Hot.E: inside Europe’s hotel market27 September 2012
The Park Plaza Riverbank played host to this year’s Hotel Investment Conference Europe – known as Hot.E – which attracted 250 owners, operators, investors and lenders. Hotel Management International joined the gathering to find out where the European hotel market currently stands, who has the money and where it’s headed.
With Europe's political and technocratic elite unable to resolve the current crisis, the wider economic picture looks bleak - confidence is lacking, large amounts of cash are sitting idle and eurozone GDP growth is likely to remain below its long-run average. Talk of a 'lost decade', once unthinkable, is now gaining credence among the economic commentariat.
The implications for tourism, however, are significantly less worrying. According to figures provided by STR Global, hotel performance across the eurozone is strong. revPAR figures for July and August indicate steady growth, and demand for occupied rooms in 2012 is higher than ever.
That's not to say the European hotel market has it easy. Konstanze Auernheimer, economics analyst at STR Global and first speaker at this year's Hot.E conference, asserts that vigilance is key. People may still be travelling across Europe, but the baseline message is clear: growth is slow and vulnerable to change.
Capital markets and gateway cities
This initial framework provided the setting for the conference, which began in earnest with a discussion between four of the industry's leading figures - Group du Louvre CEO Steven Goldman; Laurence Geller, president of Strategic Hotels & Resorts; Ashford Hospitality Trust's president Douglas Kessler; and Gerald Lawless, executive chairman of Jumeirah Group. The debate, chaired by HVS chairman Russell Kett, shifted between the state of the capital markets and the prospects of gateway cities.
The panel agreed that, while the European economy is broadly flat, the major gateway cities remain strong, with London, Paris and Frankfurt all leading the charge; however, this confidence didn't extend to the performance of Europe's provincial market - no one expressed any particular appetite for expansion there.
"Aside from a blip in June, London is terrific," said Geller. "But the periphery of London is challenging and the provinces are rather horrible."
Kessler added: "Our interest in Europe is in the gateway cities. The provincial cities seriously concern us. These are areas where there has been more distress and weakened performance, and there's concern about future prices sliding."
Despite leading their respective companies, the four men clearly knew each other well, each trading memories and well-intentioned jibes, and none more so than the jocular, but occasionally sharp-tongued, Geller. It was Geller who set the tone on the state of the capital markets, arguing that European banks are showing more caution now than in the past.
"Speculative lending on projected hotels isn't happening so much in Europe," he said. "Banks are cautious and balance sheets are driving their position. They won't take a risk just because you've got a pretty project."
The panel agreed that the conspicuous lack of deals across Europe has a lot to do with the availability of debt finance. But they also spoke about the unwillingness of banks to sell assets at distressed prices.
Europe as investment opportunity
The second panel featured a group of hotel real estate and investment advisers discussing the state of the transaction market. Michael B Hirst, a consultant at CBRE Hotels who moderated the panel, opened the debate by asking the four 'luminaries' exactly what they thought of Europe as an investment opportunity.
"Asian investors are slightly more cautious than they were 12 months ago," said Arthur de Haast, chairman of Jones Lang LaSalle Hotels. "They're chasing full-service assets in gateway cities, and they think pricing of those assets is difficult. But they still think Europe is attractive. There are plenty of people who want to experience Europe's history and culture."
The funding gap in the capital markets has invited a range of new debt providers to the scene, with insurance companies and separate mezzanine funds all making an impression. But not everyone in the panel was excited by their presence and impact.
"Alternative sources are there, but the cost of that funding is high; it remains a last-tier piece of capital," said Piers Talalla, chief executive of Avington. "For that reason, you've seen relatively few alternative debt funds."
Limited lending within hotel sector
Elsewhere, Louise Wallace, partner at CMS, chaired a debate with four leading capital providers, including Roman Kogan, part of the real estate team at Deutsche Bank, and Barclays Bank head of hotels Tim Helliwell. They agreed that, despite the turbulence, the European market has been performing reasonably well. Helliwell even expressed disappointment over the negativity surrounding the lending capacity of the capital providers.
"There are many opportunities out there that I think we, as well as some of the other lenders, are looking at," he said. "While the macro headline is still tough, there will be bankable transactions coming out."
Kogan agreed that the lending environment is relatively strong, but argued that constraints do still apply.
"Despite it being a relatively good time for lending, the capacity for debt availability in the hotel sector is finite," he said. "There is more demand than available capacity in the market, and there's even competition within organisations."
The panel accepted that having a good track record and a strong relationship with lenders are key to securing finance in today's market. But they were less united when asked about the parameters within which they would lend development finance. Only Helliwell appeared to show enthusiasm there. "They are being done," he said. "But it makes projections quite a challenge because you won't have a guaranteed cashflow for around five years."
New funding strategies
In another session, Blackstone managing director Martin Kandrac pinned Europe's slow transaction volume on the discrepancy between current asset values and the pricing expectations of investors. Obviously, some transactions are still happening. Marc Socker, senior director of hotel fund management at Invesco Real Estate, described his company's trading perspective as "bullish".
"We're looking at new concepts and new funding strategies to retain our interest in pan-European middle-market hotels," he said. "There are opportunities in Spain for medium-sized hotels that have been in trouble recently, and we're talking to banks and operators to get some of these assets at a sensible price."
The first session of the second day, chaired by PwC partner Robert Milburn, began with a general discussion on the lack of bank debt and its effect on development pipelines. Echoing the previous day's sentiments, the speakers - including Robert Shepherd, SVP and chief development officer (Europe) for IHG, and Robert Cook, CEO of De Vere Hotels and Village Urban Resorts - agreed that liquidity was restricted and that banks remain nervous about financing hotels. They also accepted that, while the outlook for development in the UK was strong, the banks retain at least some control over the direction that might take.
Life beyond London
The panellists proved decidedly more optimistic about the provincial segment than the previous speakers. Andy Fish, vice-president of finance at Westmont Hospitality, expressed interest in a number of regions outside of London, including Southampton, Cambridge and Manchester.
The country hall that followed featured in-depth, interactive discussions on the different markets across the European continent. In the Turkish session, Mehmet Önkal, managing partner at BDO Hospitality Consulting, and Atilla Öztürk, Astay Real Estate CEO, spoke enthusiastically about the opportunities the country - now the sixth-most-visited in the world - offers to investors.
"Uncertainty in Europe gives a boost to Turkey, where yields and expectancies are much higher and lending facilities are easier," Öztürk said. "Domestic banks, credit facilities, and a range of state incentives are helping to support the hospitality and residential sectors."
Opportunities in Russia
That mood of optimism was replicated in the Russia session where Michael O'Hare, managing director at Horwarth HTL Hungary & Russia; Arild Hovland, SVP of business development at Rezidor; and Patrick Fitzgibbon, senior vice-president of development (Europe & Africa) at Hilton Worldwide, discussed the country's future prospects. Investors in hotels have typically favoured Western Europe over Russia, with visas and flight costs hampering growth in the country's tourism sector. But internal consumer demand is strong and provides a potentially fruitful income stream for foreign and domestic capital.
"Opportunities in Russia are about catering for internal demand as well as flowing in tourism," O'Hare said. "The prospect for investors lies in the development of regional hotels and we're seeing a number of commissioned enquires in this area."
All in all, a mixture of optimism and caution was noticeable throughout this year's Hot.E conference, which seemed appropriate, given the state of the market. Even with hotels performing strongly, the wider economy, particularly in Europe, remains in a state of permanent difficulty. From the first speech to the last, the overriding theme was clear: vigilance is crucial.