LONDON—As the United Kingdom and European hotel markets grow, emphasis has turned to the operating contract, with the hope that wiser heads on all sides will be able to add value, revenue and cash flow while limiting risk, according to a panel of owners, operators, developers and bankers, who discussed Tuesday new hospitality-sector relationships at the Hotel Operating Agreements Conference.
The discussion is not just taking place in regard to properties in London and other European gateway cities. Stronger-than-expected traction is
being seen in U.K. provinces, which has in the last six months resulted in a markedly different transaction market.
“In last 18 months, operators have put capital into U.K. provinces, but still most money goes to London and Edinburgh (Scotland), maybe Aberdeen (Scotland). Operators still consider it a risk to hold provincial assets for the time needed for them to develop sustainable income,” said Michael Tomkins, acquisitions and development director for Jansons Property.
Two major changes, the panelists said, were that yield players had moved into European—especially U.K.—provincial markets, with such transactions as the Menzies and Principal Hayley deals, and American funds have taken increased interest due to severe pressures to place equity.
“American players are turning debt into opportunity, so expect churn in the next two years,” said Clive Hillier, CEO and co-founder of Vision Hospitality Asset Management.
Aligning interests
Interests need to be aligned to help drive positivism, the panelists agreed. That’s how it’s always been, but banks remain cautious, and developers are cognizant that pain is lessened by concentrating on the post-recession budget and economy markets.
Amid increasing competition, exit strategies and break clauses must be understood and negotiated by all sides from the beginning.
“It is all about due diligence, ascertaining what the opportunity is and whether there is a marriage there. No one is forced to sign a management contract,” said Peter Norman, senior VP of acquisitions and development, Europe, Africa and Middle East, Hyatt International.
The banks do not wish to be stung again, but they are on board, according to panelists.
“We’re relatively agnostic as to the type of operating contract, but the basics must be in place, and first among these is an operating agreement that’s right, which now largely are not management contract-based. Definitely, banks are on a new learning curve, and I consider it is experience gained,” said Tim Helliwell, head of hotel finance at Barclays.
Graham Dodd, development director for U.K. & Ireland at Hilton Worldwide Holdings, said owners can’t merely trust operator claims and must conduct on-the-ground research, while Hillier warned about relying solely on measuring in terms of revenue per available room.
“Key is the alignment between capital and owner. Does the bottom line make sense?” Helliwell added.
“It’s about insuring against the most volatile parts of cash flow. Most hotel yield stems from a trusting relationship, so whatever you do, do not erode that,” Norman said.
Hotels remain an asset class in which value can be added, the panelists agreed, but paramount to that must be the exit strategy—which for an increasing number in the new landscape will be a defined and understood as a build-and-leave scenario.