Hotels may appear as solid, unimpeachable structures offering safety and refuge to the guest, but investors and operators know this is a mirage. Safety and refuge for those within? Yes. But the business itself can be as vulnerable as an unsheared lamb on a breezy day.
Carefully gathered profits can be lost to circumstances beyond the hotel’s control, with a deluge of unexpected events in recent years. From the pandemic to the Ukraine war to the U.K. government’s changes to minimum wage and business rates, the sector has faced multiple threats to performance, challenging its growing position as the alternative asset class of choice. The latest impact on performance comes from the war in Iran, where weakening economies are combining with fears that travel itself will be restricted by cost and lack of oil supply.
Unforeseen costs and events have buffeted hotels, but, despite their unpredictability, these can be managed. The first step is controlling what you can by knowing your costs. This may sound flippant, but in an operation as complex as a hotel, a lot of businesses are not really aware of where their costs sit and what contract terms they're on. So, when a major global event happens, hotels have to suddenly consider elements they hadn’t before. Are they stuck in a contract they can’t change? Knowing what your cost base is and where you have committed services is a good place to start.
A useful starting point is to put processes in place to capture all of your contracts and build an understanding of what’s within them. Do you have copies or did you put them in a drawer a few years ago and forget about them? Having a strong operating partner, who has systems and tools in place to quickly assess your position, can protect you when you suddenly need to put yourself on a stronger footing.
Once you have this knowledge, you can then assess the higher-risk contracts, where even though you have an agreement, the reality of life is that it will have to change when there is an extraordinary event. A good example of this is laundry. Your laundry provider will try and pass on increased energy costs and while you could resist and point to your air-tight contract, if they cannot raise prices, they may go out of business, leaving you with a pile of dirty sheets.
At the moment, energy is on everybody’s minds as a high-risk item, but is the average hotel a good energy trader? Do you want to find yourself on daily, weekly calls with energy brokers, trying to manage wholesale prices and navigate global markets when you just want to keep the lights on for guests?
The reality is that your time is better spent looking after those staying the hotel and relying on a partner who has existing relationships with energy experts, who can talk to them on your behalf and de-risk your business from those high-risk, high-ticket items.
Resilience is also a valuable skill to build into demand, particularly when you’re operating in major cities. It is increasingly not a secret that hotels are an interesting area to invest in and we are seeing a lot of supply coming into some markets. This exposes them to a downturn, or an event such as the war in the Middle East, when the international travel feeding these big cities can suddenly drop off. Instead of relying on steady supply, you are fighting others for the same guest.
That guest will also have been affected by the same issues and is looking for the best value. In that environment, you need a hotel with a unique and compelling story. The standard, cookie-cutter hotels will still be able to tap into the market, but at a lower level. If you want to ensure an better market positioning, you need to help your hotel stand out. In a market where travellers have plenty of options, they will pick somewhere that’s interesting. That reflects the location where they’re staying in. That creates a level of customer satisfaction that feeds into value and helps you keep rates up, rather than racing to the bottom.
Your operating partner should have the capability to make an accurate forecast and assessment of potential impact on trading, weaving all the available information together and putting into context for owners. Every hotel holds a unique place in an investor’s strategy; understanding this means that short-term issues need not affect long-term ownership goals.
We’re lucky in our sector that we feel part of a close, global community, but to really give your property the resilience to be an effective investment, you need access to a solid network of knowledge.
Philip Steiner is chief operating officer of Vertiq Hospitality Partners.
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