HOTEL ANALYST CONFERENCE COVERAGE 2018
Alternatives embrace transparency
Investors into the alternative accommodation market were attracted by the ability to accurately gauge returns, delegates at the Hotel Alternatives Event 2018, hosted by Hotel Analyst in London, were told.
Hostels and the budget hotel sector were seen to provide the most clarity, with guests too welcoming a stripped back approach to accommodation.
Navneet Bali, chairman, Meininger Hotels, said: “Hotels don’t know what their Ebitda/sq m is.”
George Westwell, director, Cheval Residences, speaking later in the day, echoed his comments, telling the audience: “Traditionally we’ve used revpar, which I think is dead – we’re not talking like-for-like. We should be looking at profit per sq m and taking account of the cost of acquisition.”
Sean Worker, CEO, Bridgestreet, added: “Companies looking for a low-cost high value model and they are recoiling from the traditional hotel model.”
Cost was an issue central to the event and one where the budget hotels and hostels displayed an edge. Guy Parsons, CEO, EasyHotel, said: “The budget hotel market in the UK is following what happened in the US, where super-budget brands developed. The need for Premier Inn to push its rates up – because it’s a large PLC – and the need for Travelodge to get a return on its large investment left a gap in the market we were also able to take buildings which hotels cannot take. We’re generating returns of 12% +. For franchising we are making low double-digit returns. We’ve achieved rates outside London which are higher than London under our new revenue management system – we have no instruction to repress rates”
Parsons added: “In terms of Brexit we have a very low staffing cost, but it is back office where we are seeing cost inflation. The last downturn pulled property prices down, which creates opportunity. But uncertainty is a threat – interest rates are going to go up and we have a lot of people who have not experienced mortgages going up, and wages are not keeping pace with CPI.”
Tom Walsh, CEO, Staycity, added: “Brexit is creating business challenges, staffing is becoming tighter and the OTA universe is in a state of flux, creating more opportunity than threat, with competition driving lower costs of distribution.”
The potential for increased competition to push down the cost of distribution was raised earlier in the day by Patrick Angwin, senior director, Horwath HTL, who commented: “The sharing economy aggregators are bring together supply and bringing it to demand, leading to pressure on commission rates they also put pressure on rates from transparency and bookability of non-hotel accommodation types.”
The OTAs were seen by many as a required route to market. Parsons said: “When you’ve got two leviathans like Whitbread and Travelodge you can stand alone, but we see the OTAs as part of the mix as long as it makes economic sense to do so.”
Bali added: “As far as consumers are aware they are not aware of the brand, particularly in new markets, so 50% of our business comes from OTAs and that will remain for the next four years.”
Angwin questioned whether the yield gap between hotels and alternatives would close as there was more transparency for investors, adding: “Over the last decade we’ve seen unprecedented yield compression as a result of ultra-loose monetary conditions. We are now at a turning point. We’re looking at convergence of yields, property types, who the consumer is and using the same distribution platforms. You must tap into the experience economy, but you must be flexible, that differentiation cannot come at the cost of being able to change the use of the accommodation.”
Angwin described hostels as “the true hotel alternative. Over the last decade the product has changed significantly. London has 2.8 beds per 1,000 youth visitors – Berlin has 11.2. There is great opportunity”.
Bali was eager to promote transparency to the assembled, telling delegates that Meininger Hotels outperformed the hotels market “because we pay market rent per sq m and our rent cover is 2.4 and the hotel sector pays 1.4 to 1.5, which makes us 40% more profitable per sq m. There is a risk when you enter the market that the cost is very high and maybe things are turning. But we are less likely to be impacted because we target leisure, school groups, which are counter-cyclical and also at a very low price point.
“The hostel market is very fragmented – 93% unbranded, so there is a niche for us. We get families staying with us, business people, student groups, backpackers, the celebration market.”
The budget hotel market was seen to share some trait with hostels, with a clear offering uncluttered with the conference space and F&B which was often lost in KPIs. Parsons said: “Guests don’t stay – they are coming for an event. You see them check in and then 20 minutes they are back out to do what they came to do.”
Later in the day Rohan Thakker, VP development & strategy, Yotel, described the brands expansion into ski resorts, describing “a product where the guest doesn’t spend much time in the hotel” eliminating the need for extensive common areas.
Nakul Sharma, CEO, Hostmaker, concluded: “A lot of the real estate in a traditional hotel is now redundant – 10 years ago the concierge was your friend, booking restaurants, taxis, theatre tickets, now you can do all that on your phone.”
HA Perspective [by Katherine Doggrell]: Angwin struck a chord with many delegates when he said: “Millennials are looking at housing as a service, not as something you own”. While he was describing the co-living sector, the comment underlined not only changing attitude to home ownership, but a mindset amongst guests which has become more demanding, and fostered more niche products across the hotel sector.
