ukhospitality - investment readiness reportinvestment readiness report 6the discussion concerning...

Investment ReadIness RepoRt

In partnership with

COntentsIntroduction ............................................................................ 03

Economic summary .................................................................04

Balancing OTA- driven demand with your direct channels ........06

Social Media as Social Business .............................................. 07

The Benefits of Online Travel Agencies ....................................08

Have the Best of Both Worlds ..................................................08

Hotel Property & Investment Trends .......................................09

Supply and Demand Dynamics ................................................. 11

Every effort has been made by the British Hospitality Association to ensure that the accuracy of the contents of this report but the Association cannot accept responsibility for any errors or omissions.

©British Hospitality Association

All rights reserved. No part of this publication may be reproduced, copied, sorted in an electronic retrieval system or transmitted, except with written permission or in accordance with the Copyright Design and Patents Act 1988, as amended.

Published by:British Hospitality AssociationQueens House 55/56 Lincolns Inn Fields London WC2A 3BH

Tel: 020 7404 7744 Fax: 020 7404 7799 e-mail: [email protected] www.bha.org.uk

IntrOduCtIOn

In 2012, the British Hospitality Association (BHA) partnered with

Santander, Guestline and Jones Lang La Salle, to deliver a series of

seminars across every region of the United Kingdom, specifically for

BHA members. The seminars focused upon ‘investment readiness’ in

the hospitality sector with contributions from property, technology

and financial perspectives.

This paper summarises the key research and intelligence presented

by the experts who took part in the seminars held in Scotland, Wales,

the North of England, Eastern, South East, South West and Heart of

England, as well as London.

I would like to take this opportunity to thank Santander, Guestline

and Jones Lang La Salle, as well as all the BHA members who took

part in the interactive sessions and debates.

Ufi Ibrahim

Chief Executive

Ufi Ibrahim, Chief Executive, British Hospitality Association

INvESTMENT READINESS REPORT 3

I N T RO DU C T I O N

As we look at the year ahead in earnest

we continue to face tough economic

times. Modest GDP growth over the

next 12 months is forecast and against

this backdrop households place a

continued emphasis on deleveraging

their personal balance sheets: consumer

spending is expected to remain stable

but relatively flat.

Our 2012 memories are just that, our

time for reflection and distraction has

passed and we begin to ask ourselves

collectively: ‘what’s next?’ If we can

learn anything from previous recessions

it is that the fall and stabilisation of

activity levels will become more

apparent and all parties will get used

to the ‘new normal’ and accept current

market conditions.

We are looking for a positive message

after a prolonged period of press-led

recessionary doom and gloom stories.

Surely if we find ourselves at the bottom

of the market, this is the time that the

skilled investor makes their prudent

acquisitions and with cost of funds at an

historic low this gives a real opportunity

for a brighter period of trading to emerge.

The hotels sector in particular has

demonstrated the start of this with

accurate price setting during 2012

leading to improved confidence from

vendors and buyers alike.

Of course, buying and selling of hotels is

only one part of the story. Knowledgeable

and technologically advanced customers

demand the best of us, and in a world

where complaints can reach thousands

within seconds we cannot afford to lag

behind. This is a sector that is affected

by levels of personal disposable income

and those that are willing to, are deciding

very carefully where they will spend

their money.

It is vital that owners now consider their

plans to deal with the upturn, cutting

costs is sensible to survive tough

trading conditions but it is important to

remember that investment in capex and

long term planning should be high on

the priority list for hotel owners and

management teams.

This report shows that there is a strong

regional variance in the UK: the London

market must respond to macro-economic

and global circumstances in the same way

that the provinces operate under almost

totally different influencers and are far

more susceptible to UK conditions.

Banking the hotels sector:

During this period of economic

uncertainty, Santander has increased

its lending to SMEs with more than

5,000 UK businesses receiving in excess

of £3.4bn of new lending commitments

in 2012, an increase of 18% which has

been supported by the Government’s

Funding for Lending initiative.

The drive to increase lending is part

of Santander’s continued support of

the SME market and expansion of its

Corporate, Commercial and Business

banking divisions.

Hotels are an important part of the UK

economy and Santander wants to work

with well managed businesses in this

sector and we continue to seek out and

support those who match our ambition.

