You’d have to think back to the dotcom days to find the stock market doing as well as it is today. On 21 February 2014, the FTSE 100 climbed to a staggering 6,838, not far off the highest point recorded since the index began in 1984. In the US, the S&P 500 soared to record levels last year – past any point during the so-called Great Moderation.
This uptick isn’t without its critics. Economist Ha Joon Chang called it the "biggest stock market bubble in modern history". In the UK, real purchasing power has been rapidly diminishing since the coalition government came to power in 2010. Savings accounts are falling at their fastest rate for 40 years, and a rise in unsecured lending has mirrored many of the conditions seen before 2008. In the emerging markets, trillions of dollars have flowed in as a direct side effect of monetary policy – sparking fears of massive property bubbles.
The discrepancy between the ‘real economy’ and stock market investment seems stark. But, in the hotel industry, it is hard to ignore the improvements taking place.
In 2013, Hilton’s IPO raised $2.35 billion – a record in the industry. According to recent figures from Jones Lang LaSalle, transaction volumes for 2013 increased by 40% to $46 billion. After five years of economic uncertainty, that can’t just be waved away.
The numbers are, of course, slightly more complicated than first thought. While the US experienced consistent growth throughout 2013, in Europe most expansion was clustered in a flurry of activity in Q1 – almost all of it from large portfolio transactions. Chris Day, international managing director at Christie + Co called it "the year of the hotel portfolio deal". And he wasn’t far wrong.
Two deals in particular stood out. Starwood’s acquisition of Principal Hayley from Lloyds Banking Group was worth around £360 million. And Abu Dhabi Investment Authority’s $815-million purchase of 42 Marriott hotels was even bigger.
Both were examples of mid-market assets that had been languishing on the market waiting for a buyer. The protracted time frames reflected the difficulty of dealing with single buyers; only a very limited number of investors can do these kinds of portfolio deals.
But without at least some improvement in business confidence, these transactions would never have happened. And interpreting 2013 as a return to the go-go years may be unwise. But there was little doubt by the end that things were improving dramatically.
Big to small
Whatever the number of portfolio deals says about the market in 2013 – their influence on the industry in 2014 needs analysing. Three questions in particular seem important. Will their completion bring further confidence to the marketplace? Will this lead to more deals? And what kind of transactions can we expect to see?
"We’re coming to the end of that large transaction phase," says Mark Wynne Smith, CEO of Jones Lang LaSalle Hotels. "It isn’t quite finished yet. Because the market has improved, some banks are using the opportunity to put large loan portfolios into the market. Just look at the big Loanstar acquisition of Project Rock. But that stage of the market is likely to end."
As the market grows and trading performance improves, these larger assets are likely to break up into smaller chunks. Instead of single buyers and large portfolios, the market is expected to see greater demand for smaller portfolios and single assets. For Wynne Smith, two types of purchasers are likely to be seen.
"We have more demand nowadays," he says. "That means people will take the opportunity to move weaker assets onto people that are specialists in really intensive turnaround and very extensive refurbishments.
"After that, we’ll start to get more operational and institutional buyers coming in. Income growth and general market income recovery means less intensive management and large refurbishments are needed. These guys can get more debt financing and better equity backing today, and that’s what really drives the single asset deals. Tourism numbers are also growing, and that’s pushing trading and having a knock-on effect with investors looking to stretch and acquire more."
A new era
This optimism is certainly supported by the most recent figures. According to research by Jones Lang LaSalle, the global hotel market will have returned to its 2006 pre-recession peak by the end of 2014, with 8-10% year-to-year growth. Total transaction activity could hit $50 billion.
Greater access to finance will unsurprisingly play a big part in this projected growth. Liquidity problems have blighted the industry since 2008, but ‘The Grant Thornton International Business Report’ suggests that finding finance is no longer a chief concern for hotel executives. Of the 3,000 business leaders surveyed, fewer than a quarter cited finance as a bottleneck to expansion.
Transactions in the gateway cities are likely to remain central to investor appetite, but interest in secondary markets is also expected to improve over the next 12 months. Recent data from Savills suggests regional hotel transactions in the UK could be as high as £2 billion for 2014.
This mirrors a trend seen in the wider commercial property markets – where the preference for security over yield gradually shifts as the market recovers. Many of the large portfolio deals of 2013 involved hotels from secondary locations.
"If we’re talking about the UK, clearly the provincial market turned a corner through 2013 in terms of trading performance," Wynne Smith says. "There is much more demand now. Average room rates are in a growth phase, albeit a modest one."
Balancing act
As transaction volumes pick up, and a large number of hotels either adopt or switch branding, the relationship between operators and property owners is likely to come under increasing scrutiny. Negotiating the terms of management contracts is never easy – but how will the current conditions change things?
"If you have a trophy asset in London, the balance is strongly in favour of the owner," says Wynne Smith. "What we are definitely seeing is that, for these assets, there has been a fairly strong yield in favour of the seller. Anybody that is selling a trophy asset with vacant possession can expect an excellent level of interest."
This isn’t true across the board, however. Brands still add significantly to the market value of a hotel – boosting net operating income and revenue per available room.
"There are certain markets where brands are quite rightly holding out for sensible market terms," Wynne Smith says. "The competition for great projects is strong at the moment. If you look at the broader transactions market, at the mid-market assets, there are a lot more deals taking place than there were in the past. One of the trends that is firmly set in place now is that larger operators like Marriott and Starwood have created a lot of new brands that recognise segmenting the market is the best way to secure new customers and retain more loyal ones."
Of course, these tensions between owners and operators – not limited to pricing – are premised on a split between the bricks and the brains. This approach has been central to the strategy of almost every international hotel chain over the past few years, but it is showing signs of changing.
Sébastien Bazin, CEO of Accor, and a man with a strong background in hotel investment, has demonstrated his confidence in the value of owning hotels by splitting the French operator into an asset management and hotel operations company. Not only will this slow down the process of going asset-light, but may involve buying properties if the circumstances are right.
"For exceptional opportunities, we have operators that are willing to use their balance sheets to own and acquire hotels," Wynne Smith says. "Usually the plan is to sell on those assets in three or four years time when they have refurbished, rebranded and settled the trading."
If there were any uncertainties about what exactly 2013 meant for the European and global hotel market – 2014 looks set to sweep them away. In previous editions of Hotel Management International, we’ve spoken about a collapse in investor confidence and a crisis of liquidity. In 2012 and 2013, the narrative seemed to change with images of green shoots and a nascent recovery. Now, despite the underlying economic fragilities, it seems safe to say the new year of growth has arrived.
