Capital Prospects
Smart money is making a dash for Europe as the cycle powers up. Regional money is fueling growth in the Gulf States, while Africa remains a strategic play.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 5/1/2005
 Kempinski’s new Emirates Palace, reportedly built for US$3 billion, signals the Middle East’s continuing potential as a meeting/conference and leisure destination. Under the radar: Watch for budget brands to test the waters.
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Capital hungry for higher returns is defining 2005 as the year of the big deal in Europe’s hotel industry. With full recovery still more mid-term than short-term, investors are jockeying for position in property markets before the cycle moves. Their hunt comes at the perfect time, especially in the UK, where a preference for separating bricks and brains has become a mandate. Public markets continue to undervalue hotel stocks, especially those with books burdened by too much real estate. Lured by strong demand for real estate, what better solution than to offload their assets, give back to shareholders and focus on operations?
Meanwhile, in the Middle East, the story is actually moving beyond miraculous Dubai, while in Africa it is North Africa that is the biggest near-term target, specifically Egypt, Morocco, Tunisia and, increasingly, Libya.
Selling off assets, whether single asset trophies or portfolios, is this year’s biggest news. The five days from March 9 to March 14 saw three major deals totaling more than US$4 billion. Each is a harbinger. InterContinental Hotels Group’s (IHG) sale of 73 hotels to Lehman Brothers Real Estate for US$1.87 billion (£1 billion) demonstrates how hot the hotel property market is. Initially, insiders speculated it would take as long as four or five years to get this deal done. In fact, it took just over a year. Marriott International’s US$1.87 billion (£1 billion) joint venture with Whitbread Group PLC to hold 46 UK-based hotels pending sale points to a preference for a leaner, meaner corporate focus. A Whitbread statement said the deal is as much about “achieving maximum value and benefit from the strong appetite of investors looking to snap up quality hotel assets” as it is about refocusing on core businesses—in Whitbread’s case, pubs and budget hotels; in Marriott’s case, a way “to convert 46 franchised UK Marriott and Renaissance hotels to management contract status,” as Ed Fuller, president and managing director of international lodging for Marriott International points out.
“Investors want better performance, not pretty pictures (of real estate). Hotel companies are getting cash rich with these asset sales, and they are going to leverage that capital to grow strategically,” says Mark Wynne Smith, CEO, Jones Lang LaSalle Hotels, London. “We will see companies get more pro-active on purchasing (strategic assets), hold them for a few year, then sell them.”
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Though property deals are the major trend, they are not the only play. Capital wants a piece of the business action as well. Expect more deals like the formation of FHR European Ventures Fund, initiated by Cedar Capital Partners, and Colony Capital’s US$1.2 billion (€1 billion) investment in Accor. With 50% participation by the Bank of Scotland, 25% by Kingdom Hotels International and 25% by Fairmont Hotels & Resorts, FHR European Ventures will have a buying capacity of the US$1.5 billion (£800 million). Its targets are luxury European hotels that “offer value enhancement potential through rebranding and/or renovation” for Fairmont. According to Ramsey Mankarious, Cedar Capital’s CEO, the fund’s partners “anticipate making equity contributions of up to US$390 million (£200 million)” to do the deals that drive Fairmont’s development in Europe.
The Accor partnership marks Colony’s largest investment in Europe to date. Colony may not be the last private equity fund to look at deals like this. Sixty-two percent of delegates surveyed at the eighth annual International Hotel Investment Forum in Berlin said it is “likely” Europe will see the emergence of “powerful groups of dedicated hotel owners” within in the next decade. One of those groups could be real estate investment trusts (REITs). Hotel industry experts are working hard to convince the British government that hotels should not be excluded from the current REIT proposal. Charles Romney, hotels partner, CMS Cameron McKenna, London, disagrees with the government’s view that the income stream and asset value cannot be kept separate. His view is that, “excluding hotels from REITs could damage the (hotel) industry and all who rely on it.”
Where Money Is Headed
With their coffers refilled via an influx of post-property
sale capital and balance sheets brightened by improved
performance, brands are dusting off the growth plans
shelved in 2001. Russia is at the top of the list
for many. Moscow is the prime target, not surprising
given annual demand growth of 15% or more a year
and shrinking supply due to conversion. As Russia
and Central Europe mature, watch for more companies—even luxury operators such
as Kempinski Hotels and Resorts—to consider moves into secondary
cities from St. Petersburg to Budapest.
Expect more niche plays as rising real estate prices and escalating operating costs raise barriers to entry in the leading markets. Rezidor SAS Hospitality is looking to fill gaps in Southern Europe. Portugal is getting more attention. Fuller says Marriott will complement growth in Italy, Germany and France with new properties in Belgium and Kazakhstan over the next year.
