IHIF: What hotel investment might look like in 20 years
 
IHIF: What hotel investment might look like in 20 years
10 MARCH 2017 8:25 AM

Investors and hoteliers see yield demands in the next 20 years demanding leaner and more flexible hotels, notably around labor, technology and operations costs. 

BERLIN—Hotel investors are looking toward the next two decades to find the best long-term investments, and building or acquiring assets to attract millennials might not be the best option.

During an International Hotel Investment Forum session titled “The next 20 years: A collective look at the hospitality investment landscape,” panelists cited current trends to speculate on the future of the industry and discussed which demographics will drive demand during the next economic cycle, how flexible capital must be and the benefits of efficiency.

First and foremost, panelists said hoteliers should be wary about tripping over one another in a slavish race to capture the millennial market.

“The fad is millennial, but arguably they are the least compelling,” said Cody Bradshaw, SVP and head of European hotels at Starwood Capital Group. “They are earning about 10% less than their parents and have far higher student debt. So if you are going in to developing something for millennials, you have to go in knowing they will probably have less spending power.”

Bradshaw said a key investment strategy is to determine the consumer group that will remain viable over the length of any particular investment cycle.

“Population growth will drive some consumption, but the rest will come from the over-60s from developed countries, which by 2030 will grow by a third to 225 million,” Bradshaw said, “the 15-to-59 age group in China, which will grow by 20%, an extra 100 million, with its per capita spend more than doubling, and the North American working-age population, which continues to compound and grow.”

Jim Abrahamson, chairman and CEO of Interstate Hotels & Resorts, said there are demographics other than millennials that can be considered healthy target groups.

“I also see much more diverse groups within those demographics, too,” he said. “Everyone we know today as a minority will be a majority by 2040. There will be equal numbers of women as men in the workplace and in positions of management.”

Abrahamson said his investment strategy is reliant not only on the people who will fill his hotels but also the properties themselves.

“A lot of the brand landscape we see today was built up from the 1980s, so how will that product translate to the future?” he said. “What will that ageing inventory look like in 20 years, and who will take over those assets?”

Tim Helliwell, head of hotel finance at Barclays Bank, said the requirements of ensuring technology and social media strategies are in place might be making hoteliers miss a trick or two.

“Older guests make up 20% of overall spend but only receive 5% of marketing spend, and the accessibility and disability market just in the (United Kingdom) alone equals £249 billion ($303 billion), and if you lose that person (with disabilities), you might lose the family, too,” Helliwell said.

Hubert Viriot, CEO of Yotel, said his company is not relying on millennials either, although he said they are an important part of Yotel’s guest mix.

“Hotels might be quite different in 20 years from what they are now,” Viriot said. “The conference spoke earlier about hotels now becoming a major asset class, and they need to be more efficient than they’ve been and less energy-consuming. Hotel rooms need to deliver exactly what the customer demands.

“They need to be skinnier, more focused. They need to be more compact, more efficient (and) more profitable,” he added.

Flexibility of capital
One common theme of the conference was that hoteliers and hotel brands need to maintain their flexibility. So does capital, panelists said.

Bradshaw said business and capital markets are now considered state-of-the-art, but they will appear antiquated in 20 years.

“There are opportunities in that,” he said. “For example, the Internet is seeing a fundamental shift from information as its basic language of economics to that of experiences.”

Investment also is widening its reach, Bradshaw said.

“More risk-averse institutional investors have been willing to invest in more alternative assets as they realize that is necessary in order for them to stay relevant,” Bradshaw said.

Abrahamson said that while the franchise model is still growing in the U.S., brands will perfect and increase their evolution away from bricks and mortar to more of a distribution model.

“The third-party model also is here to stay,” Abrahamson said. “Overall, there is more optionality when it come(s) to the capital structure.”

Viriot said he is still reluctant to take his company in a franchising direction.

“We want to control the experience, so we want to manage, and in a world changing rapidly, when you look at the franchising model, it is very difficult to convince owners to consistently change brand standards,” Viriot said.

Helliwell said brands appear to want more and more control, but in some regards such as data security, that want is justified.

But the relationship between capital and brand and owners and operators is continuing toward a tipping point, Bradshaw said. Multiples can only go up by increasing fees or creating new fees and brands to generate, but the brands’ asset-light strategy must yield being equally light in overheads.

As evident in Marriott International’s 2016 buy of Starwood Hotels & Resorts Worldwide, Bradshaw said, “cost synergies are essentially paying for acquisitions.”

Disruptors in the industry also continue to place hotel companies and investors on wobbly footing, Bradshaw said.

“My one prediction this year is that Google will absolutely disrupt the current pattern,” Bradshaw said. “If you look at the customer journey, 90% of it is so open to further disruption. An example, I can use my thumb print on my phone but not for my hotel room.”

Exercises in efficiency
Both capital and operations must concentrate on efficiencies in product, technology and labor, panelists said.

“Guests want devices to connect rapidly, and free of charge, but as a hotelier I must ask what does anything of this do to improve the guest experience?” Viriot said. “Does it also allow us to be more efficient? And, lastly, does it result in a more valuable real estate asset?”

Helliwell said the innovative ideas that have been born in the hotel industry in the last few years now require “seamless execution.”

“Capital and debt are now spending more time in the sector, seeing how things make a material difference from an operational and technological proposition, and that is increasingly attractive to investors,” Helliwell said.

Helliwell’s prediction for the years ahead is that the funding market will increasingly split, with perhaps investors funding operational assets as standalone businesses.

“You are seeing that happen already,” Helliwell said.

Abrahamson agreed and added that the industry is already capital-intensive.

“Asset owners are more consolidated and looking for longer yield patterns, more stability, but additional outside capital will only be attracted if labor is reduced,” he said.

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