Talking Ahead

19th January 2009 (Last Updated January 19th, 2009 11:33)

What does the global economic crisis mean for the hotel industry in the next 12 months? Industry experts give Andrea Ashfield their opinions and predictions.

Talking Ahead

In 2008 growing financial instability and a fear of recession have resulted in somewhat cheerless predictions for the performance of the hotel industry. In September a sharp drop in shares prompted the investment bank Goldman Sachs to warn that RevPAR in the US would remain negative well into 2009 and, in October, a report by American Express predicted a decline in occupancy on a worldwide scale.

In the same month, one of the world’s biggest hotel groups, Starwood, revealed that it expected a fall in profits as a result of reduced travel spending. It is generally believed that there will be a slowdown in demand but the full extent of the downturn remains to be seen.

Despite the seemingly negative picture, however, there are still opportunities to be taken and experts believe that the sector is well equipped to weather the storm.

Since late 2007, the French chain Sofitel has been repositioning itself in the marketplace with the aim of creating a new reference point in the luxury market.

This includes the launch of two sister brands, Sofitel Legend and So by Sofitel. Chief operating officer Robert Gaymer-Jones admits that at the beginning of 2008, he was worried about the economic climate. "I was very concerned that we would take our eye off the ball and that the economy would affect us badly," he recalls.

"But performance is stronger than expected. In North America we hear that the situation is dire, but our hotels are doing well. We are enjoying similar success in Europe. The Middle East is also strong and we are seeing good performance in RevPAR against last year."

Gaymer-Jones believes that the demand for hotel rooms is unlikely to diminish dramatically. "There is a lot of discussion in the news but, in reality, people still need to stay in hotels. We can’t be arrogant, though. We need to be sensitive and careful, and priced correctly for the market."

Slowdown expected

Mark Wynne-Smith, CEO, EMEA at Jones Lang LaSalle, agrees that performance to date has been better than expected, although a slowdown could be imminent. "The sector fared well on the trading front – it has held up a lot better than we thought it might – but cracks are appearing in the foundations," he says.

"This is a result of reduced confidence in economic growth."

Wynne-Smith believes that some sections of the industry will be affected more severely than others. "The UK, Germany, Spain and Ireland will be the most adversely affected and we expect worsening results in 2009," he explains.

“In North America we hear that the situation is dire, but our hotels are doing well.”

One region that could remain more buoyant than others is the Middle East, where new development looks set to continue at a healthy rate. Patrick Smith, vice-president of asset management at IFA Hotels and Resorts, thinks that the area will build on its success in 2009.

"We are on track with growth and in the next 12 months we’ll deliver many units. We’re at an exciting stage," he explains. "Dubai in particular is running at exceptional occupancy and high average rate. There could be slower growth but it will still be strong. We don’t see it tailing off dramatically – the long-term prospects are very much there."

Looking for deals

With a big customer base spanning more than 40 countries, online travel agent Expedia is in a unique position to view travellers’ purchase behaviour. "One of the primary trends we have noticed in the present climate is an increase in appetite for promotional rates," says Paul Brown, president of Expedia Partner Services Group and Expedia North America.

In the last few months of 2008, 27% of the website’s hotel bookings in Miami were for promotional rates, up from 16% in the same period last year. Similar bookings in Phoenix jumped from 4% to 19%.

In Europe, Brown has noticed that, despite the strong demand for deals, customers are not compromising on quality. "Our data shows that as a percentage of bookings on our European sites, one or two-star properties are down year-to-date versus 2007. Five-star properties have accounted for a bigger share of total bookings in the same few months compared to last year."

However, some mid-market operators are gaining new business from customers who have been forced to cut costs. Chris Day, international managing director at business agent Christie + Co, predicts that the next six to 12 months will see a period of "dumbing down".

"Those who have previously stayed at luxury hotels should still be able to afford to, but mid-market operators may be able to pick up trade from institutions, such as investment banks, which traditionally held conferences and corporate events at luxury properties but are being forced to trade down," he says. "In turn those who once favoured the mid-market could turn their attention to the premium economy and economy sectors, resulting in budget operators becoming price
sensitive."

Wynne-Smith is also cautious, believing that the luxury sector is likely to see business slowing down. "There will be a fall in occupancy and rates will be under pressure, but luxury hotel operators will hold on to average room rate because it is difficult to get back. I’d prefer to own budget hotels right now."

