Deloitte 22nd European Hotel Investment Conference - Back to Basics

Signalling the beginning of the 22nd European Hotel Investment Conference, the unforgiving shrill of a school bell rings out through The Dorchester, London. 400 delegates dutifully file in to be faced with every student’s worst nightmare, the headmaster, also known as Deloitte’s Global Managing Partner of Hospitality, Marvin Rust. Dressed for the occasion in traditional gown and mortar board hat, he addressed the assembly in the typical fashion commanding a chorus of ‘good morning Sir’ by return.

Rust then welcomed Nick van Marken, Global Head of Advisory, Tourism, Hospitality & Leisure (THL) at Deloitte to the stage. Together – against the backdrop of a chalk-marked blackboard – they put the year’s hotel performance into context, commenting on the turbulent stock markets, unpredictable catastrophes, the new political era, and further UK spending cuts, to explain why the industry is going “back to basics”.

Running through the bigger picture, Rust revealed that revPAR year-to-September 2010 was up 9.7%. A pleasant surprise for the audience given that in 2009, the pre-conference survey (carried out by TNS Research International) found that no-one believed revPAR would increase by more than 5%. More encouragingly, the results of this year’s survey recorded 8% of delegates predicting an increase of more than 5% for 2011. Rust added that “most regions of the world are forecasting growth next year.”

Data from STR Global showed Asia Pacific to be leading the recovery, with key cities such as Hong Kong and Singapore making the grade. London and New York also showed strong recovery whilst the Middle East was dubbed the class dunce. van Marken noted the positive impact China’s resurgence is having on Europe with a 30% increase in new Chinese projects in Europe, and the Bank of China providing development finance in London.

Back to revPAR performance in individual cities and Dusseldorf, Frankfurt, Munich, and Stuttgart were shown to be clear winners in the Euro zone. “Hoteliers in Germany have benefited from the biennial trade fair cycle and many will have also seen a boost from the reduction in the rate of VAT on accommodation from the standard rate to 7%, introduced at the beginning of 2010,” commented Rust. van Marken referred to Deloitte’s consumer survey conducted by TNS Research International, which found that the number of German respondents to have stayed in a hotel in the last year rose strongly from 45% to 55%, likely due to the effects of lowering the VAT rate. However consumers from the UK, Germany, Italy, and Spain revealed they would be taking substantially fewer business and leisure trips in 2011 compared to 2010.

Welcome news came from the resurgence of global deals with hotel transaction volumes up 60% in 2010 with a huge amount of investment in trophy assets such as The Savoy and Four Seasons in London. Incidentally delegates were treated to a sneak preview of the £70 million refurbishment currently underway at the Four Seasons at the previous night’s cocktail party.

After some talk of confidence, who better to bring delegates back to reality than Deloitte’s own ‘Dr Gloom’, Roger Bootle, Managing Director, Capital Economics. Yet even he warned: “I may surprise you with a few upbeat messages.” Bootle began by admitting the world economy had performed better than he expected but quickly added that it remained “fragile”. Concerns lay in reluctant spenders such as Germany, Government debt to GDP, the dramatic rise in US household debt, and the collapse of bank lending. The economist predicted growth to be strong in the emerging markets, but weak in developed ones. He reported on the huge potential China has to offer suggesting a year-on-year increase of 8% GDP for 2011. Predictions for the UK and Euro zone were more conservative at 1.0% and 0.5% respectively, and unsurprisingly, the PIGS (Portugal, Ireland, Greece and Spain) didn’t fare too well.

“I don’t think there will be a double dip but continued slow growth for years to come,” Bootle concluded with unseasonable optimism (given his usual demeanour), which will no doubt instil a level of confidence in those who are yet to see improvements.

