The Knight Frank Hotels team’s fifth annual hotel round table, in partnership with CoStar News, saw eight industry leaders discuss the important issues and challenges facing the industry today.
This is part one of a discussion that explored the operational challenges facing hotels including energy and staffing, the lending and development markets in a higher interest rate world, the attractiveness of hotels as an asset class, and predictions for the sector this year.
Attendees:
- Karen Callahan, head of hotel valuations, Knight Frank
- Neil Forbes, head of hotels, Fairview Hotels
- David Anderson, divisional president, Aimbridge Hospitality EMEA
- Adela Cristea, vice-president, UK and Ireland, Radisson
- Shaun Roy, head of hotels and specialist property investment, Knight Frank
- Hilton Foster, head of debt UK and Ireland, HB Titan
Chair:
Paul Norman, Managing Editor, Europe, CoStar News
PN: What are the biggest trends or issues in the sector in hotels and hospitality and that you found this year?
NF: Staffing is probably the number one issue. If you don’t have people, you’ve got nothing else. I’ll revert to the old 3 Ps: people, product and profit. It seems to be that there’s still an issue where hospitality is not really an accepted profession, we don’t really seem to be driving it. Moreover, everywhere you turn around, they’re shutting catering colleges, chefs are almost disappearing from the industry. Another problem is that many of the students are not really committed to learning, and it seems to be that the government reward the parents for getting their child to go to catering college, so you’ve got people who actually don’t want to be there.
AC: So, from my perspective, business development, construction costs are an issue now. More than half of what we sign, contracts, are new builds. So, developers are signing them, which is exciting, but construction is an issue nowadays. I mean, financing also; I'm sure you'll talk about that. But construction costs have gone up a lot, 20, 30, 40% since before COVID, so therefore, what we have to do as the brand, is to really help the developer re-engineer the scheme to make it feasible.
And we’ve been trying to do that for the last two to three years. Sometimes you just move facilities around, you remove altogether the conference floor and then you put the rooms in there. You could convert the rooms, which could be board rooms and bedrooms at the same time. We’re looking at our current projects to do something like that, which is really the same space that you sell multiple times. You can sell it as a bedroom at night, meeting room during the day, private dining if you need to.
So, probably, in a new build you don’t have to have a meeting floor at all. That’s your guest room floor which could convert, and then you can put that on the mezzanine level, on the ground floor, so also from a staffing perspective, you can get to it and it’s mainly a common area which could convert to bedrooms at night. So from that perspective, we needed to adapt ourselves and also compromise a little bit on brand standards. We do have brand standards, but being in development I always tell our investors that the brands are there to be tailored to your project. And that is to not break them but amend them if you need to.
And also, being Scandinavian at heart, the sizes are not so important to us. An upper upscale room can be 22 square metres, so it’s really all about the look and feel. It has to look elegant, it has to look smart, people need to know why they’re paying £20, £30, £50 more than the hotel next door. But the size doesn’t matter. We don’t believe the guests measure the rooms and it has to be a certain square metres. So I think optimising the scheme with the developers and construction costs, we’re still going through exercises trying to see how we can help them make these schemes feasible.
PN: And how do customers respond to that or does it differ between different countries or?
AC: The customers? The guests?
PN: Yes, the guests.
AC: Well, the guests wouldn’t know. I mean, the guest is seeing a nice, elegant room and we at Radisson, we really have upscale and upper upscale hotels so we are not in the budget segment yet. We do have a brand now, we started to bring this brand, Prizeotel from Germany, started there about 10 years ago and we are now bringing this into the market. But, traditionally, we have been in the upper and upscale segments. And when it comes to London, for example, everybody knows that a five-star room is going to be small because the rates are high. So I don’t think it’s a matter of squeezing the space as much, as long as the space is comfortable and it looks good. And 20-22 square metres, I think it’s a nice, comfortable room, so the guest is not really penalised, but it’s really just trying to assist the investors to make this project work, otherwise they’re not going to build them, because it’s expensive.
PN: And, Hilton, you’re obviously quite new into this role, but what’s been a big trend so in the year?
