The hotel industry has seen a number of high profile mergers and acquisitions (M&A) in the last few years with deals such as Accor’s purchase of the FHRI, China’s HNA buy-out of 25 percent of the Hilton group, and the Marriott-Starwood merger, which created the largest hotel chain.
And, more consolidation could be in the works according to JLL’s latest Hotel Investment Outlook, which reveals both owners and operators strive to remain competitive by expanding. In fact, the Best Western Group’s Chief Executive Officer, David Kong, recently stated that the company is looking at M&A as well as partnerships as a means of growth.
At the same time, hotel investment is on the rise. In Australia alone, the Tourism Accommodation Australia (TAA) revealed there are 228 hotel projects under construction, approved for development or in advanced planning stages across the country.
For new hotel owners, it remains to be seen whether the flurry of M&A in the business is good for their bottomline, says Andrew Langston, Executive Vice President, Strategic Advisory & Asset Management of JLL’s Hotels and Hospitality Group. “Large mergers such as the Marriott-Starwood deal have resulted in a loyalty programme that represents 1,128,224 guest rooms worldwide with another 2,009 properties in the pipeline. The question is whether owners see the combined membership as an attractive opportunity for wider reach or whether this is offset by having closer neighbours such as a fellow Sheraton or Marriott down the road,” Langston explains.
Against these developments, owners should establish the true value of the loyalty programme and its delivery from different operators.
Choosing the right brand
The plethora of hotel brands that sit under a singular umbrella group also means that owners should be more discerning when choosing their hotel operator, especially as it is increasingly difficult for standalone unbranded properties to make a meaningful impact on Revenue Per Available Room (Revpar) in most destinations. “The marketing dollars can only stretch so far compared to a major brand with far reaching distribution networks and global positioning imagery reaching audience via a selection of media avenues,” Langston adds.
That said, smaller hotel chains that are keen to spread their reach or launch a new brand into new territories are usually more willing to be flexible with both commercial terms and fees as a means of getting their foot in the door.
The location of the property also needs to be taken into account. Hotel owners ought to ensure there is synergy in all aspects – the cultural surroundings, design of the hotel, brand positioning and image in order to drive appropriate clientele into the property.
“In addition, investors need to be clear on their objective – is their property for a short-term turnaround or the long play? Is it a trophy asset or simply driving profitability leading to retained earnings? Not all hotel owners focus purely on the bottom line, and quite often there is an emotional attachment to the destination or the actual land,” says Langston.
Langston advises owners to involve their chosen brand and operator from the beginning to avoid changes, modifications and an increase in construction costs to reach brand compliance and a smoother pre-opening process, which hopefully does not drag resulting in a delayed opening.
Even after opening a hotel, a brand might require owners to investing in up-keeping. “Operating and franchise agreements often allow the brand to revise and upgrade the brand standards over time. While both the owner and the brand evidently want the hotel to succeed, the ongoing cost of compliance with these standards may ultimately reduce their return on investment,” adds Ellen Smith, Counsel, real estate, at Eversheds Sutherland.
More factors at play
Investors should also get a professional Request for Proposal (RFP) to ensure that operators understand their specific needs and target audience. “During the RFP process, look closely at the 10-year forecast that an operator submits. Gone are the days where an operator puts down unrealistic numbers of high rates and occupancies leading to wonderfully inflated gross operating profits – an astute owner has already done his own indicative numbers and projections, backed up by a professional feasibility and market research study. As such owners should get operators who can demonstrate a true understanding of the market with true, realistic and fair numbers,” says Langston.
“When advising clients, we take into account all the variables of the project so we know what a good, and fair, deal is. A small 0.5 percent saving on base fee or incentive can save millions over the contractual life of the property,” explains Langston.
Lastly, owners might want to seek legal advice when it comes to critical decisions for their properties, such as the hiring of senior management or the reviewing of capital expenditure and yearly budgets. “It is important that the owner enlists the help of experts on both the business and legal fronts, who can advise on the best strategies for obtaining the most advantageous deal,” says Smith.
As a relationship between an owner and an operator is likely a long-term one, often lasting a minimum of 20 years, it would be prudent to ensure the operators’ values and interests are aligned with those of the investor. “Owners should get an operator which can provide them with the support and attention both they and their property need,” concludes Langston.