ECO N O M I C SU M M A Ry


eCOnOmIC summary

5,000+ UK businesses have received

£3.4bn+in new lending commitments, an increase of

18%


ECO N O M I C SU M M A Ry

We consider all applications and

work hard with potential customers

to achieve success for both parties.

We suggest transactions with the

following dynamics are most often

successful:

• A reasonable proportion of equity

in relation to debt, ensuring that

leverage is sensible and adequate

to withstand reasonable sensitivities

to plan.

• Those who can demonstrate

capacity for upkeep and ongoing

refurbishment- product quality is

imperative in a world where the

consumer is more demanding and

has more choice than ever before.

• A quality brand driven and

established by excellence in

customer experience.

• Experienced management teams

who demonstrate a good track record

in running successful enterprise.

• A well considered location that

serves its local market in an

appropriate and effective manner.

• A business plan that considers the

competition they face and has a

plan to deal with this and stay ahead

in their chosen market.

In 2013 we want to take action and continue to keep a spotlight on this important

sector; here’s how we will do this:

LendIng Our approach to lending reflects regional differences, challenges and opportunities.

We recognise the different drivers affecting the different types of hotels in this sector

and so we apply our own bespoke approach and methodology.

PartnershIP A continued BHA Partnership- we wish to support your representative body and their

hard work in 2013.

BreakthrOugh PrOgramme We look to work closely with the BHA at a regional level to identify businesses that

would benefit from our Breakthrough programme, for more information please visit

www.santanderbreakthrough.co.uk

grOwth CaPItaL Fund Hospitality businesses have already accessed part of our £200m Growth Capital Fund

and we seek to continue this success during 2013.

keePIng the COnversatIOn aLIve We are keen to keep the conversation alive and have delivered our own round table

event that will ask hospitality experts how we can continue to meet the challenging

needs of this sector, we will embed this learning amongst our relationship and credit

teams and keep our knowledge up to date with more events around the country.

unIversIty PartnerIngUsing our well established University Partnering programme we will look to place

interns in to your sector, our joint funding initiative sees us make a pledge toward

supporting future talent and creating opportunity for job creation.

seCtOr events We will support sector events through the BHA and others.


The discussion concerning direct sales channels versus OTAs, and offers valuable insight into the definitive need for both.

The regional and London trends for average rooms rates, occupancy and RevPar were broadly in line with the experiences of the BHA attendees over the past 3 years, however, RevPar trends opened up a broader discussion in the context of gross operating profit per available room, hotel profitability and ultimately hotel asset value. Distribution analysis confirmed that Booking.com in most areas of the BHA regions accounted for more than 50% of all OTA transactions (reservations delivered).

Over the past 10 years, the erosion of profit has been stark, with the gap between average room rate and travel agency commission becoming ever widening with TAC increasing and average room rates decreasing in real terms. It was clear from the interactive discussions that there was immense

concern over reservation profitability and the implications of the perceived strength and control of the online travel agents. It was noted that the hoteliers who commented on this area of their business acknowledged them as an important sales channel and therefore reluctantly accepted the associated higher commissions.

Technology advancements in the development of distribution channels, have greatly affected the evolution of a customer life cycle when booking online for accommodation. The conundrum for the hoteliers present was to decide on not whether to use direct or indirect channels to capture this growing web traffic, but rather how to integrate both effectively into a hotel’s marketing strategy. Utilising management tools available through technology providers are solutions to support this strategy.

See below diagram for a Guestline view of distribution analysis:

BaLanCIng Ota- drIven demand wIth yOur dIreCt ChanneLs

B A L A N C I N G OTA - DRI v E N DE M A N D W I T H yO U R D I REC T C H A N N E L S

Figure 2: Average Bookings by Day of the Week

Booking.com

SynXis

Expedia

LateRooms

Others

43.7%

22.8%

5.4%

18.3%9.8%

Figure 3: Bookings by Top 4 Channels

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep 2010 - Aug 2011

Sep 2011 - Aug 2012

Figure 1: Historical Booking Pattern by Month

SatSun Mon Tue Wed Thu Fri

With the growth of Facebook, Twitter, Linkedin and the blogosphere, social media is fast becoming social business, where online interactions are seen as marketing initiatives. More than ever before, businesses are viewing social media as an essential tool in their kit to communicate with consumers.

