Split view on the way ahead

Investors are keeping agents busy with inquiries, as they set aside longer term concerns over possible post-pandemic shifts in demand.  

Capacity issues are holding back greater transaction volumes, say agents. And for those with hotels in the right locations, this summer of enforced staycations looks set to make up a good portion of the cash lost during pandemic lockdowns. 

Looking further ahead, there remain broader concerns around how the pandemic has changed consumer behaviours. There are worries over the return of office workers, or whether they will prefer hybrid working; how a reduction in physical retail will hit urban centres; and how climate change issues will influence investor behaviour. 

Julian Troup, head of UK hotels agency at Colliers, said that despite the sometimes bleak picture painted, “there are parties out there with money. I think there’s a raft of investors, but there’s not a lot of stock.” His UK team has completed 24 hotel sales so far this year.  

There are also a number of smaller hospitality players, with strong backing, taking advantage of market conditions. Colliers, for example, has recently sold a hotel with strong food offering to The Inn Collection, a group focused on expanding its portfolio in northern England. “They’ve got a model that works, and this staycation boom is playing to that,” said Troup. The group has acquired four sites so far this year, taking its portfolio to 23 sites.  

Troup also noted an increased range of options for stressed hotel assets. Investors are being more creative, reviewing repurposing options across a range of accommodation niches, from affordable housing to elder living.  

Christian Mole, UK & Ireland head of hospitality at EY, told Hotel Analyst that the market is busy, so much so that anecdotally some agents are declining instruction opportunities. However, this is symptomatic of the fact that potential buyers are taking longer, and being more thorough over due diligence, before making final offers.  

Beyond the short term, researchers are weighing up the likely impact of change on real estate investments at large. A webinar organised by agents JLL flagged a number of issues that could impact future property investment performance.  

Alice Charles from the World Economic Forum, said the pandemic had forced change on cities.  “We’ve seen huge changes already,” with cities rolling out cycleways and outdoor eating spaces, focusing on “a green and just recovery”. Globally, she sees a shift away from massive metropolises towards smaller cities, and warned: “Cities are going to have to think carefully about the future of their CBD.” 

IHG CEO Keith Barr said that his company is having an internal workspace debate, off the back of the pandemic, and making changes to its corporate offices. He also sees changing demand from hotel guests feeding into the way IHG’s brands develop their design palette, with “beigeness” replaced by more distinctive interiors, and a shift towards smaller guestrooms while common areas grow in scale. In common with other major hotel brand groups, IHG is exploring how to make more of its lobby spaces, via co-working offers and other ways to enliven the space during the day. 

Matthew Richards, CEO capital markets EMEA at JLL, said that for investors it was no longer about being sector specific: “Since the GFC, investors have focused in on structural shifts rather than political risks. I think we are going to see further growth in what we used to call alternatives. Without a doubt, investors have to be more flexible.” 

Mole said the recent Horizon portfolio of IHG branded properties, sold to Marathon, was an indication of strong pricing achieved for hotels substantially located in secondary UK cities. More broadly, he still sees investors confident in putting cash into hotel assets in gateway cities across Europe.   

“To my mind, the bifurcation is between business cities, and those that are more mixed. If I was an investor, unless there’s a really strong brand, I would be nervous about those more business driven cities.” He expects to see a peak in leisure spend in 2021, due to the release of pent-up demand, with the weekend break market continuing to be strong through 2022. 

JLL’s Richards also noted growing interest in sustainability and green issues, which he sees as “a huge opportunity for investors”, particularly when considering the volume of investment needed to transition to zero carbon globally.  

But while there is interest at a macro level in opportunities for investing in wind and solar energy, consultants such as Mole see little discussion at a more granular, hotel property level: “I haven’t heard any investors talking about it.” Whitbread remains the standout hotel group in sustainability, having recently issued green bonds to finance growth.   

For brands, which do not own any properties, there is a greater challenge. “We have to significantly change our portfolio,” said IHG’s Barr, in front of the webinar audience. He said this was not just looking at new, low to no carbon hotel designs, but tackling the substantial mass of existing buildings. IHG has just put out a white paper detailing the challenge of retrofitting existing properties, across a range of measures – and is keen to tackle carbon use at the building level, rather than simply buying carbon offsets.  

HA Perspective [by Chris Bown]: It is clear that, for those with funds to invest, right now there are deals to be done. And, if you buy in the right location, there’s a bumper summer ahead that will get the cash flowing in from your newly purchased asset. Happy days – we’re told some operators have cheekily calculated the date at which they will make up all the losses of the last year. Frustrated consumers are booking the suite when they’d have had a double in 2019 – and they are prepared to pay top rates too.  

As to what’s coming over the hill, the JLL webinar pointed to a number of issues that are not going to go away. But with little visibility over how the pandemic has fundamentally changed consumer behaviour, it’s going to be a tough call on whether a hotel in a second league city will, ultimately, perform better than one in London or Paris. 

What is not in dispute, however, is that the sustainability thread will not go away. Going green demands investment – but done right, also delivers both a financial and an environmental return.  

Additional comment [by Andrew Sangster]: Getting out the crystal ball is always fun but the hard part is keeping your prejudices in check and remaining hard-headedly objective.  

As we have already remarked in this issue, Covid is not so much a change agent as something that has sped-up existing trends. It is perhaps easier to predict what has been sped up than the new, new things coming our way. 

IHG’s Keith Barr identified a number of things that were already apparent in hotels and workplaces that are set to change more rapidly. Trends towards smaller rooms and more public space – the opposite of what one would expect if you believe the viral risks are to remain – were already happening and now seem set to quicken. 

And ESG – environmental, social and governance – is becoming an ever more important issue. This week, the FT had a headline about big four audit practice PwC boosting headcount by 100,000 over five years. A key part of the USD12bn investment is to help clients with ESG, according to the report. 

A few years ago, during Hotel Analyst’s conference on digital matters, the Hotel Distribution Event, I chatted to some experts in artificial intelligence about the future. Pointing to one of our sponsors, PwC, they said that audit firms would be much smaller in the future as more of the work is automated. 

Perhaps the audit part of PwC’s business will shrink its headcount but it looks unlikely that the overall firm is going to be smaller. 

The key message, I think, is that while business lines change, well run companies and service firms will adapt to exploit new areas. The same will prove true for cities.  

While some of the reasons for the historic growth may disappear, new ones will emerge. And that fundamental driver of needing to be close to where the action is, and the people who are leading the activity, is not going away. 

If there is one thing that Covid has demonstrated, it is that there is no digital substitute for face-to-face interaction. As an enabler of that interaction, the accommodation sector will continue to grow. 

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