Interstate Hotels & Resorts, which benefited significantly from a pioneering move into Moscow well ahead of the pack, will manage the new Marriott opening in Ghent in 2006. Sizing up opportunities outside of the hubs requires fresh eyes. “The opportunity is not so much in Belgium as in the region,” says Hank Ciaffone, Interstate’s president. “It is becoming a center for logistics, medical research and gene technology. Ghent itself is center of learning and trade. It may not have huge upside, but neither has it experienced massive lows. It is solid. The window of opportunity is in the next three years.”
Up-and-comers will be building from strength closer to home, heating up development with concepts that fit the opportunities of cities the size of Edinburgh and Belfast, as well as small towns with enduring appeal. Marylebone Warwick Balfour’s (MWB) Malmaison is looking for a second flag in London but is also eyeing Dublin. Its newly acquired sister brand, Hotel du Vin, is part of a new wave of small properties that can tap under-served cathedral and university towns. “Malmaison was designed to be an international brand from day one,” says Robert Cook, CEO for Malmaison and Hotel du Vin. “We are not saying we cannot spread our wings outside of UK cities and Dublin. But the deal would have to be right. The amount of capital in the market makes bidding/buying very competitive.”
Willemijn Geels, consultant, BDO MG Hôtels & Tourisme, Issy-les Moulineaux, France, sees increased potential for upscale hotels in key French secondary cities. Largely, 4-star hotels are following business beyond the capital into cities such as Marseille that are improving their city centers and renovating industrial areas. He also likes destinations parlaying TGV connections into economic development, such as Marseille and, by 2007, Strasbourg. “The effects of the TGV are very strong. Marseille saw occupancy gains of almost 8% between 2002 and 2004. Development of point-to-point air connections is also increasing tourism to regional markets,” Geels says.
Development Beyond Dubai
In the Middle East, there is finally a story beyond
Dubai. New air service is linking Abu Dhabi with
European gateways—even
those as small as Geneva. Qatar’s government is making it
clear
it can compete for major sporting events. Oman is
redeveloping its tourism efforts. But the real change
in development focus may
be the emergence of mid-tier hotels, predicts Jean-Luc
Motot,
in charge of the Middle East and Africa for Accor. “A few
years
ago, all anyone wanted to develop in the Middle East
were 5-star hotels,” Motot says. “Now, the market is
getting segmented. Airlines such as Emirates continue
to add new flights to Europe. There is 2- and 3-star
demand from the Asian markets. There will still be
ego hotels, but development will be focused more
in the mid-scale with good product and a good brand.”
 Up-and-comers like MWB’s Malmaison are targeting secondary cities such as Belfast while waiting for opportunities in the gateways.
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InterContinental Hotels Group plans to have 30 to 40 Express by Holiday Inn properties in the region within the next five years, says Denis Johnson, vice president, sales and marketing, Middle East and Africa. That will complement multi-brand development across the region. Like Motot, Johnson sees new supply being absorbed by new demand. “Emerging travel markets from Eastern Europe and Russia are showing the strongest growth in percentage terms,” he says. That demand should deliver “strong rises” in occupancy and RevPAR this year, Johnson says, particularly in the UAE, Jordan and Oman.
Further expansion of airlift clearly will impact development and performance. “Currently, we have no discount airlines flying into Oman,” says Desmond Hatton, general manager, Shangri-La Barr Al Jissah Resort and Spa, Muscat, Oman, which will open late this year. “That may well change over the next 12 months. If visitors can fly in at a low price, they are often more prepared to spend more money on accommodation.” Although demand exceeds supply in peak periods, enabling Muscat’s hoteliers to raise rates during the 2004/2005 winter, Hatton says summer occupancies drop off dramatically. “The Ministry of Tourism is working hard to correct this. Hotels such as ours will be offering more kids’ clubs and family programs to make this a destination over school holidays,” he adds.
The government’s enthusiasm for tourism, along with Oman’s physical beauty, make it a logical target for most brands. Jordan is appearing on more development lists. Saudi Arabia may be next. “Finally, Saudi Arabia is undergoing a significant boom in its real estate industry. As a result, the Tourism Council is focusing on further development of the tourism sector-particularly religious tourism,” says Sarmad Zok, CEO, Kingdom Hotels International.
Opportunities In Africa
“In Africa, you have to work with investors who know what
is high risk, and what is stupid risk,” says Christopher Hartley,
senior vice president, sales and marketing, Kempinski Hotels & Resorts,
Geneva. “It is not public company territory.” North
Africa is the biggest near-term target. “The greatest attention
is on North Africa —Egypt, Morocco, Tunisia and, increasingly
Libya,” says Trevor Ward, director, London, managing director,
Nigeria, TRI Hospitality Consulting. “These countries are
interesting to investors from Europe, the United States and the
Middle East. Sub-Saharan Africa is a different matter. There is
some investment in East Africa from the Gulf, due to historic ties,
but little elsewhere.”
The must-have market for many will be Morocco. “Government policies are encouraging investments, and you have a lot of interest from luxury chains—an interest that means others will follow,” Ward adds. Increased airlift is not hurting Morocco’s prospects nor is the exchange rate. Motot says, “Watch Algeria.” Proximity to Europe and increasing evidence of stabilization could make this prime territory not only for locals but also for Europeans. “It is a market with 40 million people, large cities and almost no hotel infrastructure. It is still suffering from the image problems of three to five years ago. But that is changing as Algeria works to get on the international stage. We already see a lot of companies coming in from all over Europe,” Motot says.