Today, most hoteliers are engaging with social media - with interaction levels ranging from evangelist and guru, to acknowledging its importance at the least. A key idea that is often missing within these interactions, however, is that of two-way engagement – using social media not to engage at, but engage with your customers.

With the recent announcement of reaching over one billion active users, Facebook is a valuable platform for hoteliers to create community, cultivate loyalty and ultimately increase revenue by fuelling direct sales. Industry studies show 82 percent of hotel guests prefer to book directly online, and with one out of every eight minutes online being spent on Facebook, it is the ideal channel for hoteliers to have direct and instant communication with potential customers.

Owners are looking for effective online channels which customers will regularly visit and create open communication channels between them and the hotel. Capturing online demand without being compared with competitor hotels or having to pay any OTA commission fees can be achieved bysteering reservations focus through to Facebook, where deals or offers an be put up on the page to attract people and from there build a back- and- forth communication platform, engaging with past, present and potential customers.

Using social media optimally is still with a minority of hoteliers who focus solely on direct online channels over OTAs, as many hoteliers in the industry continue to struggle with believing in the revenue benefits of social media. Hotel owners and managers need to cease viewing social media as another potential ‘push’ marketing medium that should show profitable returns, but distinguish it as more of a ‘pull’ marketing tool encouraging communication between hotel and customer, building an interactive relationship, eventually enticing the consumer to book with a hotel they associate with and ultimately trust.

Still, the challenge of handling a medium which can be difficult, and at times impossible, to assess, is the prominent issue ringing true with most hoteliers. Only one in eight hoteliers use social media as a marketing tool, instead focusing on the development of other strategies which deliver predictable and measurable business. Even with high OTA commissions, the fact that conversion rates from some forms of social media are hard to track with no point- of- sale means OTAs are a preferable route as hoteliers can diversify to a broad, global online distribution mix, compared to the smaller, localised audience offered by social media channels.

sOCIaL medIa as sOCIaL BusIness

S O C I A L M E D I A A S S O C I A L B USI N E SS


1 in 8 minutes online is spent on Facebook

82% of hotel guests prefer to book directly online

With the Online Travel Agency market, also often quoted as the ‘necessary evil’ of the hospitality industry, reaching its peak in the USA, major brands are turning their focus to Europe and the United Kingdom. Due to the pressure to not only grow, but maintain their growth levels, OTAs have determined the UK markets have been fairly underexploited, which is intimidating for a large portion of hotel owners and managers.

the BeneFIts OF OnLIne traveL agenCIes


T H E B E N E F I T S O F O N L I N E T R Av E L AG E N C I E S

have the Best OF BOth wOrLds

14% of consumers who booked online accommodation, claimed they would make their purchases from a web- based company they had never heard of, because it was cheaper

There has been much discussion around whether hoteliers need to focus on using indirect sales channels like OTAs to conjure business, or that they need to move away from indirect channels and join the growing industry of social business.

Ignoring one channel at the expense of another is dangerous – hoteliers need to focus on both in order to capture all forms of online demand. At Guestline, we believe in both forms of online distribution – as they serve alternate purposes, they are

equally necessary to implement into a marketing strategy. By integrating social media and direct booking channels into a hotel’s marketing strategy, hoteliers can build a community within their brand, influence two- way engagement and, as a result, build a reputation with consumers. The customers will in turn spread this perceived image throughout their acquaintance base, whether through recommendations, reviews or simply uploading photos of their experience for all to see. From these recommendations,

further potential customers then seek out reviews and pricing comparisons in search for the best deal, which is when OTA presence is crucial.

This is the new lifecycle of a customer shopping in the hotel accommodation market, and by utilising both direct and indirect distribution channels, hoteliers can be confident they are capturing all forms of online traffic, and optimising the profit per available room through minimised travel agent commissions.

However, hoteliers need not to be afraid of such a growing market, but rather utilise these distribution mediums to their advantage. A study from Mintel showed 14 per cent of consumers who booked online accommodation, claimed they would make their purchases from a web- based company they had never heard of, because it was cheaper. Also, out of the 70 per cent of consumers who booked their holidays online, 44 per cent said they trusted the reviews on OTAs, which helped influence their decision to book.

