Asset managers - essential or excessive expense?

The role and value of asset managers in the hotel industry will be one of the hot topics under discussion at the Arabian Hotel Investment Conference, so Hotelier spoke to the experts ahead of time to find out whether asset managers are an essential or excessive expense

Hotel asset management has gradually been evolving in the Middle East, but it is still a service not fully understood by some owners and operators alike. To tackle this issue, next month’s Arabian Hotel Investment Conference (AHIC) will include a breakout session dedicated to the role of asset managers (May 2). A panel of specialists will gather together to debate the best types of asset management — in-house or outsourced — and discuss which types of business could best benefit from their services. Hotelier Middle East has the sneak preview, as we find out whether asset managers are the industry’s new best friend, or a superfluous expense.

WHO NEEDS AN ASSET MANAGER ANYWAY?

Asset management was born out of a realisation by owners that “the operator’s interests are not always aligned with theirs,” says Wasl Hospitality general manager St John Kelliher, one of the AHIC panelists.

“I believe that all hotels should have a hotel asset manager, as they play an integral role within the investment scope of operations,” says Kelliher. “It is sometimes difficult for an operator to see the asset from all angles, and the focus gets limited to merely creating profit from the facility rather than increasing the value of the asset in the short and long term investment cycle. Asset management specialises in both; the returns on operation and the increasing value of the asset,” explains Kelliher.

The asset managers Hotelier spoke with were generally in agreement on this note, with Frank Croston, partner at Hamilton Hotel Partners, adding that neither the type of owner nor their location was important when considering using asset management — industry knowledge is what is important.

“We see benefits across the spectrum of ownership by type in the Middle East region — from family businesses to Sovereign Wealth Funds, including businesses that are directly or indirectly government owned,” says Croston.

“The reasoning behind appointing an asset manager remains the same whether the asset is in London, New York, Beirut or Riyadh. The role is to optimise returns to the owner over time, of both a capital and income capture, and to maintain a constructive and challenging dialogue with the operating partner.

“If the owner has both the time and industry awareness to fulfil this role themselves, the asset management function may not be required, otherwise it will provide a level of comfort to the owner that all efforts are being made to safeguard and maximise their overall return on investment,” Croston adds.

The economic downturn has highlighted a demand for the services of asset managers, as a result of more distressed properties on the market. AHIC panelist Siegfried Nierhaus, managing director at Atlas Hospitality LLC, says the company has seen an increase in demand as a result of the financial crisis.

“Owners having distressed properties as a result of a lack of experienced operators would certainly look for experienced hoteliers, professional consultants or knowledgeable asset managers to help and advise them during these turbulent times,” says Nierhaus.

Kuwait Real Estate Centre head of hotels Marco Nijhof, who is also speaking on the panel, said that while he had not seen an increase in demands, he believed that this was likely to come from financial institutions in the near future.

“I think that more of the financial institutions are realising that they sit on real estate assets, which are possibly below market value now for some time,” says Nijhof. “These institutions cannot off-load at the current market conditions and they will now have to take an active interest in the distressed property so that at least the property (both physically and financially) starts to look better, in order to eventually get the best price.”

“There are financial institutions that do not have the hotel knowledge and it is these companies that will ask for support from the asset management companies,” he predicts.

IN-HOUSE OR OUTSOURCED?

It might seem prudent to have an asset manager in-house and accessible round the clock, but this is normally counter-productive, according to the experts. Of course, they all have a vested interest in promoting asset management as it is their business, but they also do make some valid points.

Vision Hospitality Asset Management CEO Clive Hillier says: “Having asset management in-house would appear to give owners and operators a more hands on approach. However, this argument is severely flawed in that in-house asset managers only have access to comparable information for their own assets.

“Appointing external asset managers means that the owner’s or operator’s assets are being compared with other like assets in the outside market. Looking internally is a short term measure fraught with longer term risks,” warns Hillier.

Nijhof warns that in-house asset managers “can become costly, as the asset manager will need a support team in terms of finance, marketing and market analysis, operational analysts and even possibly operational representation”.

He says: “ To establish this kind of a structure may be difficult. The asset management companies tend to have these skills in house at a fraction of the cost. In our own case the annual fee of the asset management company is not little, but divided over the hotel portfolio it is only a very small cost, which is very much worth your while”.

Kelliher and Croston take a more balanced view of things, saying that the assessment really depends on the owner’s situation. Kelliher says the decision rests on a range of factors: the size of a hotel, the number of rooms, the number of hotels, the hotel locations, the branding of the hotel, the style of operations, long or short term investments, and the available expertise.

Croston point out that it depends on how many hotels the owner has.

“If the owner has an extensive portfolio of hotel assets across the region it is probable that an insourced solution will be both more cost effective and may over time facilitate further expansion in the sector,” he says. “If the portfolio is small or even a single asset, the outsourced solution is likely to be more productive. One of the key issues is the ability to attract and retain the right calibre of staff to execute the function internally, which is likely to be more realistic as the portfolio grows and the owner can offer career progression”.

He adds: “A hybrid solution whereby the function is outsourced but the owner retains the senior asset management role internally can also be a good solution for all parties”.

Assuming an owner has taken the decision to appoint an asset manager, there are many considerations to follow in order to pick the most suitable company , continues Croston.

“The owner should ideally already have a clear understanding of the role they want the asset manager to undertake. The term “asset management” can cover such a wide spectrum from relatively passive observation and reporting to active involvement and collaboration with the operating partner/brand. In order to select the right asset manager the owner first needs to decide if their desire is to monitor, or to actively drive, towards optimum return on investment,” he says.