Airline links from European cities to the Middle East and onto Africa will impact development, Hartley says. He sees opportunities for high-end resorts in Kenya, Tanzania, Uganda and Zimbabwe. In Western Africa, development will be more business-hotel driven in destinations such as Chad, Mali and Senegal.
South Africa also may be bracing for more expansion in the mid-tier hotel industry. While hoteliers in Cape Town and at some luxury lodges are considering “freezing tariffs at last year’s level,” the emerging black middle class, cross-border tourism from neighboring countries—particularly for shopping, and the growth of local budget airlines are supporting steadier occupancies in the middle market, says Colin Grimsell, founder and head of Hotel Performance Consultants, Rivonia. He sees Accor making a major move (helped along by a partnership with Southern Sun for its no-frills Formule 1/Inn concept); IHG (also working with Southern Sun); Cendant’s Days Inn, Carlson’s Radisson and Park Inn, Hilton’s brands, Starwood’s Sheraton, Best Western, Hyatt and Orient-Express as the ones to watch.
Locally, mid-market City Lodge has posted “brilliant profits and occupancies,” Grimsell says. Look for more attention being paid to Inter-national Finance Advisors, developing at Zimbali with Sun International, and to new players such as Legacy Hotels & Resorts International, which has both hotels and timeshare resorts. Just coming onto South Africa’s radar are boutique hotels. “Often, they are run as a hobby, not for a profit,” Grimsell says.
Winners & Losers
Where operators want to be
in 2005: London, much of the regional
UK market, and Moscow, certainly; Edinburgh;
Paris (if average performance is acceptable) as well as
regional French cities such as Toulouse (benefiting
from the aero-space industry’s economic boost)
and Marseille (thanks to a high speed train link);
Prague; Budapest (making good gains in percentage
terms, albeit from a very low base); almost anywhere
in the UAE or Kuwait. Copenhagen could see the beginning
of a turnaround if the conference market shows any
real resurgence. Amsterdam’s balance of business
and leisure appeal could prove a good draw. Some
glimmering of an upswing in U.S. tourism could boost
performance for Italian hotels. In Africa, watch
Morocco and select destinations such as gaming lodges
and, in Western Africa, a handful of cities serving
oil- or mineral-related business travel.
Where managers will be bracing for another soft year: With a few notable exceptions, Germany’s hoteliers are in for another year of soft occupancy and rate (in Berlin in mid-March, occupancy was off 10%; rate was off 25%). The news is no better for the Benelux countries (Amsterdam being the exception). Spain is oversupplied. “Warsaw is the coffin of the hotel industry,” says Mark Wynn Smith, CEO, Jones Lang LaSalle Hotels. Politically unstable areas of the Middle East and Africa are write-offs.
Challenges,
Opportunities
Hotel performance
in Moscow will continue to improve in 2005 over
2004. “There is an undersupply of rooms
(although 725 rooms will be added this year)
at a time when demand is strengthening. The political
environment is stable, and the economy is robust.
Key industries are driving corporate demand.
It is the tour/travel sector that is declining,
as the result of the lack of 2- and 3-star accommodations.” -
Hank Ciaffone, Interstate Hotels & Resorts
“Low-cost air carriers have created a new customer base of people who never traveled before. The cost savings they feel from the air ticket is being invested in accommodation.” - Tobias Ragge, assistant to the CEO, Hotel Reservation Systems (HRS)
“The proliferation of discount airlines increases Europeans’ ability to travel to more destinations for short breaks. Hotels are benefiting from that. They are also benefiting from online leisure packages and tactical promotions.” - Arie Van der Spek, COO, InterContinental Hotels Group, Europe
“There is too much copying amongst the Gulf States. Qatar, Dubai and Bahrain are racing to establish themselves as the region’s financial center. This demonstrates a lack of regional planning as it may ultimately yield to duplication within a small area. Each state should concentrate on something unique. Qatar is heading that way with its focus on education.” - Sarmad Zok, Kingdom Hotels International
“Oversupply is a big issue. In many areas, it is not a problem getting people to fill the rooms, it is getting people to pay the rate to support 5-star services.” - Christopher Hartley, Kempinski Hotels & Resorts
"The basic problem with developing hotels in Ukraine is the absence of cheap credit. The franchise model could be a solution since it allows access to credit through the operators of western franchise networks. There are still risks connected with the possibility the new government will revise privatization measures.” - Vitaly Goncharuk, deputy general director, Mayger Consulting, Odessa
"Consolidation will continue in Europe. There will be more portfolio deals. Hotel owners are becoming more and more demanding in terms of return. They expect the operator to deliver premium—that is, best in class—performance.” - Knut Kleivan, executive VP, CEO, Rezidor SAS Hospitality
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