Today, technology has allowed for getaways to be researched easily online, and price comparison sites are making this even more efficient for consumers. OTAs are helping them find the best possible deals - whether it be a complete holiday, or just a hotel room through shoulder rates and reviews, potential

bookings are determined and consumer decisions made.

Customers are consistently looking for the best deal possible and are using OTAs to find it. Through shoulder comparison rates, package deal offers and customer reviews, OTAs are the booking channels customers ultimately prefer to use as they essentially cut down the research time, and offer all the information necessary on one web page.

Hotels need to make use of the increased strength and diversity of OTAs and exploit the consumer traffic that will trend from this growing market. The ultimate benefit of working with OTAs is their expansive customer reach, which is the reason the commissions on bookings are so high such a broad reach is the result of huge marketing spend on the part of the OTAs.

It is granted fees and OTA commissions can often significantly cut into the profit seen from a booking, but hoteliers need to understand the value they receive in return. Through presentation and retailing expertise, OTAs have perfected the way to convince consumers they are getting ultimate value for money when booking online - ideal for hotels looking to steer clear of the traditional, more factual marketing techniques.

This section summarises and updates the content of a series of briefings presented jointly by Jones Lang LaSalle, Guestline and Santander to the regional membership of the British Hospitality Association. The presentations focused upon ‘investment readiness’ in the hospitality sector with contributions from property, technology and financial perspectives. The sessions were themselves interactive and this paper seeks to build upon the lively level of debate, both in London and in the regions.

PrOPert yIt will come as no surprise that discussion and sentiment around investment issues were very different at our first session in London, as opposed to the subsequent meetings around the provinces.

• Comparing UK hotel Performance with the wider economy

That differential is emphasised in the following table which compares the growth of RevPAR in the UK Regions (red) with that of London (yellow). Many of those attending the regional sessions confirmed that from their own experience, hotel revenues had been tracking Real GDP growth (orange).

That dynamic is reflected in the table below which shows too the particular fragility of revenues in the regions whenever GDP becomes negative.

In comparison, the robust performance in London owes everything to its role as a global capital, and its ability to draw over 50% of inbound visitors (2011). For 2012, visit Britain forecasted 31 million international arrivals – reflecting the London Olympics and Paralympics – and being a slight increase upon the 2011 figures.

hOteL PrOPerty & Investment trends

H OT E L P RO P E RT y & I N v E S TM E N T T RE N DS


Regional UK RevPAR

London RevPAR

UK GDP

Figure 4: RevPar growths of UK & London vs economic growth

Source: Jones Lang LaSalle

2005 2006 2007 2008 2009 2010 2011 2012 Oct yTD

-15%

15%

20%

-10%

10%

-5%

5%

0%


The above evidence makes it possible to predict trends in the UK regions which are likely to follow the Real GDP growth curve:


2.00

3.00

1.00

0.50

1.50

2.50

-0.50

0.00

Real GDP growth (%)

2012F 2013F 2014F 2015F

FeedBaCk FrOm Bha meetIngsIn the light of such data, many of the BHA members we met last year recognised the need to generate organic growth rather than hoping merely for an upturn in UK economic performance. At our workshops, we were able to draw a distinction between those circumstances that are non- negotiable, and those elements of a business which provide owners with an opportunity to create growth.

The following is a representation of the conclusions we reached, the red segments being the elements that ‘we are born with’, and the orange circles identifying potential areas from which to create additional growth.

H OT E L P RO P E RT y & I N v E S TM E N T T RE N DS

Track Record (Sustainable)

Management TeamBranding

or strong independent

Identity

Asset Management

- CAPEX

Technology

Architecture Planning & Development

Lo

catio

n

The consensus view from our sessions suggests that the cumulative effect of

improving each element by a few degrees, will improve the investment readiness

of a hospitality business.

Particular emphasis was placed upon the need to maintain and upgrade facilities

(and the risks of not doing so), and to the importance of capitalising on latest

technology as a means of delivering more profitable revenue.

The strength of a management team and the correct choice of a ‘brand’ were

identified as important. The sessions benefitted considerably from the experience

and expertise of several independent hoteliers whose own personality very

evidently constitute the ‘brand’ and the driving force behind their own business.