HF: So before this I was at OakNorth, where I was lending to the hospitality sector, really, and before that was HSBC. I would say probably the biggest challenge from a lending perspective is the simple fact that the cost of debt is five times higher than it was a year and a half ago. There’s not a lack of debt. There’s plenty of debt, it’s just more expensive. The knock-on effect of that, I think, will be potential adjustment of yields, because what investors are willing to pay for a hotel will be less, because what they can borrow will be less, because it’s got to be serviced by that cash flow which has changed a bit but not as much as the debt.
So there are all these knock-on effects, right? And I think from a lender point of view, there is a question as to "what is the actual impact on valuation yields?". I suspect there isn’t enough evidence as to get a proper picture of what that looks like. So that’s a challenge. If you have a hotel and you have a chunky debt that you need to refinance, I think you’re looking around and the answers you’re getting are not what you want to see. From a lending point of view, looking at that slightly differently, I’m trying to lend money, actively lend money, there’s no shortage of money to lend. So it’s about matching up the opportunities to that investor base that is willing to pay more for getting something that they perceive as value.
From an operational point of view, I look at the market and I wonder "is it possible for hotels to carry on charging what they’re charging in the room rates for the next year or two or three?". It just seems like hotels are expensive. Now, don’t get me wrong, I like that because I need that from a debt service point of view, so it’s a question both as a consumer and someone in the industry. Just how sustainable are the cash flows from a top-line perspective? And that’s an open question, I really do wonder about that.
PN: Well, that’s a good question to ask Karen.
KC: It is. I think, as Hilton rightly pointed out, there are challenges, especially for me as a valuer, as to where the yields truly do sit at the moment, and the cost of debt is clearly one of those factors. Now, there’s obviously a lot of speculation that over the next 12-24 months, we will probably see that cost of debt come down, which will ease things, and I think some people that are investing now have an eye on that, that this higher cost of debt is not going to be forever, and there will come a time when they can refinance at a more palatable price. I think the challenge for those investors is that, when they are looking at opportunities, if they wait two or three years for that cost of debt to come down, let’s say we get down to 3% stabilised base rate, that opportunity might not be available anymore.
This is particularly so in the London market, where many of these opportunities sell very infrequently. From a valuation perspective, it is challenging – how sustainable are those average room rates – but as a valuer we look at what the business on the books is. Whilst, short lead in times isn’t necessarily helpful to that, but there’s usually enough evidence that there’s no signs yet that average daily rate is under pressure. Meanwhile, whilst occupancy it isn’t fully back to where it was pre-pandemic, for many of the sectors and hotels that we’re looking at the growth in ADR means that revenue per available room is significantly up for the most part.
The other challenge is food and beverage revenue. How hoteliers make that a profitable and viable part of the hotel with departmental expense margins now pushing beyond the 70s and into the early 80s, depending on the configuration of the outlets and the segmentation that you have. By the time all costs are accounted for, hoteliers have to closely analyse if it is worth opening that restaurant all day anymore? Are hotels going to need to move more towards a breakfast-only offering? What is the F&B doing to support and drive the rest of the hotel in terms of room revenue, meeting and conference-led business? Those are very challenging, as to how you get the F&B back on track and profitable.
DA: Aimbridge has a very ambitious growth plan. When there are high costs of debt, there are less transactions. So, your normal growth plan gets interfered with, and you have to find other ways of growing. And that’s where we, being the scale that we have, it allows us to deal with the labour issues that are in the market because we can attract great talent because of the scale we’re at. We can give great opportunities within the industry.
People within Aimbridge can cross over from one brand to another but stay in Aimbridge. We’ve invested over the years in a lot of technology to allow us to have the foresight on how the markets in various regions are going, which gives us that edge when we’re pitching. We did a deal last year with a third-party operator. And so when you’re talking about pace and ability to calculate what that business on the books is across 1,500 hotels across 81 brands, it’s a challenge.
