For those of us within the hotel sector, the mood can tend toward “what fresh hell is this?”
Costs only ever increase. Teams only seem to decrease. Airlift cannot keep up with demand.
It’s all about problem-solving, and as soon as one is solved, another one — or two or three — takes its place.
Sometimes you can be too close to a situation to see it clearly. You need to take a breath and a step back, because how we may sometimes feel in the weeds of the hotel sector is not how the rest of the world views us.
Property and investment conferences are eager for hotel experts to come and tell them more. More about the value uplifts. More about how you can enjoy a daily income. More about how the sector has been the fastest asset class to bounce back from the pandemic and more about how, even when inflation quakes global economies, it is the most expensive category — luxury — which is attracting the most development.
Existing hotel owners may be complaining about the lack of distressed assets on the market to buoy their portfolios, but for those on the outside, there is only appetite.
Business advisory JLL’s most recent Global Investment Outlook reported a “notable” increase in new investors entering the sector in 2022, with 16% of the year’s global investment volume generated by first-time hotel buyers, predominantly comprised of family offices and high-net-worth individuals.
In Singapore, there are now an estimated 700 family offices, more than double the amount pre-pandemic. The brokerage said that the sector should expect this trend to continue this year and beyond as lodging demand accelerates.
Performance is expected to continue to boom, aided by sluggish supply as a result of the pandemic. There is strong pent-up demand for travel, which is showing no signs of receding, and rates are expected to keep rising, just as international travel continues its recovery. Those same border openings are expected to invite more cross-border investment, and markets such as the United Kingdom, where the currency is weak, are prime targets.
The luxury and leisure markets — and preferably the two combined — are favored.
Last year, Saudi Arabia’s Public Investment Fund and London-based Cain International put $900 million into Aman Group to expand the Swiss hospitality investment firm’s portfolio.
This year, Henderson Park sold its stake in the 428-room Westin Paris Vendôme to Dubai Holding for an undisclosed sum, valuing the hotel at a reported 650 million euros ($694 million).
The hospitality sector is undeniably attractive to investors looking in from the outside, and for an alternative to office or retail. But the hotel asset class is very different from that of office or retail.
A hotel has multiple moving pieces and, as with any growth sector, it has its challenges. Should you be sidestepping the core hotel product entirely? Should you be thinking about peer-to-peer lodging? Should you be considering hostels? Or serviced apartments?
The good news for those itching to get involved is that the industry has evolved to allow those without the first clue about turn-down service or distribution to reap the rewards. This evolution began in 1993 when the big brands decided that there was more value in splitting off the asset from the brand, driving faster expansion and the growth of those big flags. The use of franchising and management contracts further allowed owners to step back and let the experts step up. Because for all the exuberance of those eager to pick up a hotel or two or 20, hotels are still the most complex of the asset classes.
The key to building that bridge between the owner, the brand and the hoped-for profit is the expert asset manager. On behalf of owners, they ensure that the operational team creates value through the day-to-day business, working closely with the operator to obtain a much higher return, keep the brand corporate expenses and fees under control, have above-average revenue and greater flow-through and maximize the real estate value.
The focus is on improving the hotel’s profit, and this benefits the investors, but, concomitantly, the operator’s higher performance means higher fees.
It is well-known by seasoned hoteliers that the interests and objectives of the operator as opposed to those of the owner have never been aligned and the reason why the sector split off assets from brands back in the 1990s.
The intention may look the same — that is, the running of hotels — but the end goal will always be different. Hence, the asset manager is here to find the right balance and level the playing field by focusing on the success of the hotel.
Those asset managers superintend the operator, optimize performance and strategic direction, support operations, increase the brand’s value and ensure the reasonableness of the operator’s costs. They also help the operational team by convincing the owner to reinvest into their hotels or address issues that affect day-to-day operations. They guide the executive team to increase the operating profit and the cash flow, with the goal of increasing the property’s value and maximizing return on investment on the exit.
Asset management must also come with a wider knowledge of the sector and its highs and lows. When does the owner want to exit? Is now the time to invest in the asset? Or is now the time to look at other locations for expansion to drive scale efficiencies? We are seeing an increase in demand for asset managers in the hotel sector, not only from owners old and new, but also from lenders, who need reassurance as the sector navigates through choppier times.
The sector is built around hospitality. The industry should only be too happy to extend that to new investors.
Thuy Tran is a hotel asset manager at London-based Global Asset Solutions.
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