It is an appreciation of and investment in resources such as these which will

enhance investment readiness in the remainder of 2013.

the ImPaCt OF addItIOnaL suPPLyAt each of our sessions, BHA members had an opportunity to compare their own

experience and knowledge alongside external data which was specific to their

own region. In particular, the sessions included a regional map comparing the

present trading performance of hotels within local towns and cities and considering

too the potential impact of new hotels planned for the future. Those results were

benchmarked against national trends.

For the purposes of this paper, those regional results are summarised on the map

of England, Scotland and Wales, which appears below. (Source: AM:PM).

In each case, the panels which appear on the map show the following information:

suPPLy and demand dynamICs

SU P P Ly A N D DE M A N D Dy N A M I C S


Occ/Rev Par

Location Existing Pipeline% Increase

On Hold% Increase


SCOTLAND73%/£58

63,510

2,059 – 3.2%

18,186 – 28.6%

ENGLAND74%/£74

474,062

23,803 – 5%

101,717 – 21.4%

WALES71.4%/£49.14


Overall, the statistics for England, Scotland and Wales are as follows:

On a national basis, Room Occupancy and

RevPar in England was held in balance

during 2012 at 74% and £74 respectively

with a pipeline (2013-2015) of new

bedrooms coming forward at a rate

equivalent to 5% of the existing stock.

There is a further 21.4% of the existing

supply either on hold or unconfirmed as

at February 2013.

Those numbers are heavily influenced

by London which accounts for nearly

a quarter of the existing number of

rooms in England. This means that the

national Room Occupancy and RevPAR

performance is affected significantly by

the outperformance of the capital.

The Scottish powerhouses of Edinburgh

and Glasgow command 30% of the total

room supply in that country. With just

a 3% increase in new supply expected

over the next three years, Scotland

expects proportionately less new

competition than is likely in England.

We have referred to different published

data for Wales (Source: HotStats 2013:

UK Europe & MENA Hotel Industry

Report). That report confirms the

importance of Swansea City Football

Club attaining Premier League status in

2011 and estimates the value to the local

economy as being in the order of £58.6.

The report too acknowledges that hotel

statistics for the country are underpinned

by those of Cardiff which benefitted

last year from Olympic events at the

Millennium Stadium. Cardiff will gain

too from the promotion of Cardiff City FC

who will join Swansea next season in

the Barclays Premier League.

Source: AM:PM Data for Wales from Hotstats

Occ/Rev Par

Location Existing Pipeline% Increase

On Hold% Increase

CARDIFF70%/£43

4,811

0 – 0%

1,378 – 35%

BIRMINGHAM67%/£42

12,172

1830 – 15%

4,288 – 58.3%

LIVERPOOL68%/£42

6,883

694 – 10%

4,049 – 47%

MANCHESTER77%/£53

14,396

1,138 – 7.9%

7,306 – 50.7%

GLASGOW76%/£46

7,674

262 – 3.4%

6,036 – 33.3%

EDINBURGH77%/£64

11,982

1,002 – 8.4%

3,845 – 16.4%

LEEDS71%/£42

5,995

514 – 8.6%

984 – 12.6%

NORWICH75%/£47

2,257

50 – 2.2%

285 – 44.2%

CAMBRIDGE79%/£68

2,003

379 – 18.9%

996 – 26.8%

LONDON82%/£113

115,640

11,110 – 9.6%

30,260 – 14.4%

OXFORD75%/£62

2,127

122 – 5.7%

259 – 29.7%

BATH74%/£70

1,632

206 – 12.6%

486 – 63.8%

EXETER77%/£46

1,542

240 – 15.5%

865 – 28.6%

Drilling down into the regional landscape, the following map summarises the regional perspective:



Occ/Rev Par

Location

Existing

Pipeline% Increase

On Hold% Increase

Source: AM:PM Data for Wales from Hotstats



When observed from a national viewpoint, London clearly remains the focus of hotel

activity. The Occupancy and achieved rate ensure that the fundamentals of the capital

are among the strongest in Europe.

