Operators seek less risky management contracts

The global downturn has prompted hotel operators to challenge traditional lease or hotel management agreements in a bid to achieve more balanced, less risky deals with property owners, a new report from HVS London observed.

The trend, which HVS said is evident throughout Europe, Middle East and Africa, suggests that traditional hotel management agreements (HMAs) are becoming more owner-friendly as owners secure a level of control on operations and a guaranteed return to at least cover debt service.

Report author Liliana Ielacqua, an associate with HVS London, said: “The industry is reacting and adapting to new necessities. Hotel operators don’t want to take the risk of operations on entirely themselves, and neither do property investors.

“Hotel contracts are reaching a level of optimal balance between operators’ and owners’ return while preserving the value of the asset, which is ultimately what sustains both returns.”

She added: “We are seeing a much more flexible approach to the hotel property market, whereby both owner and operators are more protected in a downturn, but benefit when trading improves.

“Lease structures have now become more flexible, depending on the level of risk the property investor is willing to take, varying from a fixed fee from the operator, to a share of revenue or a share in the net operating income,” observed Ielacqua.

She concluded that it is crucial both parties are incentivised to increase the property’s profitability as, should the hotel underperform, the owner would bear the consequences in either a hotel management agreement or a lease if the operator is not able to guarantee a level of profits that supports the rent payable.