Significant Increase in Transactions in the Hospitality Sector Expected for Year Ahead Says Ernst & Young

  • Cautious but growing optimism among investors and hotel brands
  • New project announcements at highest level in 18 months

NEW YORK & LONDON--()--An overwhelming majority (83%) of hotel investors are optimistic about the mid-term future of the hospitality industry. That’s according to a survey of top hotel sector investors and operators polled at an Ernst & Young hospitality sector workshop held in London recently. Approximately 60% of respondents to the survey believed that hotel transaction activity in the Eurozone would increase “significantly” this year with the overwhelming emphasis being on gateway cities such as London, Frankfurt, Paris and Brussels.

And, according to Ernst & Young’s recent report Global Hospitality Insights: Top thoughts for 2013 (GHI), while access to financing is still difficult in many markets around the world, new project announcements have risen to their highest level in 18 months. This reflects the cautious but growing optimism among investors and hotel brands in the trajectory of the global economy.

Delving further into the financial aspects of the industry, GHI says the hospitality industry will be shaped by an emphasis on controlling costs at all levels of the business as well as optimizing capital. This could mean continued scrutiny of maintenance spending and the re-evaluation of capital improvement projects, as owners decide where best to invest limited resources.

Hotel companies are also looking at ways to restructure and reposition for tax purposes, with some again contemplating IPOs for real estate investment trusts (REIT) formation as a way to both reduce overall tax and also unlock value in their real estate. On the investment front, in spite of increased regulatory hurdles and illiquidity in the capital markets, global private equity and sovereign wealth funds will find more opportunities in the sector.

Among the other key trends discussed in GHI were:

Cities: Increased investments in infrastructure by city governments — especially in rapid transit facilitating the movement of travelers from airports to downtown locations — appears to be paying off as a new class of trendy travelers flock to statement-making urban hotels.

Development: A rise in both emerging markets as well as prime downtown urban locations and across segments — particularly at the upper end of the market and among select service brands appealing to the value-conscious traveler.

Markets: Africa could be the next major thrust for global hotel brands as more investors target sub-Saharan nations rich in natural resources such as Nigeria, Gabon and South Africa, for expansion. Globally, most markets experienced steady growth in 2012, with the notable exception of Europe, where economic challenges continue to be greatest.

Commenting on the report, Michael Fishbin, Ernst & Young’s Global Hospitality Leader says: “Hospitality companies continue to evaluate the capital agenda and this is causing them to focus on the very basics of their businesses – maintaining stability, creating operational efficiencies and reinforcing cost reduction strategies. We are beginning to see signs of renewed vigor in the sector as a whole and companies who have successfully addressed their capital needs are in a stronger position to take advantage of opportunities during these early stages of recovery.”

To download the full report, visit www.ey.com/realestate. A summary of the report’s key points follows below.

Global Hospitality Insights -- summary:

Tax
  • Globally, tax and structuring issues affecting hospitality companies continue to be driven by the hotel operating model.
  • Tax matters, such as reductions in corporate tax rates and the tax deductibility of interest on debt, have gained significance in hospitality transactions.
  • Hotel companies are restructuring and repositioning in unique ways for tax purposes and to unlock value in their real estate, including as REITs and “OpCo-PropCo” spinoffs (separation of operating companies from real property assets).
Performance / outlook
  • The current macroeconomic performance and outlook for the global lodging industry continues to be mixed; political, economic and weather-related events have dented both the hospitality sector and investor confidence.
  • With the exception of Europe, most global lodging markets have experienced steady year-to-date RevPAR growth.
  • The luxury and upper tier segments are expected to have the highest RevPAR gains in 2012.
Valuation
  • Despite global economic uncertainties, lodging fundamentals in much of the world continue to improve, with many investors anticipating hotel values to remain either stable or increase.
  • While the discounted cash flow analysis remains the primary valuation methodology, methodologies utilized vary by region, particularly in areas of decreased market activity and/or impacted by external factors (e.g. economic, political).
Capital agenda
  • Hospitality executives remain cautious despite some renewed growth and investment.
  • An unfavorable M&A environment has shifted strategic focus to maximize capital by controlling costs, improving performance, and focusing on bottom-line improvements.
  • Hotel companies are refocusing on the basics: maintaining stability, operational efficiency, and cost reduction initiatives.
Emerging markets: spotlight on Africa
  • The opportunity for development in Africa has caught the attention of multinational hotel players; major companies have targeted Africa as a strategic area for expansion
  • South Africa has received the largest investment to date; however, other countries rich in natural resources, including Nigeria, Ghana and Gabon, have seen a considerable rise in development.
Development
  • Hotel development is rebounding as investors slowly regain lost confidence in the economy. New project announcements have grown to the highest level in 18 months.
  • Development in emerging markets is on the rise, but investors in search of financing continue to face stringent lending standards from financial institutions.
Segmentation
  • Increasingly health-conscious lifestyles are creating a traveler segment that demands lodging that can accommodate healthy choices and personal wellness.
  • A new class of trendy travelers is flocking to urban hotels that make a statement for their guests.
  • The recession has resulted in a wave of value-conscious travelers that recognize the benefit of select-service hotels, resulting in select-service offerings further catching the attention of major hotel players in 2012.
International brands
  • As major hotel companies expand abroad, new efforts have been made to connect to local guests; some companies have partnered with local operators, while others have adopted slogans in the local language.
  • Fostering partnerships in local markets is a critical element of a global expansion strategy.
Transactions / capital markets
  • In continued global and economy uncertainty, a divergence in the global real estate market persists; investors continue to seek high quality assets in stable locations, while investment in smaller markets remains challenging.
  • CMBS deals are slowing coming back to life, with overall issuances estimated at between US$75 and US$90 million over the next several years.
  • Major hotel companies are exploring the opportunity to form IPOs over the next 24 months as a possible exit strategy.
New ways of communicating with guests
  • As technology revolutionizes the way customers interact with brands, products and each other, each owner/operator/brand must evaluate the role of technology in its business to stay relevant.
  • Social media, mobile distribution, and in-room technology offerings have significantly changed the traditional guest experience.
Strategic tourism
  • With overall trends predicting heightened travel activity, destination marketing organizations are looking to re-invent their destinations in an effort to capture the returning leisure and group traveler.
  • Destination marketing organizations are identifying new marketing strategies to reach consumers, including the use of social media and third-party experts/consultants for support (e.g. benchmarking analyses).
Global real estate funds
  • Private equity funds in the hospitality sector face a period of significant structural and cultural change, with cautious investors, large-scale regulatory overhauls and the ongoing illiquidity of the capital markets all driving the change.
  • Despite uncertainties, creative investors can thrive, devising and offering solutions to invest in the hotel space (e.g. refinancing opportunities).
Infrastructure
  • Major cities have recognized mass transportation as a gateway to the city, and have increasingly invested in infrastructure to facilitate travel (e.g. railway from airports to city centers).
Hybrid contracts
  • Hotel management takes many forms across the globe; while franchising is common in the US, hybrid contracts are gaining momentum in EMEA and Asia, given the broad mix of leasing, ownership, franchising and management contracts.
  • Hybrid contracts enable each party to balance the risks and benefits associated with operating a hotel.
Capital expenditures
  • Maintaining an appropriate level of capital expenditure remains crucial to the successful operation of a hotel. However, hotel owners continue to face tight budgets, often resulting in deferral of both maintenance and capital expenditure projects which are already overdue.
  • Investors with limited funds should prioritize smaller scale projects that directly impact the guest experience (e.g. guest bathrooms, wireless internet capacity, soft goods replacements) over larger expenditures (e.g. spa facilities), which will take a long time to generate returns.

About Ernst & Young’s Global Real Estate Center

Today’s real estate industry must adopt new approaches to address regulatory requirements and financial risks, while meeting the challenges of expanding globally and achieving sustainable growth. Ernst & Young’s Global Real Estate Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

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Contacts

Ernst & Young Global Media Relations
Bijal Tanna, +44 (0)20 7951 8837
btanna@uk.ey.com
or
Gallen Neilly Associates.
Andrew Neilly/Tim Gallen, +1-925-930-9848
andrew@gallen.com
tim@gallen.com

Release Summary

A recent survey of top hotel sector investors and operators polled at an Ernst & Young hospitality sector workshop held in London. Global Hospitality Insights: Top thoughts for 2013 (GHI).

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Contacts

Ernst & Young Global Media Relations
Bijal Tanna, +44 (0)20 7951 8837
btanna@uk.ey.com
or
Gallen Neilly Associates.
Andrew Neilly/Tim Gallen, +1-925-930-9848
andrew@gallen.com
tim@gallen.com