Turning to the regions, Edinburgh and Manchester are the strongest performers by a

distance and interestingly both cities anticipate an approximate 8% increase in new

bedrooms in the shorter term. Cambridge, Oxford, Exeter (and Bath) are destinations

with strong leisure and business markets and their historic performance also

outperforms the rest of the provinces.

Although the map reveals a gulf between conditions in the regions and those of London,

the recent BHA sessions highlighted the significant entrepreneurial spirit and expertise

of business owners in the regions – where conditions obviously remain more challenging.

Investment vOLumesThe UK remains Europe’s most active hotel transaction market and interest remains in

key assets in prominent locations. Again, on the face of it, there is a chasm between

London and provincial markets, in terms of volume. The two following tables track the

very different profiles:

Notable single asset sales in 2012

included the 4star Cavendish Hotel which

was sold for £159 million (£690,000 per

key) to The Ascott Limited, a company

based in Singapore. Other notable

transactions included two further 4star

hotels, the Hoxton Hotel and The Kingsley

by Thistle (bought by Oriental Holdings

– a Malaysian company), which changed

hands for £65 million and £43 million

respectively.

Those transactions reflect too the diversity

of ownership within the London hotel

market where only 53% of the 4 and 5

star hotel bed stock is owned by UK

residents. Asian owners are the second

largest group and constitute a share of

18% which has increased slightly as a

result of the Cavendish and Kingsley by

Thistle transactions mentioned above.

European ownership accounts for 12%

(mainly high-net-worth individuals)

whilst both the US and Middle Eastern

ownership in the upscale segment is 7%.

The beginning of 2013 has seen further

activity with the announcement in March

2013 of the sale of the 447 bedroom

InterContinental London Park Lane.

The short leasehold (approximately

57 years unexpired) was acquired by a

private Middle Eastern investor for a

sum of £301,500,000. Operated by IHG,

under their prestigious InterContinental

brand, the hotel was sold subject to a

long term management agreement with

InterContinental Hotels & Resorts.

8%increase in new bedrooms anticipated in Edinburgh and Manchester in the shorter term


Figure 7: Regional UK: Hotel Investment Volumes 2003-2012 (£ Billions)

Figure 6: London: Hotel Investment Volumes 2000-2012 (£ Millions)

2003 2004 2005 2006 2007 20102008 20112009 2012

£4

£7

£2

£5

£1

£3

£6

£0

2000 20032001 20042002 2005 2006 2007 20102008 20112009 2012

£800

£1,400

£2,000

£400

£1,000

£1,600

£200

£600

£1,200

£1,800

£0

In 2012, investment volumes in the

regional UK amounted to £762 million,

a 13% decline on 2011 volumes. Similar

to the previous year, investment activity

was often driven by distressed sales,

such as the Cambridge Crowne Plaza

that was bought out of administration

by London & Regional for about £35m.

Overall, 24% of all recorded hotel

transactions in the regional UK in 2012

were receivership sales.

As we enter 2013, there is firm evidence

that some of the most active buyers

are targeting the UK regions this year.

This is evidenced by the sale in February

2013 of the Marriott Portfolio of 42 hotels

–the largest UK hotel portfolio transaction

to complete since the financial crisis

of 2007/8.

The portfolio (comprising 7,800 rooms) was

sold for an undisclosed sum and the hotels

will continue to be operated by Marriott

subject to long term Management Contracts.

In addition, an investment fund affiliated

to Starwood Capital Group also

completed the purchase of 23 UK hotels

within the Principal Hayley portfolio.

Those examples represent a significant

vote of confidence in the UK regional

hotel market by international investors.

Those investing outside London will

naturally be diligent in the way in which

they appraise hotel businesses, and will

have particular regard to issues raised

at the BHA sessions, including the

requirement for CAPEX and the growth

that might be achieved through investment

in infrastructure and technology.

Nevertheless, the positive sentiment for

investment in the regions is welcome and

expected to become a more prominent

phenomenon as the year progresses.



£762mtotal 2012 investment volumes in regional UK

24%of recorded hotel transactions in 2012 were receivership sales

British Hospitality Association, Queens House, 55/56 Lincolns Inn Fields, London WC2A 3BH

Tel: 020 7404 7744 • Fax: 020 7404 7799 • e-mail: [email protected] • www.bha.org.uk

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