked a merchant bank to hold a beauty contest, and find a partner.” The key attraction was rent cover. “The great thing about Meininger is its profitability,” with a promise of 2.5 times rent cover on its lease obligations, compared with a typical 1.5 times for a hotel. “We do generate more ebitda per square metre than most of the hotels in the world.”
For FdM, an alliance with Meininger achieves several objectives, said deputy CEO Gael Le Lay. “We wanted to change from a pure French player, to a European player,” he said. Three years ago, Accor properties accounted for two thirds of his portfolio, and many of those were in France. Meininger takes FdM into hostels, into Germany and other European countries, while the group has also moved to diversify away from purely leased properties.
“We want to industrialise the business, we don’t like doing single deals,” said Le Lay. The pair have already successfully bid on a development site in Paris, and have projects live in Munich and Milan, with a further three under investigation. The pair have a weekly call to update on opportunities, while FdM has the right of first sight of any investment. “Exclusivity does not work, you must have flexibility,” said Le Lay, noting that there may be city markets where FdM considers it already has sufficient exposure through its other investments in brands including B&B and Motel One.
Both A&O and Meininger operate hybrid properties, in a format that is becoming common across the growing hostel brands. This combines traditional private hotel rooms within a building that also includes hostel accommodation, with dormitory rooms that appeal to school groups and independent budget travellers.
“It’s a hybrid, so you can book a bed, or a room as you would in a three star hotel – it’s very flexible,” said Bali. While more complex for an investment partner to understand, this flexibility is key to getting the most out of a location, noted Safestay’s Houghton. “Hostels are unique – the room configuration, the level of food and beverage, depends on the city – there is no cookie cutter approach, each project is bespoke.” At A&O, the mix averages 3.5 beds per room across the estate.
Houghton said the market dynamics are changing fast: “Things have moved a lot in the last two to three years. Our guests are getting older – mid to late 20s is now the norm. And our number one channel is Booking.com, followed by our direct channel,” as dedicated hostel booking platforms fade in importance. A&O, too, uses Booking as its most important OTA, albeit “our own channel is stronger”. And it has recently started a new trial with Airbnb. “We see them more as a partner, and we are using them as a distribution channel.”
HA Perspective [by Chris Bown]: Today’s hostel is a building with some floors as a hostel, some as a budget hotel. Mainstream hotel investors still stand aside, wary of getting involved despite what is clearly a very profitable model. Metrics may be hard to come by, but in a highly fragmented niche, those building brands are also building strong profits. There ought to be plenty of opportunities to buy out mom and pop operations in the bid for scale.
Medium term, there ought to be an appetite from the major hotel operators to buy into this market. Meininger talks openly of floating its business, once a substantial scale has been achieved – and this will be a pure opco, with its French partner looking to continue in a major role as landlord. Whether TPG will want to split property from operations at A&O, in due course, remains to be seen; but the mix of property tenures will surely mitigate against this, in the medium term.
The changes in distribution revealed by the Hotel Alternatives Event delegates show how fast the hostel market is moving mainstream. Dedicated hostel booking sites are losing out, as agnostic travellers book via mainstream OTAs. Meantime, A&O’s experiment with Airbnb echoes the moves of others such as BridgeStreet in taking a closer look at how to work with the disruptors, rather than fight against them.
Leases Divide Opinion
While investors love leases, the accommodation sector has seen a significant move against them in recent years. And at the Hotel Alternatives conference, the strengths and weaknesses of alternative contracts were aired with vigour.
Fast growing entrants into the hostel, serviced apartment and student accommodation markets love leases. Yet, for the hotel sector, the love-hate relationship was demonstrated by remarks from a polarised panel of participants.
One market where leases have been used to good effect is in student accommodation. Paul Hadaway, is founder and CEO of Empiric Student Property, listed as a Real Estate Investment Trust (Reit). “The value is in the freehold and the ability to let it,” he noted. “Student accommodation fits the Reit model really well. Given the raw material we had, given the demand for Reit returns, you wouldn’t do it any other way.” Yields are currently a consistent 6%, while US lenders have “bought into the story” and committed 16 year debt at low fixed rates.
Yet the success of Empiric is in distinct contrast to the failure to create a Reit holding leased hotel property. An attempt to create one in the UK, Vector, fell out of bed as the market moved past its last peak. “The problem with Vector was, we were trying to do three portfolio deals and an IPO at the same time,” reflected Tim Lloyd-Hughes, vice chairman real estate, gaming and lodging at Deutsche Bank.
Lloyd-Hughes sees some fundamental obstructions to a hotel Reit. “The public market never really values the real estate at its real value,” while institutions prefer internal rather than third party management; and there is market risk in the run-up period. “The maths just don’t work.”
David Ryland, partner at Paul Hastings, also noted: “The problem is leases, and on one level, hotels are less interested in leases. In that area, the UK regulations are more tough than other markets.” But he had noted leases coming back into favour a little in recent months, “and we have seen situations where brands JV with a management company who signs a lease”.
LLoyd-Hughes said other markets presented other opportunities. The successful IPO of Scandic Hotels “has gone remarkably well”, with seller EQT subsequently selling down two further tranches of shares. “But trying to do the same in the UK with Travelodge would not be easy.”
At hostel operator Meininger, leases are viewed as a positive, and that helped cement the relationship with new property partner Fonciere Des Murs. For others, notably those adopting US accounting practices, a lease can sometimes appear as a substantial balance sheet liability. And fund investors, particularly those in Germany, are bound by rules that demand a substantial part of their property-derived income is drawn through lease contracts.
In serviced apartments, Safestay’s Barry Hickey declared himself a fan, viewing leased properties as the only practical way to grow a new brand: “The model is based on growing revpar.” Lisa Neubueser, head of global roll-out at serviced apartment hybrid Zoku, also sees merit in leasing to grow, with the benefit of full operational control as the Zoku team looks to build a global brand. “But I would stress, that there are a variety of types of lease,” she cautioned.
Asli Kutlucan, director of development and acquisition at Cycas Hospitality, said the extended stay operator had moved from management contracts towards favouring leases – though she insisted the greater profitability of extended stay, compared to hotels, coloured her view. She also noted that “indexed leases do not exist any more” in markets Cycas operates in.
Contrasting the positives was Elie Younes, chief development officer at Carlson Rezidor, which has spent the last decade extricating itself from onerous leases. Most recently, it agreed a GBP15m penalty payment for an early exit from six leases on UK Park Inn branded hotels. “On at least three out of ten leases, you will lose money,” he warned. “My humble opinion is that leases will disappear.”
HA Perspective [by Chris Bown]: The desire of the big brands to strip themselves down not just to opcos, but to brand franchisees, means those servicing them have had to adapt. The mainstream hotel industry, as a result, has a plethora of management and operating agreements.
Non-flexible leases, notably those signed in the good times in the UK, have given plenty of hoteliers a negative impression. Yet as LLoyd-Hughes from Deutsche Bank noted, lease deals signed in the Nordics often have fixed and flexible elements, with a commitment to sharing property upgrade costs.
And, for companies on a growth track, then signing a lease gives them certainty of property costs, while enabling them to bank all of the upside as their brand grows and improves on its room or bed rates. Hence the attraction for operators such as Cycas, Staycity, Zoku and Meininger, who are convinced their brands will create further value as they grow.
As for the Reit route, in the UK for now it appears there will be no hotel Reit. Market sentiment appears to trump any fundamentals, despite the apparently strong defensive play that hotels represent, when set against Brexit-facing offices or industrial premises. A missed opportunity – but one that alternatives such as student accommodation are clearly exploiting.