In recent years many prominent hotel companies have chosen to reduce their real estate portfolios, opting instead for operating, lease and franchise agreements. For owners these contracts enable investors to buy into the power of a particular brand and take advantage of its expertise in the sector, and for hotel operators, there is an opportunity to focus on building the company while reducing the risk that comes from owning property.
However recent economic events have affected the sector, with many big hotel groups reporting a slowdown in their pipelines, so how will this affect operating agreements?
Starwood Hotels and Resorts has been reducing its investment in owned real estate for some time, allowing the group to concentrate on its expansion plans. “We don’t need to own the walls to build on our lifestyle brands,” explains Roeland Vos, president for Europe, Middle East and Africa.
“We will continue to own in some strategic markets, but it’s hard to expand if you want to own every hotel. We’re happy to work together with the right partners in the right locations. Owning properties generates high returns when things are going well but on the downside, there is risk.”
The group’s portfolio stands at 942 hotels. Of these only 69 are owned or leased, and 436 are managed by the group on behalf of third-party owners.
Starwood receives franchise fees for the remaining 437.
Vos thinks the group’s preferred way of doing business provides clear advantages. “The owners buy into the power of our brand and our sales force,” he considers.
“There is also the added value of our expertise. We are one of the largest operators in upscale hotels and we can pool from our resources as needed. Management is a science as well as an art.”
Joanne Owen, a partner at law firm DLA Piper, thinks that agreements of this nature are especially attractive to those with no previous experience in the hospitality sector. “Owners with no skill or expertise are looking for someone to help with the operation,” she says.
“Some will look at what a brand can produce for them in terms of revenue, while others may be looking to venture into a new market. Brands have huge pulling power.”
However owner expectations can cause problems. “The benefits are debatable, depending on what the owner wants to achieve. A silent owner may be looking to outsource the entire operation, but this comes with the risk that people who are not familiar with the business don’t understand its complexities.”
With the credit crunch taking its toll on the hotel sector across Europe, some operators are also changing the way in which they view contracts. “The economic climate has had an impact on the way we operate,” says Vos.
“We consider that our contracts can only work if both parties are getting out of it what we consider to be fair play. Obviously as revenue changes in difficult times, we’re in it for a similar percentage as the owners.”
The Dubai-based group Jumeirah has luxury hotels in the Middle East, London and New York, and, although the company owned and operated its assets during its first few years of existence, it now runs its entire portfolio on a management contract basis. For executive chairman Gerald Lawless, the advantages for owner and operator are obvious.
“For the owner – and for us – there is an opportunity to build an international luxury brand,” he says. “People buy very strongly according to brand loyalty. There are other benefits too, such as our central reservation system and our marketing loyalty programme.”
With the group’s properties now owned by third-party investors, the company is able to focus on the day-to-day running of its operations. “As an operator rather than an owner, we have the ability to be able to develop at a faster pace and get the brand across on a global basis,” says Lawless.
Lawless believes that in the present market, brand recognition is becoming more important than ever. “The economic climate has had an effect on our pipeline,” he explains.
“We’re finding more demand as credit is very tight. Investors who have managed to get funding have done so on the basis that the hotel operation will be run by an international management company. Owners are relying on brands to drive business.”
With more brands moving into the European marketplace, competition for contracts is also increasing. “I see the situation as an opportunity for a company like us,” says Vos.
“In good times everyone thinks they can do it, but the tough times separate the men from the boys. Good brands will survive and weak brands will die out.”
Vos also thinks that operators with long-term interests in the industry will ride out the downturn. “It would be incorrect to say that our pipeline has not been affected by the economic climate, more in some markets than in others,” he says.
“In some areas it has been drying up but other markets are still doing well. We will open between 80 and 100 hotels globally this year, including our 1,000th hotel. It’s important to show that we continue to grow at a rapid pace. Our track record will show that we will have 40% growth between now and 2011. These hotels won’t come to market for two or three years and by that time, I’m confident that our pipeline will be running at the same pace.”
Owen believes it is difficult to anticipate the effect the downturn will have on new contracts. “It is hard to see, because a lot of what is going on at the moment is in relation to operations that are already in existence,” she says.
“Over time it will have to change, and it will be driven by owner expectation.” She thinks the increasingly congested European sector could witness growing disorder.
“If you look at the numbers of brands and how they have grown, it can be confusing.”
“The marketplace is always very competitive, but one of its great strengths is that it is very diversified,” adds Lawless. “For us Dubai is an international base and the domestic market is small – all of our guests are from abroad. Working in Dubai, we find that our market is global, which helps us get recognition.”
Despite the slowdown Jumeirah is also pressing ahead with a raft of new contracts. “We are on track with regards to our pipeline,” continues Lawless.
“Our overall programme is healthy and we have 14 hotels under construction, 25 signed up as agreements and an extensive pipeline with letters of understanding already signed or being negotiated. By 2012 we aim to have up to 60 hotels in operation or development.”