Third-party management companies were provide a source of comfort for investors to rival the brands, delegates at this year’s Annual Hotel Conference in Manchester heard.
As the sector moved away from the periphery of real estate investments and towards the core, there were increasing demands placed on the brands to justify their roles.
Jens Blomdahl, KSL Capital Partners, said: “The brand pendulum swings back and forth. With the movement of the third-party managers coming into Europe there is some comfort to be had from them, they create operational efficiency. When you’re on a seven-year cycle of ownership and you have a 25-year agreement wth a brand, it’s better to have a third-party operator instead, because you can sell unencumbered.”
Speaking for the lenders, Emma Young, Allied Irish Bank, added: “The value of the brand depends on location and management. They don’t work on every hotel, it’s on a case-by-case basis. We take comfort not just from the global distribution, there are brand standards which have to be maintained, so you know there will be capex spent to maintain the property. If a hotel hasn’t been established yet, they can also add to a property. We lend to branded and unbranded, depending on the site. The availability of finance coming into the sector has increased over the last six years, but we still focus on the fundamentals, on location and on management.”
Earlier in the conference, a group of independent hoteliers told attendees that the brands were not required to have successful distribution, with Nick Davies, The Cottage in the Wood Hotel
commenting that “The OTAs have played a part in levelling the playing field with the big players”, while in contrast, Ben Harper, Watergate Bay, responded: “We don’t use the OTAs – once you turn them on it’s hard to turn them off again”. An option for iconic hotels.
David Orr, CEO, Nadler Hotels, said that there were “more opportunities to forming bilateral bonds with customers, but there are threats to that”, one example of which was the OTAs and their eagerness to own the customer.
While the brands continued to proliferate, Karan Kanna, Intercontinental Hotel Group, said: “We have to be careful not to create a sticker brand – brands which are out there just to take on supply-side situations. It has to stand for something.”
The brands hold looked to be wavering, with STR’s Thomas Emanuel telling delegates that “more of the hotel pipeline in the UK is independent, rather than branded rooms”. Funding that pipeline, Dan Williams, Clydesdale Bank, said that “Banks want duration and they want to continue to lend, so there is still appetite in the marketplace. For us, location is key and borrower profile is key.”
Causing some concern to the lenders was the rise in ground rent deals, driven in part by growth in participation in the sector by the institutions. Young said: “You can almost talk yourself into ground rents, but it is a senior deal. We see a lot of people asking for it, I can see the attraction from an investor’s point of view. When it comes to development finance they are a ‘no’.”
Williams added: “As a bank we don’t like a super-senior position, they’re untried”, while Lissa Engle, Berkeley Capital Group, said: “Lenders all value the ground rent aspect differently. We need to see it tried and tested.”
Despite a drop in UK hotel transactions in the first half of 34%, as reported by PwC, there was confidence about the deals market, with CBRE Hotels’ Joe Stather telling the event: “European and domestic institutional investors are leading the charge when it comes to UK hotel portfolio acquisitions and the 2019 UK hotel investment volume is on track to reach GBP5.3bn”.
The Marathon deal remained to be done in the UK, while during the AHC Talash Hotels announced that it was being marketed, illustrating ongoing appetite for hotels.
HA Perspective [by Katherine Doggrell]: As we heard at the recent Hotel Distribution Event, the increasingly professional ownership community has been looking at the brands and wondering why they get so much of their money. Change is already being forced and greater participation is being seen from flags who are motivated by a need to maintain their pipelines.
But the grumbles are not over. Elias Hayek or Squire Patton Boggs was cautious about the round of consolidation in the sector, which meant that owners were seeing themselves become smaller players in a big pond and worrying about their share of the pie as a consequence.
Happily, a solution to all this was available, with the expansion of the third-party operators into Europe, keeping the brands in check or, in some cases, not branding at all. With the likes of OYO offering a new route to market, the established flags are facing some readjustment.