BERLIN — Future-proofing is the new marathon-training plan for the hotel industry amid noisy geopolitical unrest, the continuation of cost increases, the jitteriness around interest-rate levels and the K-shaped bifurcation of customer spend.
More noise requires more care, panelists said at a panel titled “Balancing risk, demand and opportunity” at the International Hotel Investment Forum.
Martina Maly-Gaertner, chief operating officer and member of the board at UBM Development, said the rate of inflation is still outpacing growth in average daily rate.
She said her company is investigating strategies for combatting that, but they can be "more time-efficient but not always cheaper."
“We ask, what costs can we tighten?” she said.
The current Middle East crisis has increased oil prices and, as a result, construction costs too.
Maria Calvo, director of hotel asset management at business advisory Savills, said she has seen construction costs in the United Kingdom increasing per key from £60,000 to £120,000.
Hotel brands are increasingly adding to their soft brand portfolios due to these pressures.
“Construction costs are [investors’] second concern behind geopolitical noise,” she said.
Key money from the brands helps but is not the answer to future-proofing, said Luciano Scarfone, investment director at Pygmalion Capital.
“Key money is never the final decision,” he said.
A strategy Scarfone uses is to appoint a white-label operator on the acquisition of a hotel, take the former flag off the door and go through a new brand-selection process while doing some property improvements.
“Key money does not move the strategy. There is an agreement during the CapEx period that the hotel will be independent, with the next brand committing to this and the business plan. [For the brand that creates a] shift from being a flag on the building to being a partner in the building,” he said.
Yannick Wagner, deputy chief development officer, Europe and North Africa, premium, midscale and economy, at Accor, said that while key money can move forward the conversation, it is only ever a short-term incentive.
Valerie Schuermans, chief development officer, Western Europe at Radisson Hotel Group, pushed back a little, saying in the current climate, what is required is increased liquidity.
“Nothing is free in life, but key money can be an important lever, certainly in markets of uncertainty,” she added.
Maly-Gaertner said hotel rebrands appear more often in periods of uncertainty, and key money will never be far from the table in such periods.
“Any change of operator will have an impact on the P&L,” she said.
Designing flexibility
Hotels that are flexible and able to push revenue per square meter are in the best position to gain profitability.
Completing such a task, some on the panel said, does not necessarily require a brand over the door.
Schuermans disagreed.
“We feel our brands are relevant, focused on the destination or the segment, or both. This is essential for profitability,” she said.
Wagner said he believed the continual reanalyzing of brand standards might not always add something to the hotel or to guests’ hotel-choice criteria.
Scarfone said if an owner does not know who the next buyer will be, they must keep open all eventualities.
“An investor after five years will say I need all the options on the table,” he said.
Flexibility also can be baked in through technology, artificial intelligence, experiential components and sustainability. Sustainability is flexibility, panelists said.
They said in Europe, sustainability is now a core element, and without it, no institutional owner will even look at a hotel there.
The same is true of many banks’ debt books. Cheaper finance, or at least finance at competitive rates, depends on a hotel’s or hotel firm’s ESG credentials.
“ESG pays back if it is done properly,” Scarfone said.
“This is more expensive to do this in existing hotels, but it is still the right thing to do financially,” Schuermans said, adding the “right thing” also includes extending ESG along the supply chain.
Scarfone said the certification process is worthwhile undergoing.
“It proves you have done your homework,” he said.
Wagner said it is a mistake, too, to underestimate guests’ interest in these matters, as that interest directs where their spend goes.