5 Minutes With Cristina Badenes, European Hotel Analyst
-- Hotels, 7/13/2009 2:54:00 PM
Cristina Badenes is the Barcelona-based head of research for Meridia Capital. She took some time to discuss the Europe hotel market with HOTELS magazine...
How have European hotels performed through the first half of the year, and what are your expectations for the remainder of 2009 when it comes to rate and occupancy?
The straight answer to that is: Not well. The industry has suffered severely over the last few months, with sharp declines in both occupancy and rates. That said, we should see some, even if little, improvement over the coming months, if only just because comparables vs. the second half or fourth quarter get easier.
Are there any hot markets for development in Europe right now? Conversely, are there any markets that have really cooled off?
We don’t think there is really what we would call a "hot" market for development, simply because development seems to be on hold for the moment. Investors are currently far more risk averse than a couple of years ago ,due to higher risk premiums. In addition to this, it is highly complicated—in some cases virtually impossible—to obtain financing for greenfield development. Third-party debt is undoubtedly more difficult and more expensive to get nowadays. Banks scrutinize deals in a way that they did not do before. Return expectations are far outweighed by risk in certain deals, and therefore the amount of development projects has fallen sharply.
Are there any markets in Europe that have not felt the effects of the downturn as much, and have some been hit especially hard?
All markets in Europe have suffered. Although countries such as Germany or France may have suffered less—far less in some cases—than others, like Spain, all of them have felt the effects of the downturn. That said, a top capital city in Europe such as London has seen less steep RevPAR declines than, say, Amsterdam, Brussels or Prague. Provincial and secondary cities have also been less resilient.
What steps are hotels taking to stimulate room demand, and what has been most successful?
Virtually all hotel management companies have reacted in some way or another. Most are implementing severe cost-cutting measures—and this is, in fact, one of the few good things about the downturn: companies, especially at the luxury end, are being forced to work much more efficiently than before. But apart from reducing costs, hotel groups are also trying to find ways to encourage top-line growth. A free night, a free breakfast or a free spa treatment are some of the well known policies that are being put in place. Almost all groups have shown themselves publicly reluctant to reduce room rates in order to stimulate demand. Past recessions have shown us the harm that this can do to the industry and the big difficulty that companies face when trying to bring rates back up. For luxury hotels especially, there is also an image or status issue. Notwithstanding all this, most of them have been forced to lower their room rates. The moment a player starts discounting, it is difficult for others not to follow.
How much has the lack of available capital and financing slowed development in emerging markets, and can you predict when it will become more viable again?
Very much so. We don’t foresee the situation becoming more viable in 2009. We are going through a major downturn, and recovery will take its time. Although there may be some shy signs of improvement currently, we do not expect the situation to get really better until at least second half of 2010 or well into 2011.
How much of the announced European pipeline will ever find its way to market?
It is difficult to give an exact percentage, but what is clear is that some of this pipeline will never see the light. And that is not necessarily a bad thing. On the contrary, this translates into growth of new hotel rooms being more limited. In some instances during past cycles, supply growth was too high and that did hurt the industry severely. Some property and hotel management companies are, absurdly, too eager to grow their pipelines—there are numerous projects around the world that should not have seen the light in the first place and that have had a negative, rather than a positive, impact on their respective markets. Currently, demand may be falling off a cliff, but at least supply growth is not rocketing, which would be the worst outcome.
For the big brands in particular, is conversion a better short term solution at this point than new development in Europe?
Yes, we believe so. As explained above, the risk that new development deals carry is difficult to justify within the current environment. Even if they are not owners and operate under a management agreement with the larger risk going to the property owner or developer in this case, no big brand would choose to put its name to a project that later defaults because of lack of financing or some other difficulty. Conversions, like any other deal, do not come risk-free but are what we could call "less challenging" for companies at this stage.
What is the state of the transactional market in Europe? How and where are deals getting done, and what is the outlook for the next 12 months?
There is virtually no transactional market in Europe at the moment. We do see some deals getting done, but nothing like in 2006 or 2007. Volumes have dropped very significantly, especially in relation to large hotel portfolio transactions. We are indeed witnessing some asset disposals, not only in the U.S., but also here in Europe. However, one swallow doesn’t make a summer. The market is not back yet and it will probably take more than the next 12 months to see a full recovery.
Do you expect the recent trend toward international branding of European hotels to continue?
Yes. The percentage of branded hotels in Europe is far lower than in the U.S.—the difference is abysmal. In our opinion, the long-term trend is towards the U.S. model: more properties will be branded, chain affiliated and operated by the large international hotel firms. It will be increasingly difficult for small, independent hotels to compete against the hotel giants, in all aspects—sales and marketing, operating efficiencies, etc. That said, the need and appetite for capital is also making owner/operator relationships evolve, especially in mature markets. Demands from the banking sector will become increasingly relevant and may shift the balance of power towards owners and banks.
Are certain market segments—by region, target audience or price point—better positioned to recover more quickly than others?
Segment-wise, luxury hotels have suffered more during this recession and therefore should see a more pronounced upturn when the industry recovers. Also, urban hotels in large key capital cities should be better placed than, say, a resort hotel in a secondary town. They should be a safe bet in the long run. It is difficult to imagine that a good, well located hotel in London or Paris city center will not see demand recover at some point in time.
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