But having that deal we did last year allows us to have that data by day, by segment, by channel, by hotel. 365 days going forward and 365 days going back. So, when we go to investment committees with private equity guys or whatever, we’ve got that data insight which they love, which helps to secure the information when they’re trying to make these decisions. Now, on the labour challenges, a couple of years ago we started our own apprenticeship scheme, exactly for the reason we all stated, that catering schools, unfortunately, are not highly reputed in this part of the world. And so we’ve had to take that on internally and so, on an annual basis, we’ll probably produce 10% of our own internal chefs that then come up into senior positions within our bigger properties.
We have property maintenance guys that we put through an apprenticeship scheme so we train them and we get that loyalty, and that’s probably the luxury we have as a large group that we can afford to do that. And then, what keeps me awake at night, right now, is when owners say we’ve got challenges with our debt service because our financial agreement has come to an end, we have to refinance, it’s a different model. And then how can you as the operator try and save us money so that… you know, they’ve had huge utility bill rises in the last couple of years, inflationary costs there which has gone up 1.5% on the [profit and loss]. You’ve had labour inflationary costs which has gone up and in the last year you’ve had interest rates that have really gone the wrong way for them. So I think it’s a challenging world, but one of our remits is to be there with our owners and to help them through this, but it’s challenging. So it’s not commercial challenges – hotel activity has never been so strong. I was looking at our performance yesterday – annualised we are at 80% occupancy on the year across over 100 hotels. That is slightly better than 2019, we’ve got a rate that is 30% higher. The costs are in line with that. So it’s just maintaining that bottom line.
But to your point, how long do we continue driving the top-line performance? Karen, you addressed the point of food and beverage and that is something where you can’t have a standard food and beverage operation and hope to make money. So we always look at that: what is the F&B experience? What is the value to the guest? And if we can’t create that, then let’s go light. But if we do have the opportunity to create that, let’s do something really special.
One of the things we did as an organisation was to reinforce strategic leadership with food and beverage. So we can go to our owners and, inside our own business, we say to them: “Look, we can design you a food and beverage concept. We can do all the research in that city to say what is the opportunity of food and beverage here? What would be the expected footfall? What would be the IRR on the investment?”, without them having to go outside of that. So, we’ve kind of brought stuff in-house, aligning with our owners to help guide them through these challenges.
PN: Ok, thank you, loads there to follow up on as well. Shaun?
SR: I think the biggest change in the market in the last 12 months would undoubtedly be gilt rates, bond rates, and therefore the associated attractiveness or otherwise of real estate. So, as a sector, and as a sub-sector i.e., hospitality, we’re now competing with ever more attractive other options for people, for capital. Capital is pretty agnostic, capital goes wherever it can get the right types of returns. They will do gilts or infrastructure or property or hospitality or equity, wherever the cost of capital requirements are met in a risk-adjusted manner. And I think our industry has been a little bit clobbered by the dramatic change in gilt rates.
Why, a year and a half ago, wouldn’t you put your money into commercial real estate when you were getting 4, 5, 6% yields with indexation etc, when the gilt rate was 1%? Now it’s knocking on 5, or just sometimes gone past 5, we need to make ourselves just as attractive as opportunities a year, 15 months ago, but in a landscape that is fundamentally changed. So, I think that has been our biggest challenge. The good side of this sub-sector, i.e., hospitality, in the wider commercial property world is that we’re trading well and we’re an attractive proposition. In terms of deal flow, dare I say it, one of the biggest deal preventers is cladding. So cladding and the physical structure of buildings has never been more reviewed than it is at the moment. And it’s not a case of it’ll run to value, and if it’s not quite good enough, then we’ll knock some money off the price. It’s either liquid or not liquid. So that’s has been an onward trend since, dare I say it, 2016, 2017, but it is becoming more and more of an issue and stark reality, for all different buckets of capital.
PN: And it is more of an issue for the hospitality sector.
SR: It is because people sleep there. So that is one of the big differences in regulation. So a shed that is built of combustible materials might be viewed in a different way from a [private rented sector] block, a student block, a hotel etc. So, yeah, it is a living sector problem.
PN: In terms of the other, broadly speaking, commercial sectors, probably offices are having a tough moment, I guess. Does hospitality stand out in a good way at the moment?