Finding funds

Despite the uncertain climate, there is evidence to suggest that property deals are still being made, although it is becoming more difficult to finance new projects. "It is fair to say that a lack of confidence in the banking sector and its struggle to free up money are hampering the funding of deals," says Day.

"However, judging by our discussions with a number of banks, they continue to show a strong interest in financing quality deals at the right price, backing sound management in the process."

There is little doubt that transaction levels are down compared to 2006–07 but, according to Day, the market is far from being on the edge of a precipice. "A number of big deals mooted from the middle of last year onwards have fallen by the wayside or been set in a holding pattern," he says.

"New supply is also benign, with a wait-and-see attitude, preventing owners from presenting their assets to the market." There have been signs of recovery with regard to big transactions, however.

In July, Millennium & Copthorne announced that it had agreed to sell its stake in the Korean company CDL Hotels for £232.6m. This was followed in September by Host Hotels & Resorts, the US hotel real estate investment trust, announcing that it had signed an agreement to acquire six hotels for £451.4m through its joint venture in the Netherlands.

"There are also opportunities in this market for those who are liquid and able to act quickly by investing their cash," continues Day. "In addition trophy hotels in key locations will always be of interest to investors, whatever the economic climate. The recent sale of the five-star, 168-bedroom Prince de Galles in Paris for €141.5m shows that there is still a demand for large-scale hotel deals."

Patrick Smith agrees that the present situation has advantages for some. "At IFA we see it as an opportunity for possible purchase because values are dropping," he adds.

"The market is good for acquisitions."

2009 could also be a good year for branded hotels, with economic uncertainty leading customers towards familiar names. "At times like this, consumers and businesses are inclined to favour a safe option," considers Day.

"For most consumers, a brand is that safe option. It symbolises consistency, reliability and support. While the credit crunch has invariably caused a slowdown in the number of big transactions, it has also increased the likelihood of developers and owners choosing brands – established or original – to anchor their new schemes and projects."

“Trophy hotels in key locations will always be of interest to investors, whatever the economic climate.”

While independent hotels may represent something of an unknown quantity, brands can help to mitigate risk for the developer, owner or operator.

There could also be a slowdown in management contracts for those relying on new investors, considers Wynne-Smith. "Money for financing new development is the hardest to obtain, and this will be the case for the next 24 months," he says.

"Where there is existing cash flow, however, there is an opportunity for management companies to grow."

Positive actions

So what can hotels do to protect themselves in the present climate? In spite of the grim predictions, some believe the sector will be able to batten down the hatches and emerge relatively unscathed.

"Historically travel spend has proven fairly resilient during times of economic turbulence," considers Paul Brown. "However it’s more important than ever for hoteliers to ensure that their distribution and marketing strategies are aligned with the present environment."

With consumers increasingly looking for good deals, Brown thinks that online distribution is imperative. Hotels should also be prepared to monitor the competitive environment, remain nimble in managing their rates and inventory, and be willing to institute aggressive merchandising.

"Some hoteliers are employing a more dynamic mix of long-term strategic promotions with tactical initiatives closer to the stay date," he adds. "In this way they’re able to optimise RevPAR and shift share without diluting their rack rates."

Wynne-Smith agrees that customers are becoming increasingly price focused, but considers the hotel industry in Europe to be better equipped to deal with the tough climate than in previous downturns. "Economies can be made," he says.

"As with other industries, there has been an element of laziness about cost control because money has been easy to come by. However we are in far better shape than we were ten years ago because owners, lenders and operators understand the market much better."

At Sofitel the focus for 2009 will be on creating a stylish, design-led brand. "We would love to have a portfolio of luxury hotels that are distinct, with a true French personality," says Gaymer-Jones.

"We want people to choose the brand because it is the best in the market. People still want a luxury hotel stay and they still want to be pampered. By relying on our service standards we will see our way through."

While it is widely agreed that the industry will experience a slowdown in 2009, predictions are varied. Many companies will need to cut costs and it could become increasingly difficult to finance new development.

It also seems likely that some regions will be affected more than others. However experts believe that the situation will not become untenable.

"The early part of 2009 will be challenging but not, as many would have us believe, impossible," says Chris Day. "The sector needs to remain positive and fully explore opportunities."