Way to Go

28th June 2009 (Last Updated June 28th, 2009 18:30)

With little sign of recovery on the horizon, the credit crunch continues to bite. However many big companies are forging ahead with development. Andrea Ashfield reports.

Way to Go

The European hotel sector has been affected significantly by the economic downturn, with changes in spending patterns leading to a sharp fall in bookings. Recent news stories have highlighted many delayed openings and experts agree that hotel development throughout the remainder of 2009 will be muted compared to previous years.

A big drop in corporate travel has had a considerable effect on the luxury sector yet, in spite of this, many of the industry’s biggest names are pressing ahead with their expansion plans. Marriott has more than 770 hotels in its pipeline and will launch its Residence Inn brand in Europe by 2011, while Starwood is set to open its 1,000th property this year.

Despite announcing a new focus on costs and cash flow, Rezidor has added 2,300 rooms to its pipeline in the first quarter of this year, while InterContinental Hotels Group has almost 1,800 new hotels planned.

According to Robert Milburn, hospitality and leisure leader at PricewaterhouseCoopers, the sector’s poor performance can be attributed to two principle factors. “Firstly a reduction in consumer confidence affected the leisure travel market, and we can see from surveys that it has got worse every quarter,” he explains.

“One hotelier we spoke to told us that in November his biggest single revenue stream was cancellation fees.”

“Secondly there has been a decline in corporate travel. This didn’t really have an impact until the tail end of 2008, when the corporate world really woke up to what was going on and began to address its travel spend.”

With conferences booked well in advance, this meant there was a three to six month delay before the cuts started to filter through. “One hotelier we spoke to told us that in November his biggest single revenue stream was cancellation fees,” adds Milburn.

“This may be an extreme example but it shows us what’s going on.” PWC’s latest forecast for the UK is equally bleak.

Published in March, the report predicts continued deterioration for all four quarters of 2009, with a hefty RevPAR drop of 37% expected for London towards the end of the year.

Mark Wynne-Smith, CEO for Europe, Middle East and Africa at Jones Lang LaSalle Hotels, agrees that the outlook is not encouraging, and thinks development for the rest of 2009 will be noticeably down on previous years. “There will be less development over the coming months because there is far less debt in the system,” he says.

“Finance is harder to obtain and it’s slowing down the pipeline. Banks see trading hotels as far lower risk than developments. It’s tough because investors with funds have a very wide choice, so there is a fight for a small amount of capital.”

For hotel operators, less funding means a slowdown in new projects. “The pace of hotel signings is linked to the lending market and the longer it remains closed, the more this will influence the number of hotels we sign into our development pipeline,” says Andy Cosslett, chief executive of InterContinental Hotels Group.

With seven big brands and nearly 620,000 rooms in its worldwide portfolio, IHG is in a good position to ride out the recession and, despite the tough conditions, Cosslett believes there are still plenty of avenues to explore. “On the flip side, the situation brings new opportunities for conversions,” he continues.

“The property already exists so less financing is required and the hotel can be up and running more quickly.”

IHG has steady expansion plans in place for the rest of the year, with almost 400 new hotels set to open at a rate of more than one a day. “No one is in any doubt that the current environment is very challenging and it will be throughout 2009,” says Cosslett.

“Right now we’re focused on delivering a great guest experience and supporting our owners by working harder to drive revenue and reduce costs.” The group has almost 1,800 hotels in its development pipeline, more than 60% of which will be Holiday Inn or Holiday Inn Express properties.

In addition, the brand is in the throes of a $1bn relaunch, due for completion by the end of 2010. “We are often asked if now is really the right time to be doing this and the answer is yes,” enthuses Cosslett.

“Guests are looking for quality and value more than ever. People are also trading down, so the relaunch is giving people a good reason to try us out.”

Falling prices

Lack of funding has also led to a slowdown in transactions. In March HVS reported that while the European hotel market declined by about 7% in 2007, the following year it fell back to just over €6bn, a drop of more than two thirds.

