Lighten the load

When Sebastien Bazin took charge of AccorHotels back in August 2013, he wasted little time transforming France’s largest hotel operator. Just a month into the job, in one of his most significant strategic decisions, the chairman and chief executive split the company into two separate business units: one that owns and invests in hotel assets, the other that operates and franchises them.

Not only did the move reverse Accor’s previously asset-light strategy – or at least add a significant caveat to its pursuit – it marked a clear break with the industry consensus of selling bricks and mortar, and concentrating on franchising out and managing hotels. “This strategy is powerful, compelling and obvious,” Bazin said of the decision, adding that the company had “lost some of its innovation” and “ability to adapt to change”.

Fast forward four years, though, and AccorHotels appears to be changing tack again. Speaking at an analyst conference announcing the company’s full-year 2016 results in February, Bazin announced new plans to raise billions in revenue through asset sales on a revamped ownership platform called AccorInvest, which will lie outside of AccorHotels.While the group still has a more “multifaceted business plan than many of the major operators”, says Mark Wynne Smith, global CEO at Jones Lang LaSalle’s Hotels & Hospitality Group, “the move certainly makes Accor considerably more assetlight that it has been for some time”.

“Splitting this business from AccorHotels and selling a majority share would make AccorHotels an asset-light business,” said the ratings agency Fitch in a statement. “Most of its income would be derived from franchise and management fees, including some fixed- fee revenue, which would be more regular and consistent than the current business model”.

While operators selling assets is nothing new – particularly in the US – according to Fitch, the move by AccorHotels highlights a “growing shift” to the asset-light approach among hotel operators in Europe.

Last year, for example, InterContinental Hotels Group (IHG) became a fully assetlight company following its sale of the InterContinental Hong Kong. And groups like the Spanish Meliá Hotels International are also consolidating that side of their business.

“The European industry is evolving and really catching up with where the industry is in the US,” says Wynne Smith. “There are some who still regard ownership as a core part of their business model and want to have a strong balance sheet supported by assets.

But I would say the industry generally has a similar mindset now to that in the US. Most of these companies are now much more comfortable in that franchise space. They are more brand-oriented than they were and they concentrate on the evolution of those brands.”

For Wynne Smith, the key reason operators are choosing to sell assets is financial: return on capital invested in brands tends to be higher than it is in real estate. “Operators are looking to grow and, clearly, this is less capital-intensive for them,” he says. “Even in terms of running the hotels, it is the franchisees who are doing that on a day-to-day basis.

This is a simpler business to run. They concentrate on the brands and the channels driving business, and, generally, that offers a higher return on capital than you might get off real estate assets.”

Feeling peaky

Perhaps more worryingly, Accor’s decision has been interpreted by some as a sign that operators think the hotel market is peaking. “The changes come while market conditions in some western European countries, such as France, are challenging,” said Fitch. “We expect overall European occupancy and pricing to improve in 2017, but believe both are peaking notably in Germany and the UK.”

But while some operators are nervous – a recent Deloitte survey of 100 senior industry leaders found that a third predict the peak will be reached in the next 12–18 months – for Wynne Smith, AccorHotels’ move should be understood separately. “The value of real estate as a portion of the value of the company is not the key driver of decision-making,” he says. “Your strategic goals are focused on your brand evolution rather than selling your real estate at the peak of the market. Accor has done this because it is part of a plan. It recycles capital and gets better returns from that capital. I don’t think it has any connection to where the market cycle might be.”

For operators looking to shift bricks and mortar, the trick, says Wynne Smith, is moving at a sensible speed. “If you look at the IHG plan, that started in 2005 and completed 18 months ago when they sold off the IHG Hong Kong,” he says. “It clearly doesn’t pay to rush these things. It is also about getting more partners in place to help drive growth, which IHG was very concentrated on when it went through that programme. It didn’t sell to just anybody; it sold to strategic partners who were going to help it grow.”

Working in such a way also helps operators sell assets at a fair price, says Wynne Smith. “There are very few sellers out there today whom I would regard as forced sellers,” he says. “Particularly for a public company, selling at less than the valuation is not something they will entertain because they can keep holding. This product will keep yielding for them. There is no rush or sense of urgency that is driven by missing something if they don’t do it. If this doesn’t work for Accor, for example, they will hold that real estate.”

With operators more likely to be selling than buying assets, who does have the appetite for investing? In 2016, institutional investors made up 20% of the market share – four times larger than the year before.

According to Wynne Smith, that pattern is repeating itself this year.“I think, on average, institutional allocations to real estate have gone up from 8% and are now heading towards 10%,” he says. “It may even get as high as 11%.

“A lot of that is down to the weaker performance of bonds and stocks, and the fact that hotel real estate tends to give a higher return than core office and core retail,” he continues.

“That has drawn more capital into the market and we are certainly seeing the likes of AXA, Amundi and others who are increasing exposure to the hotel market.”

This capital will be particularly interested in the Accor portfolio, adds Wynne Smith: “The returns I think that portfolio is likely to offer will draw fresh institutional capital into the space, particularly given how much allocation there is from institutional investors to real estate at the moment. The management team are trying to extract part of that.” Buy, fix and sell

While institutional investors stand to gain from current market conditions, private equity buyers are in an inferior position. Their share of acquisitions dropped from 40 to 25% in 2016 and they have been quiet so far in 2017.

“Private equity likes to buy, fix and sell,” Wynne Smith explains. “Clearly, the opportunity to do sizeable transactions on underinvested and overlevered assets is reduced as the cycle continues. There is just less product around that can give them the returns they are after. Things always come along, of course, but not in the way we saw in 2010 and 2011.”

Capital controls aiming to stop the mass exodus of Chinese money is also limiting the involvement of Chinese investors, according to Wynne Smith. “We are seeing a slowing of outbound capital from China,” he said in the last edition of Hotel Management International. “The aspiration to invest among Chinese companies doesn’t change and I think that capital will arrive, but it is going to be stretched out over a much longer period than has been the case in past years.”

That may leave more space for domestic investors, who played a much more prominent role in the European hotel market in 2016, accounting for 12% of European hotel deals, according to the global commercial property adviser CBRE. “At the moment, I think we are seeing a domestic shift in terms of the percentage of local and national buyers to global investors,” says Wynne Smith.

This is being helped by a broader domestic turn in the European hotel market, he adds. “We are seeing a new base of operators starting to emerge with UK companies like BDL and others. It is very much a domestic market. They are still using international brands, but it is domestic capital. Leisure demand across hotels is also increasing but if you look at the World Travel & Tourism Council statistics, a lot of that is taking place in country as opposed to internationally.”