As Carl Michel, chairman, Veeve put is: “What’s happening now is elemental – it’s supply and demand beginning to be matched. All these formats existed in people’s minds, they just hadn’t been supplied.”
He added: “Hotels have created a lot of good brands, but a lot of trade brands of which you or I could possibly identify four of . We need to go back to understanding the consumer. They may not care abut the room if it’s a destination.”
As guests have become more demanding, so too have owners. The first incarnation of EasyHotel was an exercise in unbundling – guests could pay more for sheets, rooms to be cleaned and other edifying scenarios. The sector has not followed the budget airline market to quite that extent, but investors have become more demanding in terms of knowing where their cash is going. Parsons has previously told this publication that his investors were not the type of hotel owners looking for a fancy restaurant to show off to their friends, they wanted returns.
And this is what the alternatives sector is delivering – a happy dose of clarity. Every part of the operation must be made to justify itself. This works in the budget and hostel sectors where the product is now massively commoditised, it does not work in the luxury sector, where look and feel are less quantifiable.
Whitbread considers alternatives
Whitbread confirmed that it was considering further expanding its brand stable, with the super-budget sector under consideration.
The comments, at the Hotel Alternatives 2018 Event, hosted by Hotel Analyst, were made as the concept of the brand itself was attacked by speakers.
Mark Anderson, managing director, property and international, Whitbread, said: “The P&L has a bit of stress in it, which is putting pressure on our growth plans, plus competition from other hotels and people like Airbnb are a disruptive threat. We are a little too UK focused and a little too exposed.
“We’ve started to look in the UK at other tiers – there are some great hostel markets, there is a budget level below Premier Inn. We’ve got a number of other ideas in the pipeline. When we’ve been rolling out Premier Inns as fast as we have you get to a point where you can’t build any more Premier Inns in the UK. Hub is a bit small, you might get 25, 30 hotels. That’s why we’ve started to look overseas.
“I think we’re about 10 years late, but not too late in Germany. We’re going to be loss making for three or four years in Germany for bringing in costs before we have any income.” When asked how the company could compete for sites in the popular German market, Anderson said: “We’re competing with our cash, we’re able to use the Whitbread balance sheet to get in quickly, but it’s pricey, it’s a bit lumpy. We’re prepared to pay to be in these locations.”
As Whitbread was planning to expand its Premier Inn brand, Tim Sander, director, BDRC, told delegates that research undertaken by the company had revealed that: “For some guests, brands have lost the local connection. The concept of consistency has become toxic”.
Sander, reporting on Airbnb, 21% to 52% of hotel stayers said that they had used Airbnb and the sharing platforms were drawing demand away from hotels. Pointing to the attraction of Airbnb, he said that the comfort of a home was the main reason for using Airbnb, for business and leisure travellers, over cost. Sander said: “This is an area where the industry really needs to get its act together. People found hotel stays to be lonely. Considering that hotels have a pool of people available, is there something that they can do about that? Brands like Citizen M, Hoxton, their public spaces are heaving.
“A sense of adventure is also a factor, they don’t just want accommodation, they want an experience, personality, authenticity. It should be possible to create a cluster of rooms with some shared space which can be private if necessary.”
Nakul Sharma, CEO, Hostmaker, added: “The hotel companies need to think about a much larger play to take on Airbnb than just adding pipeline – they should look at adding apartments.”
Giulio Leporatti, VP, global strategy & corporate development, IHG, responded: “All the operators have an extended stay proposition, but we’re not there yet against Airbnb. Can we get better and provide a solution for longer stays, stays that need a bigger space?”
Brands remained a must in the branded residence sector, where they could mean a premium for developers.
Tariq Bsharat, strategy & business development, Al Marjan Island, said: “Some of the developers are pulling in 50% premiums for the residences on luxury brands – this can eliminate debt altogether. Branded residences have changed over time, now it is being pushed as an investor scheme and something which investors have to consider.”
The area was not without potential conflict. Elie Younes, EVP & CDO, The Rezidor Hotel Group, said: “The more the developer wants to do a short-term investment, a two-year hit and run, the more they will conflict with the brand.”
Changing ownership profile was also affecting the market, with Chris Graham, managing director, Graham Associates, adding: “The investment profile now is that two thirds of buyers have switched from lifestyle to investment and ownership. 70% to 80% of owners are now looking to put their units in the rental market.”
Without careful control of the development and a long-term view Bsharat, warned, hotel could be left with empty restaurants and car parks.
HA Perspective [by Katherine Doggrell]: The issue of branding is one which us observers of the sector have come to accept as a constant, albeit with some ebbing and flowing in the power struggles between brand and owner. But the battle for loyalty (which is really the battle for direct booking) has thrown some extra light on what everyone in the branded sector is fighting for.
Richard Bowden-Doyle, chairman, Neilson Active Holidays, said: “Loyalty is another thing, it’s not a piece of plastic which can be used to bribe you. You can buy a slightly disproportionate share of business, but that is not loyalty. And by and large it’s just a big cost.
