A view from Berlin: IHIF

Bench Events chairman Jonathan Worsley reports from the International Hotel Investment Forum and says that while the hotel industry is lacking confidence, it remains cautiously optimistic

If there was one resounding theme from the recent International Hotel Investment Forum (IHIF 2010) in Berlin, it’s good riddance to 2009, manage through 2010 and plan for better times ahead. Anyone who thinks the hotel investment industry will exit quickly from the global recession is mistaken.

As speaker Eric Danziger, CEO of Wyndham Hotel Group, said: “The market is still bad but less bad”.

There was certainly a feeling that we have reached the bottom and prospects can only look up. The focus for many speakers and panel discussions was one of cautious and conservative optimism for long-term prospects, where growth will be harder and need to be more focused and intelligent than ever before.

The theme “Charting the Course for Intelligent Growth” provided the impetus for attendees to share ideas and work together on helping the hotel industry bounce back in a measured and rational way. The days of greed and easily obtainable credit were placed firmly in the past — a view reflected in the 1600 delegates attending the event, including almost 500 who had not attended the conference the previous year.

We all learned a lot in Berlin, and while it was acknowledged things are not going to be easy, there was also acceptance of the challenges that lie ahead.

According to Simon Turner of Starwood Hotels & Resorts Worldwide: “It’s a cyclical industry…you have to keep plugging away and I think that if you have a longer-term view…if you stick to your basics and keep plugging along, you’re going to continue to see growth”.

Many of the attendees agreed that there was an underlying current of community spirit — a passion for the industry to dust itself down and square up to the realities of a new global economic market.

Who knows when?

In the 2010 European Hospitality Outlook Survey, DLA Piper asked more than 400 European hotel executives for their views on the recovery buzzword, and more than half of the respondents agreed that it will be at least 2012 before industry room rates return to the levels witnessed before the recession kicked in.

Interestingly, only 2% of respondents expect an upturn in fortunes this year. Last year, 37% predicted solid growth in 2010. Forecasts, as always, are all over the map and different surveys throw out different results, but there was general consensus from the conference that growth will come from a selection of BRIC (Brazil, Russia, India and China) and emerging countries rather than the traditional Western economies that have suffered from a massive banking crisis, out of control public spending and a debt burden that will put these countries in the slow growth lane for years to come.

Other highlights of the Outlook Survey include:
• 54% of respondents describe their 12-month outlook for the European hospitality industry as “bearish”, down from 84% in 2009. Bullishness is up from 5% to 27%.
• 68% of respondents view the economy and mid-market sectors as the most attractive opportunities for investors in the next 12 months.

The survey suggests that whilst we appreciate the predicament we find ourselves in, hotel investors are beginning to position their businesses for a recovery. Look at Starwood, where Turner pointed out that the business has cut US $1 billion off its debt, leaving a strong balance sheet.

During a panel session, Turner asked: “What are we going to do with the cash? Buy each other out, or hoard the money?” The panellists agreed that investment and growth should only be done if it makes a brand stronger (the long-term approach), and not just because it looks good on the balance sheet (the short-term approach).

Roger Bootle of Capital Economics (who predicted the recent boom years would come to an abrupt halt) agreed with the panellists and has urged businesses to proceed with caution. He highlighted that the issues responsible for the global economic crash have yet to be resolved, and until they are, money will be in short supply. And if money isn’t available, deals and developments will suffer accordingly.

Bootle’s presentation really hit home the reality of the situation we all face, not just in the hotel industry. The banking system is currently too busy licking its wounds and not interested in listening to external advice on how to transform itself from a sector based on greed, poor regulation and the pursuit of its own interests into something that would actually be able to cope with another financial disaster.

“The assumption that the system will come up with something that is good for all of us is pie in the sky,” commented Bootle, adding: “a radical reform of banking can be expected with banks being pretty poor providers of lending for some time to come. Increasing the regulation of financial service will add to the cost of borrowing”.

The lack of money means that corporate customers aren’t travelling as much, focusing on staying at home and safeguarding their jobs, whilst leisure travellers opt for shorter breaks, alternative holidays (such as camping) or not travelling at all in a bid to save money. This means that revenue per available room (RevPAR) has been badly hit and (despite some signs of occupancy level stabilisation), judging from the comments at IHIF, won’t reach previous highs for a few years. The figures opposite highlighting occupancy and RevPAR forecasts for 2010 were provided in a presentation by STR Global’s Mark Lomanno.

Hotel investment

Many other speakers at IHIF echoed Bootle’s comments and sentiments. The figures above, presented by Arthur de Haast of Jones Lang LaSalle Hotels, highlight just how much hotel investment has decreased in 2009 and reflects the reality of how great the impact of the financial crisis has been. Investors and lenders are still holding tightly onto their assets, which means that, on the whole, prices remain somewhat unrealistic.

According to Michael Fishbin from Ernst & Young: “Banks will rollover loans rather than call them in, or, to put it more succinctly, extend and pretend...a rolling loan gathers no loss”.

Whilst deals are few and far between, there are signs of renewed activity and as the pressure to sell mounts, some decent stock is coming onto the market with CBRE Hotels listing Grosvenor House in London for a reported £550 million and Christies selling the Park Inn Hyde Park for £35 million.

This is in no small part down to London outperforming the rest of Europe with RevPAR growth in 2009 and 2010.

However, the investment market will continue to remain difficult until there is an economic upturn, hotel/land owners find themselves in financial distress, or when the banks get to grips with their loan books and call in the administrators or undertake some form of financial restructuring.

Building brics and future growth plans

Whilst some developers and investors may try to avoid Europe and the Americas in the short-term, many people see the BRIC economies as the ones which offer the greatest potential for returns on investments. According to the DLA survey, respondents identified India (24%) and China (28%) as representing the best opportunities.

Karen Friebe of DLA said: “Some chains have focused on cutting their debt and are now reasonably well-positioned to grow through new market opportunities in BRIC countries — particularly China and India”.

James Goulding of Hong Kong’s LimeTree Consulting said his company was investing in beach front and coastal land in the Asia-Pacific, especially in places like Thailand, Vietnam, Cambodia, Australia and increasingly in Sri Lanka. Goulding said that with Asia home to more than two billion people, the Asian tourism industry will be less about westerners and more on intra-regional tourists — most of them within three hours flying time of the tourist destinations across the region and having greater spending power.

So where do we go? 2009 was tough and sent shockwaves across the industry, but it will be the actions that we take in 2010 that will really shape the hotel investment industry in the years to come. Now, more than ever, we need to take intelligent decisions, make intelligent investments, plan more intelligently for the future and, perhaps most important of all, think more intelligently.