Continuing on the bullish trend, leaders from Starwood Hotels & Resorts and Marriott International discussed performance and pipeline for each of their brands in the End of Year Report: View from the Top session. “We saw occupancy coming back early in the year, in some cases to peak level,” commented Roeland Vos, President, Europe, Africa and Middle East, Starwood, who named Sheraton as its top performing brand. Amy McPherson, President and Managing Director, Europe, Marriott, was cautiously optimistic reporting positive revPAR growth, particularly for its Courtyard brand, but raised concerns over VAT rates and government cuts. Both parties believed there were still parts of Europe that offered potential, but pinpointed China as a huge growth opportunity, both within the country and for the rest of the world’s economy. “In the next five years, 100m people will have the financial capability to travel,” commented Vos. This backs up the recently published Deloitte report ‘Hospitality 2015: Game changers or spectators?’ which details a vision for the future of the industry. Session moderator and Global Managing Director, Tourism, Hospitality & Leisure at Deloitte, Alex Kyriakidis commented: “China is seeing huge growth in GDP per head, forecast to more than double between 2010 and 2015, fuelling growth in disposable income and interest in travel.”

Returning to the hotel groups in question, Vos revealed that the next three to five years will see the addition of 15-20,000 rooms across its portfolio, whilst McPherson announced a pipeline of 5,000 rooms, 40% of which are earmarked for Courtyard. Both speakers believed lifestyle hotels would prosper in the next cycle, as demonstrated by the recent launch of Marriott’s first foray into the sector with Edition, and the scale of Starwood’s pipeline for W, larger than that for any of its other brands. Kyriakidis confirmed: “By 2015, mass market lifestyle brands will increase both in number and scale by providing a differentiated offering to consumers and sufficient financial returns to owners and operators.”
As talk turned to the budget sector, Kyriakidis presented TNS pre-conference survey findings that showed the majority of the audience to believe capital will be spent in the budget sector in 2011. Despite this, Vos said it unlikely that Starwood would venture here, and McPherson commented: “It’s not never, but not now.”

The dreaded Mathematics lesson followed lunch with two investors and two lenders taking to the stage. Moderator Rod Taylor, Chairman of Taylor Global Advisors, questioned what back to basics meant in terms of investment? According to Carmen Hui, VP, Acquisitions and Development Europe, Host Hotels & Resorts: “Back to basics means going back to core investments and pure competencies...The owner/operator model is a good one, but it’s high risk, high reward and if you don’t have the core competency you will get a big fat F.” From the lender perspective, Diane Scott, Director, Business Development at Lloyds Banking Group, is “looking at what makes a good deal”, whilst Peter Anscomb, Corporate Director, Head of Hotels, Royal Bank of Scotland is “going back to forgotten practices” and ensuring deals are struck with “the right people and the right brand.” Scott encouraged those wanting finance for new projects to look at less-costly alternatives. “Do you really need to build another hotel,” she questioned, “Or can you add 50-100 rooms and add value to the property?”

Although both banks assure that they are still lending, albeit cautiously, Anscomb warned: “There’s good reason to believe that there will be tight lending positions in the sector for the foreseeable future.”

On the agenda for the afternoon’s lessons were ‘Induction’, ‘Home Economics’ and ‘Art’. Panellist Des Gunewardena, Chairman and CEO, D&D London, announced plans for a hotel driven by its F&B outlets; CitizenM’s Founding Partner Michael Levie spoke of his “lifestyle experience at a more affordable price”; and Mark Lankester introduced the Tune Hotels concept based on the notion of sleep where everything from towels to cleaning is charged as an added extra. Tune Hotels was particularly bullish in its plans, eyeing expansion in the UK and London. The day concluded with a look at the potential impact of social media on guest choices. 70% of industry figures surveyed ranked TripAdvisor as the source of information most likely to influence a consumer when choosing a hotel, to which van Marken responded: “This is a positive response from operators as it indicates they have recognised the potential impact, both positive and negative, travel review sites can have on their business. Indications are that hoteliers are in fact embracing the platform and actively encouraging their visitors to provide their feedback on the travel review site.” Delegates were encouraged to proactively manage comments left on social media sites however questions were raised over the resources required for such a task. Whichever way you look at it, Geraldine Caplin, VP Global eCommerce Services, Hilton Worldwide, made a valid point when she said: “This is very much the future.”