The hotel industry has witnessed several high-profile mergers and acquisitions in the past few years. These include Accor’s purchase of the FHRI and China’s HNA’s buyout of 25% of the Hilton Group.
According to JLL’s latest Hotel Investment Outlook, which shows that both owners and operators are looking to expand to stay competitive, there could be more consolidation in the pipeline. David Kong, Chief Executive Officer of the Best Western Group, stated recently that the company was looking to grow through M&A and partnerships.
Hotel investment is also on the rise. Tourism Accommodation Australia (TAA), a national organization, revealed 228 hotel construction projects in Australia. These include those approved for development or at advanced planning stages.
Andrew Langston is the Executive Vice President of JLL Hotels and Hospitality Group’s Strategic Advisory & Asset Management. He says that it will be interesting to see if the flurry of M&A activity in the industry positively impacts the bottom line of new hotel owners. The Marriott-Starwood merger has resulted in an international loyalty program that includes 1,128,224 rooms, with 2,009 more properties on the way. Langston explains that the question is whether the owners view the combined membership as a way to reach a wider audience or if they are offset by the fact that there is a Sheraton or Marriott right down the street.
Owners should evaluate loyalty programs’ value and delivery by different operators.
The right brand is essential. There are many hotel brands under one umbrella group. This means owners need to be more selective when selecting their hotel operators. It’s also becoming increasingly more work for unbranded standalone properties to significantly impact RevPAR (Revenue Per Available Room) in most locations. Langston says marketing dollars are limited compared to major brands with global positioning images and distribution networks.
Smaller hotel chains, however, that want to expand their reach and launch a brand in new markets are more flexible regarding commercial terms and fees.
Location is also essential. Hotel owners should ensure synergy between all aspects, including the design of the property, the brand positioning, and the image, to attract the right clientele.
“Investors should also be clear about their goal – are they looking to buy a property for a quick turnaround or if it is destined for the long-term? Is this a trophy property, or is it simply a way to drive profitability and retain earnings? Langston says that not all hotel owners focus solely on the bottom line. “Quite often, there is an attachment to the location or the land,” he adds.
Langston recommends that owners involve their chosen operator and brand from the start to avoid any changes, modifications, and increased construction costs. This will ensure brand compliance and a smoother process leading to the opening.
A brand may require owners to invest in maintenance even after opening a hotel. Operating and franchise agreements allow brands to upgrade and revise brand standards as time goes on. Both the owner and brand want the hotel’s success, but the cost of maintaining these standards could reduce the return on investment. Ellen Smith, Counsel at Eversheds Sutherland, says:
Factors at play
Investors must also obtain a professional Request for Proposal to ensure operators know their needs and audience. “During the RFP, pay attention to the 10-year projections that operators submit. The days of operators submitting unrealistic figures for occupancy and rates that lead to inflated gross profits are over. Astute owners have prepared their projections and indicative numbers, supported by a professional feasibility study and market research. Owners should therefore hire operators who can demonstrate a real understanding of the market, with realistic and fair figures,” Langston says.
When advising our clients, we consider all variables to know what is a fair and reasonable deal. Langston explains that a slight 0.5 percent reduction in the base fee or incentive could save millions of dollars over the life of a contract.
Owners may also want to consult a lawyer when making critical decisions about their property, such as hiring senior management, reviewing capital expenditures, and creating yearly budgets. Smith says that the owner must seek the advice of business and legal experts who can help him determine the best strategy for getting the best deal.