LONDON—Particularly in London, the hotel industry winners will be those who pinpoint the next happening submarket, get in early and take sufficient risk, panelists said during the recent Boutique and Lifestyle Hotel Summit.
Starwood Capital Group’s senior VP and head of European hotels, Cody Bradshaw, underlined that sentiment during a session titled “Meet the investors.”
“The only way to find yield is to take on development risk at this point. … You have to find the next submarket before anyone else does,” Bradshaw said.
In London, Bradshaw has his sights on Bloomsbury, a neighborhood south of renovated Kings Cross and east of Fitzrovia that has a long literary history and grand housing built mostly by aristocratic landholders in the 18th Century.
Starwood Capital’s holdings in Bloomsbury include Hotel Russell, London, a 373-key property it bought as part of the Principal Hayley deal in March 2013. Bradshaw said his company is investing money into the hotel.
The emphasis on risk taking exists because opportunity is few and far between, panelists said.
“There still is juice left in the land,” Bradshaw said. He and his team recently sold the Ace Hotel London, in the Shoreditch area of the city, which Bradshaw said “was a good deal. … (but) I think it was a good deal for the buyer, too.”
Bradshaw said risk had been taken there, too.
“There were three pain points. Firstly, we had to make a bet on the market; secondly, we had to put a square peg into a round hole, putting the trendy Ace into a standard big box; and thirdly, there was key (personnel) risk and change of control, with the death of Alex Calderwood. The entire hotel is more of a case study than people think,” Bradshaw said.
Barriers such as high development and operations costs scare many off the U.K. capital, and for smaller operators, the risk curve is even more fraught with danger.
“All reasons why we have been busier in the provinces,” Bradshaw said.
Even though moderator Charles Human, CEO of business consultancy HVS London, said the lending environment has improved dramatically, panelists said for independents and smaller concerns market parameters remain difficult to overcome.
“Where is the next Shoreditch? There probably are opportunities, but banks want a lot more detail, a lot more history,” said Rafael Bejerano, director of AB Hotels, which has three hotels in London and England’s southeast corner.
“It is also expensive to go through renovation. Costs are out of the stratosphere. It is not a buyer’s market. We put out a tender to 12 major contractors,” said Grace Leo, VP of Reignwood Investments UK, referring to her luxury Ten Trinity Square hotel project in London that is set to open as a Four Seasons property in 2016.
“Only two responded, and this is a major project. They can charge whatever rate they want, and you have to go with the flow,” Leo said.
Boutique risk
With hoteliers starting to—or willing to—move up the risk curve, even more emphasis is being placed on operational savings and understanding what a hotel is and what its guest list will comprise.
Operations can somewhat be controlled; guests’ wants might be more difficult to nail down.
Even recent trends such as becoming part of a chain “soft brand” and/or finding the latest boutique-hotel fad or niche do not mean investors will be hammering on the reception desk, panelists said.
“Whenever you launch that trend, or fad, or whatever, then you are already out of date, which makes the property even more capital-intensive. Important, especially for the owner and the investor, is to have the hotel have that timeless quality or inherent value,” Reignwood Investments’ Leo said.
Bejerano held on to that truism that the secret remained having the right hotel for the right guest in the right location.
Bradshaw leaned more toward operators protecting their downside.
“Especially in boutique and independent hotels, there needs to be a marriage between all the parties, a pre-nuptial agreement if you will, especially in terms of (food and beverage), which defines you in the independent sector. … Make sure you have the right contract,” Bradshaw said.
Bradshaw added that what he now is seeing is the adoption of what amounts to a quasi-management contract between the hotel operator and the F&B operator, which he said in terms of risk for both sides offers a more correct balance.
Even with some of the world’s largest hotel chains putting capital in the independent sector, risk has not evaporated for these operators, panelists said.
“A lot of big brands look to get into the (independent and boutique) space by acquiring platforms. The obvious example is Kimpton (Hotels & Restaurants), going from a sort of institutionalized but still independent guise to a space with a little more uncertainty, and now we’re seeing Kimpton owners flying out to London all the way just to make sure their relationship with (new owner InterContinental Hotels Group) is as good as it can be,” Bradshaw said.
“The Autographs (and other chain soft brands) … I cannot even remember the names of all of them. The boutique sector is becoming industrialized and attacked from both sides, (online travel agencies) to one, large chains to the other. It has become saturated in the last few years. It used to be design and F&B that were the differentiators, but that can hardly be said anymore.
“So to protect yourself; it’s about downside and contracts,” Bradshaw said.