In the same month Jones Lang LaSalle Hotels announced that transactions in the US had fallen to a four-year low, reaching $8.5bn in 2008, down from $45bn the previous year. “There is no question that the industry has been significantly affected by the economic downturn and crisis in the financial markets,” comments Robert Koger, president of real estate advisory firm Molinaro Koger.

“We can point to the lack of transactions over the past 12 to 18 months, and the significant decline in RevPAR and profitability that will continue throughout 2009. Things are very tight right now.”

However Milburn thinks there could be some promise of improvement for UK hotels, albeit some way off yet. “It is certainly difficult to raise a lot of finance, but there is capital there and the government wants banks to lend again,” he says.

“This would primarily be for homebuyers and smaller businesses but funds should become available for single asset transactions or small portfolios. We are just beginning to see an amber light.”

There is also a perception that a fall in prices makes this a good time to buy. In a recent hospitality outlook survey published by DLA Piper, two out of three respondents in the US considered that current market conditions have created good buying opportunities for well-capitalised investors.

“We have to remain focused on the positive long-term trends for travel and tourism.”

However not everyone agrees. “There are opportunities but the difference with this downturn is the safety net put in place by the government,” says Milburn.

“We don’t truly understand what the guarantee scheme means and this is causing a different attitude. Previously if a loan went bad there was a strong inclination to take the asset back. Now the change in values is so big that lenders are more likely to hold and sell in three to four years when they can recover the original loan. Buying opportunities are likely to be hotels that are very hard to bring back to life.”

In addition there remains some reluctance to sell at reduced prices. “Sellers are still looking to achieve high figures but in the past six months the seriousness has hit home and the industry has had to appreciate the need for lower prices,” adds Wynne-Smith.

“We could have reached the point when it is cheaper to buy than to build.”

Looking forward

Experts are predicting little sign of recovery this year, although some market segments and geographical areas may fare better than others. “Lack of finance will have the biggest impact on the four-star market and this will lessen as it goes down the pyramid of product,” says Wynne-Smith.

“In higher brackets, such as luxury resorts, there will be a slowdown, but in the economy and mid-market, development will still occur. Europe may fare slightly better than the UK because the development market is substantially supported by leases.”

“The luxury sector has been hit the hardest, for both financial and political reasons,” adds Koger. “No CEOs want to be seen walking out of luxury properties or holding events at these hotels. It will slowly come back, but not as quickly as four-star urban assets.”

Koger also thinks Europe will have a rougher ride than other parts of the world. “Even if the global economy begins to turn mid-year, which we’re projecting, the business will not benefit until the end of this year or the beginning of 2010. There is more downward pressure in Europe than the US, with so many different economies on the continent.”

Despite the difficult conditions, however, Andy Cosslett believes there is still much to be positive about. “Things are tough but we have to remain focused on the positive long-term trends for travel and tourism,” he concludes.

“People are living longer, new markets including China, Russia and the Middle East are travelling, the internet is making tourism easier and low-cost airlines continue to drive demand.”

Strategies for success

  • In March, DLA Piper’s Hospitality Outlook Survey for Europe found that 36.4% of respondents were seeking to reduce operating costs in order to ride out the recession.
  • Other initiatives highlighted by respondents included downsizing staff (18.8%), deferring capital expenditures (6.9%) and finding new revenue channels (19.5%).
  • Strong branding has become more important than ever, with those situated in prime locations better equipped to survive the downturn. “Good brands with good marketing organisations will do well,” says PWC’s Robert Milburn. “Under the banner is a good place to be.”
  • Deloitte’s Hospitality Outlook 2009 recommended a renewed focus on marketing and sales, by re-evaluating customer segments and strengthening loyalty programmes to reduce the financial burden and build strong relationships.
  • The report also highlighted sustainability as a mandatory business requirement for successful hotels, after a survey revealed 95% of business travellers think hospitality companies should undertake green initiatives.