SR: Yes. You know, sheds, beds and meds is an oft quoted thing – meds have snuck in there in the last 12 months. Yeah, sheds are still very popular. A lot of the money that has been raised is very thematic these days. All the North American private equity, a lot of the Asian buyers, they are thematic buyers. They are not just “we’re going to buy because it’s cheap” or we just want to buy real estate. They have raised that money for a theme and a lot of it centres around that sheds and beds thesis.
PN: Ok, how will innovation in the hotel sector, partly in terms of the data help drive margins. What are you looking at in terms of innovations that are going to help the sector?
DA: So, if I start, if I take the P&L and start with the top line, I think the technology to be able to take revenue management to another level and continue to secure these premium rates we have is vital. I spoke about our relationship with Amadeus, that gave us incredible insight into any market, any segment, we can see future trends 365 days out. If we see business picking up eight months out or we see business travels decline we can then adjust our strategy there.
One of the things we have done as an organisation is, above property, we have I would say 48 people in my company, in EMEA, that just focus on commercial. So these are revenue managers at the property level, who are then supervised by area revenue managers above that, then strategic managers. So we’re very, very focused with our technology, with our understanding of technical competencies, like we’ve never understood before, about getting our people super trained so that we can make these decisions. And we have a remit, which is outperforming the market.
We don’t do the market, we outperform it, so we’ve got to live up to that. So I would say that, on the technology in terms of optimising our rate it is crucial. Then it’s working with the brands, to optimise the brand performance. We work with some 81 sub-brands across the world, so we understand what "great" looks like, we understand how to help brands optimise that using our own knowledge and skills set. You like to have high franchise fees, and so when there is a franchise model, again, we use our technology to optimise performance.
When it comes to labour, you know, what can technology do to take out those processes when you check into a hotel? We’ve seen the mobile check-in now, which is very commonplace. If guests arrive late or just don’t want to queue, they can avoid that now. So, enhancing that guest experience. No one likes to queue, so we try to avoid that, we try to encourage our owners to invest in that technology so that we are tech-compliant savvy, and we enhance their experience. Where we see our teams now is more enhancing the guest experience, rather than dealing with those processes that technology can now do. So, we work towards that.
SR: So, enhance rather than making it functional?
DA: Yes, so the functionality, just like we do now in our corporate office with accounting. Whereas before we had all these key stroke entry people, but we have allowed them to have a more strategic view on the finances, so they have more value-add. So it’s the same on property, the guest experience will be enhanced and not tripped up by queuing. But, I think the other part of this is how, in the booking process, today we have all these online travel agents that dominate the world of booking. You know, they have huge investment funds that allow them to drive the search element, and the brands are trying to counter that by great loyalty schemes and all that.
And we obviously are caught between the two, but we know that where technology helps the brands drive that search performance, there is also a costing when we look at sales and marketing spend. Search costs need to increase too, to outweigh the OTAs, so there’s a bit of a pressure there. But I think we’re all getting to a point where we’re trying to find efficiencies, technology is helping us do that in various forms, but also not just technology, but innovation. So, finding innovative ways for food and beverage, innovative ways to drive the guest experience and to keep them with us. And now, with the staff issues that were there a couple of years ago, recruiting for personality, having the ability to train people through technology as well, because you no longer have classrooms, you have online programmes and testing mechanisms. But where you’ve got great people, who can engage with your guests through their personality…
PN: How do you recruit for personality then?
DA: Well you…you say you want…you’ve got to be technically trained, they’ve got to be punctual, you know. That’s moved away, it’s now…how these people can interact at various levels, how much they know about the local city and town and culture. I remember one bar man who was – he turned up with earrings and tattoos, this was a couple of years ago, and you think “really?”. But then when they’re in-situ, and you see their ability to engage with people at the bar and their knowledge about whisky because they happen to have a passion about that. And then when the guests check out and the barman is waving “see you next time, John”, that makes a difference.
SR: I can’t remember which brand it was, obviously a relatively edgy brand, that actually gave staff a sign-on bonus towards getting new tattoos. I can’t remember who. It was meaningful money. Something like 500 euros towards a piercing or a tattoo. But maybe they’re trying to attract those types of people?
