By: Guest Contributor
Hotels were moving into the mainstream as an asset class before the pandemic, but the promise of a rapid return to travel has seen it eclipse the beleaguered office and retail sectors, with 2020 seeing closed-end funds alone targeting the market to the tune of an estimated $24.5bn.
Investors have come to appreciate the combination of daily revenue and long-term growth in property value, topped off with models which mean they need never step through the door, let alone lay mints on the pillow.
Tom Oakden, managing director, Hilltop Hospitality Advisors, said: “Why is there so much dry powder for hotels? The theory was that hotels would suffer the most distress and hence provide the best and most predictable recovery, backed by vaccine programmes, the return to work and the return of international travel.
“This could all still happen, but it’s a waiting game. Right now larger hotels in major global cities are operating at below 10% occupancy, and they have been able to preserve liquidity through furlough and bank forbearance. But what happens when there is no more cash left to burn? Deferred distress and deferred recovery means deferred pain for owners.
“For investors sitting and waiting? Their timelines for investing closed-end funds will be diminishing at a time when competition for assets is increasing. So it would be natural to assume that extensions and less aggressive hurdle rates will be negotiated by some of these funds.
“Whilst discounts are available on hotel transactions, many hotels are being sold at par, through a combination of the quality and location of the asset, competitive sale processes, positive underwriting and belief in the long term fundamentals. In some instances vendor financing, guarantees, deferred payments have been necessary to bridge the gap from a ‘shaky’ deal to a certain deal.”
William Laxton, CIO at Mactaggart Family & Partners (MF&P) – majority shareholder of Resident Hotels, the five-strong city-centre group, said: “We like operational businesses that are real estate backed and we like the operational risk adjusted returns. We manage the hotels ourselves through Resident Hotels, where we own the brand and the operating company. And that works for us, that risk reward of being in the daily trading, exposed to EBITDA, but also the value add on the real estate, through repositioning an asset in planning and development.”
The company is now looking to expand through further MF&P real estate acquisitions and also management contracts with third party owners to help them maximise value and cash flow from their real estate, with a target of an additional 1,200 to 1,500 rooms in the UK in the next seven years.
“We have faith in the long-term potential of the hotel sector and in our management, brand and model, which is lean and profitable with attractive revenue conversion, underpinned by very happy guests and the feedback to match.”
One of the most successful sectors for transactions during the pandemic has been high-end aparthotels and self-catering, which have offered a sanctuary where guests can control their own stay, backed by hotel services. The largest deals of the past 18 months in Europe have been in the sector, including KKR’s purchase of Roompot for €1bn.
Lifestyle brand Beach Retreats, which offers high-quality beachside holiday properties in Cornwall, is expanding with a project underway in Hayle which they will manage for developers Corinthian Homes. The parent company of Beach Retreats is Watergate Bay, the award-winning ‘ski resort on a beach’ which has set the standard for lifestyle hospitality based around active relaxation.
Simon Wright, Corinthian Homes’ CEO, said: “For us as investors I like the idea of building something and retaining it and I like the idea that we then have a permanent income.
“The holiday market has grown and has attracted different people as it has evolved. We looked at the people who were buying our apartments and they were a great match with the Beach Retreats product. These apartments are high quality, they’re not going to be the cheapest, but that doesn’t mean that it has to be an expensive stay. You can decide not to go to the restaurant, you can go to the supermarket over the road, you have the flexibility to make it work for you.”
There are multiple models investors can now use to run their hotels, from the traditional owner, operator model and its sleepless nights and early-morning breakfast calls, to a franchise with a third-party manager, where all matters operational are taken care of. What the modern owner is ill advised to do is step back entirely, as success in ongoing trading is not simply a matter of installing a management team and standing back, with the sector evolving constantly.
One leap which has been made over the pandemic, to the benefit of guests and investors, is a push towards greater use of technology. Hotels were burned by early adoption of technology such as wifi, signing onerous contracts which they are still working out, and having been wary of returning.
Their hand has been forced by guests’ needs for distance; for online check in, room keys on their apps and whereas once the concern was that more technology meant poor service, even the luxury segment is finding it delivers both revenue and satisfaction.
Tristan Gadsby, CEO & founder, Alliants, which has helped some of the world’s most respected luxury hotel, travel and retail brands deliver exceptional customer experiences, said: “Guests are used to being connected to all their services in their daily lives, there is no reason why hotels can’t also do this and benefit from it.
“The use of messaging gives hoteliers the opportunity to deliver on the long-sought-after seamless experience. Not only can it help deliver a better guest experience, messaging is also a key enabler in driving ancillary revenues – we found that there was a 90% increase in spend for users of chat. Messaging helps to create that relationship with the guest which drives lifetime loyalty, but on their terms.
“As interest in the sector grows from investors, they are starting to look to technology to maximise return on the property, adding to the pressure from guests for hotels to overhaul their approach to service.”
For investors, hotels have long been presented as too complex, too lacking in reward, too peripheral to bother with. But with everyone from private equity to pension funds now diversifying their portfolio with hotels, is it time to check in?