“I have yet to meet anybody who wants a relationship with an airline or a hotel company.”
As one wag pointed out to this correspondent, no, but there are lots of people in relationships with their ‘phones. Emulate that convenience, that instant gratification and that personalisation, and you might just have loyalty. Branded or not.
Picking the alternative opportunity
Across the alternatives landscape, there may be attractive investment opportunities. But participants at Hotel Alternatives pointed out the challenges of choosing a winner, finding backing, and making a distinct offering within even a niche market.
Helping guide the choice of those still undecided were three brokers, who put forward their arguments for serviced apartments, student accommodation and the healthcare sector.
Ben Davis of Saxbury believes the serviced apartment sector is only now appearing on the radar of mainstream investors – and that could mean things start to get busy. Starwood Capital’s acquisition of the Think portfolio three years ago was, he said, “a milestone moment”. Brookfield’s acquisition of operator SACO “is the largest deal the serviced apartment sector has seen”. He now expects overseas brands to expand into the UK “and they will bring sovereign investors”.
“Care homes is the market to invest in,” declared Colliers International director Adrian Clery, in his review of opportunities in the healthcare sector. They benefit from a strict regulatory environment, with demographics pointing to steadily rising demand. “What they do give, is wonderful leases,” he promised, generally of a good length, and RPI linked. But with many operators keen to own, properties can be hard to come by, and it could be easier to invest in a dedicated reit.
Jo Winchester, head of student housing advisory at CBRE, said the UK market still offered opportunities due to undersupply. But with the effects of Brexit still unclear, and an “extremely challenging” set of proposals in the new London Plan, there were potential clouds on the horizon. Her recommendation was to invest in student accommodation in European cities where less purpose built space has yet been delivered.
Anyone looking to develop, in whatever space, inevitably faces the challenge of funding, particularly in an alternative niche that is not well understood by traditional funders. And that has led to some interesting initiatives. Gavin Woodhouse, chairman of Northern Powerhouse Developments, is building a portfolio of UK hotels and had found it difficult to source institutional debt, so opted to go the retail investor route. “It’s come at a cost – it demands higher returns – but it has been flexible. We’re part way into a five year business model.”
Developer Andrew Southern said he uses a mix of private individuals, hedge funds, and lenders such as Topland. “Everything we buy is without planning permission. We create value from the planning process, and regear accordingly.” He had worked through a potential ground rent funding model for a site in east London, but ultimately dropped the idea after finding it too compromising.
Asti Kutlucan, director of development and acquisition at Cycas Hospitality, said the company had the fortune to receive early backing from Patron Capital. “That helped us to start working with private equity. Then we moved into the lease market,” and finally a Thai family office has backed them.
Camil Yazbeck, investment director at Patron Capital, said: “There’s a lot of deals out there, but it’s hard to put a price on things.” But the investor loves alternatives, having backed Generator hostels in their first stage of growth, and having recently backed a hostel in Dublin. “The key is all about value add,” often around the operational aspects. “Most of the investments we had, the management continued on after us.”
The funders insist they are ready to participate in the alternatives market. Trevor Morris, debt finance director at new bank OakNorth, said he was happy to consider non-traditional structures, leading against leaseholds and even fine art. “We’re less held up around the repayment profile,” and use a big data platform to quiz the management team behind any proposal. The traditional lenders are stepping up, too. Shona Pushpaharan, head of hotel and real estate finance at Clydesdale, reassured: “WE quite like risk – we have taken a leap of faith with some new concepts.”
And then there is the challenge of making a really distinct offer. Jill Ju, investment director of coliving company The Collective said they consider themselves developers of purpose built, institutional grade property. “We are a typical investor developer, but in a new space. It is what we consider a new way of living. We’re extremely customer focused,” and regularly poll residents to pick up feedback that guides product development. “We have a full in-house tech team, which is quite unusual for a property developer.”
In the hostel sector, CODE pod hotel owner Andrew Landsburgh said his pitch to guests is: “We really play on our sleep quality – it’s better than a bunk bed”. And for landlords, he looks for awkward office or industrial buildings that his format will easily fit into. But Nuno Sacramento, COO at Safestay, frankly admitted the challenge of growing a distinct brand fast: “I don’t think we’ve firmly differentiated our brand,” he confessed, partly because of a drive to expand fast, and significant recent acquisitions. “The biggest challenge is to be able to provide a vibrant atmosphere. Are we there? Not quite.”
HA Perspective [by Chris Bown]: Whichever route you choose, it is as ever the challenge to bring a funded, operating product to market and speakers came up with some enterprising options in terms of funding. Woodhouse’s retail investor model is backed with a clear endgame, and a buyback clause that gives him greater certainty.
Yazbeck, clearly the most popular man at the event, was making all the right noises, and has a great track record in backing alternatives, having helped Cycas launch its serviced apartment business in the UK, and successfully supported Generator; it has also successfully exited both investments.