AC: I agree with David. I mean, we have also a similar view on technology. It's super key. Nowadays you need to increase productivity because the staff is not there anymore. Now they all work for Amazon and other competitors which are not competitors. And we really need to look; we invested in technology for the last year in our own property management system and that's obviously developed by ourselves together with [software company] SAP and it's giving you visibility on all the channels out there. And yes, we do fight OTAs, but we realise how strong they are, especially from a marketing perspective. They are investing billions in marketing on an annual basis. I'm always saying some of these hotel companies, the market capitalisation is not £2 billion. That's the amount of money that Expedia and booking.com put out there on an annual basis in advertising. And we realised that it's probably not a fight we want. So then we found a way to work with them. And especially since COVID, since it's more and more leisure in the hotel. The corporate obviously during COVID was not much of it, but leisure business was mainly what we've had in our properties in the last couple of years. When you are a leisure guest and you're going to a destination, you want to see your 10 hotels on one page. You don't want to go on 10 different websites and check everybody.
PN: But do they then come to you to look if there's a better deal on offer?
AC: That's what I do because I'm from the business and I know that if I book on OTA, they're going to get 15% of the rate. But the normal guest doesn't really care about who pays what commission. So they find it there and they just click and it's easy. I mean, they've got these websites that are so easy to go by and then you've got the 10 people you want to see in a market on the page. And then we found a way, an agreement with that, that we are always at the top, sometimes at the highest rate. And our CEO actually showed us a list of segments, average daily rate by segment, and the ADR via the OTA was £40 higher than the ADR via some other direct channels.
SR: Really? Wow.
AC: And if I make £40 more, I'm going to find £15 in there, £20 to pay the OTA commission. So I think ultimately, if you can work with them rather than fight them, I think you can be better off because it's so much OTA business. We used to be about 27% in the UK. Now it's 35% because it's so much leisure coming through the doors. And then coming back to the F&B point, I mean, what we've seen in our P&L, I also analysed that with our ops people just to see what's happening in the market. We also saw 10% increase in ADR, 10 percentage point occupancy versus 19 overall, more or less. F&B revenues are 15% up versus 19. And the reason for that is leisure. Now we have more people in the building. Corporate was one in and out, quickly running to their meetings. Now I'm having a couple and a family wanting to hang around, wanting to have a drink at the bar and have a salad and have a little snack. So there's more people in the building from leisure. We do better in F&B. The conversion is not quite there yet. We used to be UK wide at 40%, now we are at 35. That's a mixture of payroll is just one percentage point, energy, that's gone up about 40%. So as you're saying, probably from 2-3%, now it's 5-6%. So that's really impacting the bottom line. So a few percentage points on the bottom line lower, but overall the top line is strong and that five percentage points probably is still better as an amount.
PN: Well, obviously there are lots to unpack there, but in terms of Fairview and innovation, I think there was talk about lots of interesting things, for instance around OTAs.
NF: I think we're very much in tune with, as David said, innovation and technology, which we have to embrace. There is no choice. You either keep up with it or you fall behind. We have a similar approach, albeit on a lower scale, It's how do your people make the business better? What can our people do to make the stay enjoyable? Yes, you can use automisation to streamline the process, but we are finding that leisure people generally want to interact with our teams. So I think wherever you can make it easier to run the administration process, be it taking bookings, be it processing the account, be it achieving the actual sale we embrace technology. It is then about once you've got the guest through the door, how can our people improve that stay and basically get loyalty and get people coming back again? We work with the main brands and despite the loyalty programmes all brands offer we still rely heavily on OTAs.
SR: What sort of percentage?
NF: I would estimate 50%. We meet with our brand partners on a regular basis to discuss this and whilst we are told how the brands system is producing, the OTA’s contribution is still a major contributor. Unlike David we do not have a platform which compares brand contribution and so it is difficult to benchmark against the different brands on a like-for-like basis. We're not by any means going to be trailblazers or market leaders in technology, but we will make sure that we embrace what needs to be done and then we just have to look and say how can we as a smaller player, make a difference? And I like the idea of the analogy of the tattooed person, going to be a big direction of travel.
This is part one of a two-part roundtable debate. For part two, click here.