Once the decision to appoint an asset manager has been made, the owner should then assess candidate asset management entities against the following set of criteria, recommends Croston:
• Demonstrated track record of successful asset management activities (preferably by speaking with existing/former clients).
• The CVs and the track record of
the personnel that will be assigned to the task.
• The extent to which the asset manager is able to articulate a clear vision of the areas of opportunity for enhancing performance after an initial review of the situation.
• The extent to which the remuneration of the asset manager is aligned with the defined “success” or objectives of the owner.
Another thing that is also important, adds Nierhaus, are personality and relationships.
“The owner needs a person that he can trust, who is hard working and who can translate his vision into reality and his business into a profit,” asserts Nierhaus.

WHO CONTROLS PRICING?

There is some debate about the role of asset managers when it comes to pricing, with some experts believing it is an integral part of the function and others advocating that the asset manager remains distant from this.

Nijhof says he thinks that asset managers should be “very much” involved in pricing, but only after very closely studying the market to gain competitor knowledge.

Croston says that “an asset manager should never be making direct pricing decisions”.

“Pricing per se is clearly a matter under the direct control of the operating partner and the asset manager should never be making direct pricing decisions. It is vital, however, that the asset manager closely monitors all pricing and distribution strategies being pursued by the operator and provides feedback where they believe that an alternative approach might be more productive. This is best achieved by demonstrating the success (ideally in the same market and at the same time) of alternative pricing and distribution strategies available and by reference to relative RevPAR performance over time,” says Croston.

“Particular pricing approaches may reflect brand level instructions to the general manager and his team and it may be that the asset manager will have to escalate certain pricing and distribution issues to regional and/or global level within the brand in order to effect productive changes in policy. The ability to communicate at this level and bring about positive results is another factor the owner should consider in their initial selection of the right asset management partner,” he says.

Ròya International director asset management Madhu Azad agrees that asset managers should be involved in pricing “more from a global point of view”.

Meanwhile, RMAL Hospitality PJSC, chief operating officer Walter Hall, warns: “The asset manager should not get involved in the day to day pricing of the hotel as micro management in this respect helps neither party. However, they should be very aware of the hotel’s performance in relation to its competitive set and be in a position to discuss the pricing strategy with the management team in relation to the hotel performance and where that hotel should be in comparison to its competitors”.

SUPPORTING OPERATORS

Hall makes an important point, as he draws attention to the all-important relationship between the owner and the operator.

He says “it is helpful if the asset manager is involved in the negotiation of the contract as the management agreement establishes the fundamental terms of the relationship between the parties involved”.

“However this is just a starting point,” continues Hall. “Open communication is essential with a mutual understanding of how success will be defined and measured. Regular meetings with the management team ensure that both parties are aligned. There will be certain conflicts aside from the financial performance of the hotel. The open ended check book other wise known as brand standards is always a debatable point as the asset manager is purely interested in the financial performance of the hotel where the operator is interested in having a showcase for future investors. Through sensible collaborative dialogue these issues can be dealt with sensibly.”

The experts were in general agreement that the asset manager should also support the operator in executing their contractual obligations.

“This needs to be done in a manner which is supportive to the operator and does not seek to interfere with or denigrate the operator’s contractual right to manage,” says Croston. “When the right type of relationship is constructed the operator should view the asset manager as an additional support to the GM in identifying ways and means of enhancing profitability, which the GM then executes against. It is very important that this is provided as advice and recommendations rather than instructions, so that the operator/GM can “buy-in” to the advice and execute accordingly”.

Nijhof adds: “One of their main priorities should be to create a good working and professional relationship with the management companies. Through the creation of this relationship they will have the ability to motivate the management company for better hotel performance and be able to push the envelope”.

SUPER GROWTH OR SUPERFLUOUS?

The asset managers make a good argument for their services and all predict further demand for their business, though growth may be slow.

Croston says that while he has seen some opportunities for asset management in Western Europe, the sector is still “embryonic” in the Middle East.

“The tendency is to use an “owner’s representative” – often an ex-GM employed directly by the owner to fulfill the role of asset manager. Ironically the decision to appoint a third party asset manager is clearly more difficult when earnings have fallen and the desire is to preserve as much cash as possible. This reality is likely to act as an inhibitor to a rapid growth of third party asset management in the region. Once individual owners become aware of the potential for enhanced performance, through dialogue with other owners who have experienced the benefits of third party asset management, the situation is likely to evolve quite quickly,” he explains.

Others are far more assertive on the important role of asset managers.

“Asset managers are not superfluous, rather they should become an integral part of the owner’s plans,” says Azad.

Hillier says that Vision Hospitality Asset Management gained 18 hotels in 2010, taking it to a total of 183 hotels under asset management.

“We strongly believe that the role of asset managers is growing on a month by month basis,” says Hillier. “If you study the relationship between hotel revenue, hotel profit, owners returns and operators fees you will see that an operator is not sufficiently motivated to drive the bottom line performance of an asset. Almost all operators monitor their performance by published RevPAR data. An owner cannot take RevPAR to the bank. Only profit and an experienced and knowledgeable asset manager will significantly add to the bottom line profit”.

And linking back to the operators, Nijhof has the last word.

“From a management company point of view, I only have one thing to say: The asset management companies are here to stay, so embrace them and do not become controversial. Give them access and interpret the management contract with a bit of flexibility.

“At the end of the day both the management company and the asset manager would like to achieve the same objective, which is the highest possible profit levels/ amounts”.