Investment Alignment – which pandemic-induced changes are here to stay?13 May 2021
"Demand continues to far outstrip supply, with investors eager to participate in what was expected to be a strong bounce back once travel restarted, aided by the growing success of vaccination programmes."
The webinar included all sides of the debate, from asset managers to hotel companies and brokers, with confirmation that investors were looking forensically at the market but remained committed to a sector which looked to be one of the most promising as the pandemic eased.
- Demand continues to far outstrip supply, with investors eager to participate in what was expected to be a strong bounce back once travel restarted, aided by the growing success of vaccination programmes. Owners were looking to non-core disposals to bolster cash rather than wholesale sell-offs. Ms Bonnejean noted: “There is an enormous amount of capital chasing opportunity, whether that be on the equity or debt side. We’ve probably never seen as much interest for our sector. Anything that comes to market attracts an enormous amount of interest, a lot more than retail and office which are more doubtful in the current environment”.
- Refinancings are still very active, as good businesses experiencing hard times is the message of the day, rather than bad businesses going under (although there will be some casualties). The need for cash was pressing and Mr Taylor noted that Michels & Taylor had set up a £200m fund specifically designed to support owners with liquidity issues, with £150m already deployed.
- There was much debate over when the sector would see any distress. The market is currently being supported by government measures, which were due to tail off heading into summer 2021 in the UK, creating a potential autumn of M&A in which we could see values drop after being artificially supported. Ms Bonnejean commented that “we’re probably at about 95-100% of aspirational pricing”.
“There is so much competition right now you can get to the pricing, in some cases even achieve over the pricing. In some processes we have even seen above guide price achieved,” noted Mr Taylor, adding “it’s an extraordinary situation. We should be in the depths of a recession with a load of distressed assets with hundreds of people working on deals at the bottom of the cycle and working up again”. At this point, sellers are sticking to 2019 values and, until banks start to look again at valuation, which was not expected soon, no change is expected. A possible drop of 10% to 15% is anticipated when this happens, with Mr Taylor commenting: “That’s when it’s going to start to get interesting”.
- It was not thought that the pandemic would scare less experienced owners from the sector, with Ms Bonnejean adding that there was “enough support from brands, operating platforms and asset managers to support those less seasoned who want to enter the sector”. The panel added that at a local level it was those owners who might be seen as less experienced, but more passionate, who helped to make hotels a much-loved part of people’s lives, which benefited and inspired the rest of the sector.
- Business travel lies at the heart of the sector’s recovery, with the majority of hotels – particularly in city centres, where so many have been closed – designed to cater to corporate guests. There was much speculation on how and when business travel would return, with Ms Bonnejean commenting that “the biggest challenge we now have is trying to anticipate what business travel is going to be. There is an element of travel that can be replaced by Zoom calls but certain jobs require you to be there in person. You can’t value a property without visiting. I’m quite confident business travel will come back – it might be a readjustment or reinvention – but the vast majority will come back”. While the waiting continues, hotels have to adapt their unused space and coworking was considered and agreed to be a trend which would remain after normal service resumes.
- Another area which is continuing to garner support, and likely to continue to do, is ESG issues. A number of investors in the sector are supported by funds with an obligation to support ESG goals and guest support is expected to drive this further.
- The combination of Brexit, a lack of cash coming into hotels and the perennial problem of a skills shortage in the sector means that hotels are looking to adapt operations to fit, something that Mr Magnuson saw as an opportunity. “This is the clean break everyone has been looking for. If you have a hotel where 80% of reservations are online, you don’t need three guest service reservation agents. There are so many things that a hotel could get up and operational with greatly reduced staffing. It’s more important than ever that a core team is multi skilled and cross functional”, he noted. It was felt that, with a growing number of technological solutions which could address the more functional elements of hotel service, staff could instead look towards providing a more personalised service and hospitable stay, to the good of the market as a whole.
- Some models offer more options than others. The franchise model was described by Mr Taylor as having “completely changed our industry, for the good” providing the advantages of the brands but allowing the owner more control either directly or through a management company”. He added that asset managers such as Michels & Taylor allowed investors from outside the hotel sphere to come into the sector and get the best out of their assets, benefitting the market as it matured.
- The pace of change created an opportunity for a “power grab” on the part of the brands, said Mr Magnuson, if they could be nimble and act quickly. Lenders continue to favour the brands and, if transactions pick up pace, the global flags could dominate.
"Relationships are the key to success between brands and owners, with collaboration rather than confrontation advised when looking at potential changes in terms or operations."
The key messages as we emerge from the pandemic, as drawn together by WFW’s global Hotels & Hospitality team include:
- Relationships are the key to success between brands and owners, with collaboration rather than confrontation advised when looking at potential changes in terms or operations;
- Moving forward for branded hotels the franchise/manchise model is more likely to be an owner’s preference (and it is always worth approaching an operator with a view to conversion in terms of model or brand);
- Flexibility is needed when looking at future business, as the corporate market is unlikely to return quickly. New types of guest, possibly government or key workers, and better utilisation of assets will have to be found and both owners and investors must be innovative when looking to fill rooms and meet distribution goals;
- In terms of marketing, Owners need to look to markets within both their country and locality to make the most of their space and, where necessary, press its brand on what it is doing to address those markets and the staycation approach;
- Changes to operations, with more investment expected in technology, will mean more communication between brands and owners, who will be expected to pay for this innovation. The ROI must be clearly laid out and decisions taken on whether this would be an operational or capital expenditure and any offset in terms of staff requirements will need to be assessed; and
- In terms of funding it will be increasingly important to understand the environmental, social and governance agenda of the investment community as well as the concerns of guests.