HVS - 20 July 2017
Looking Back - Game Reserves & Sustainable TourismMost national parks in the late-19th to mid-20th centuries were established with the purpose of protecting wildlife and to preserve their natural habitat. Often it was the hunters who turned to conservation and led the way in establishing protective boundaries for depleting animal populations. As animal populations flourished there was an increasing interest from tourists to witness the wildlife in its natural habitat, which led to establishment of park rules and regulations. Game reserves found a way to sustain themselves while generating tourism revenue. While this seems straightforward, it is important to note that the right balance between tourism and conservation is the key for the successful national parks and is critical to sustainable tourism in the long run.In South Africa, The South Africa National Parks (SANParks) is the body responsible for managing the national parks in of which Kruger is the most popular game reserve. A quick comparison of SANParks annual report from 2004/05 and 2015/16 points out a steady increase in tourism over the decade.It is interesting to note that the annual increase in absolute visitation in room nights and units sold has increased steadily but not at an alarming pace. However, the tourism revenue has increased by more than 5 times (over 16% year-on-year increase) pointing out to an effective strategy that can be adopted by national parks and overall by the lodging industry. Visitation to national parks cannot be a volume driven approach and hence the rate strategy is very important.The co-existence of Kruger National Park and the adjacent Greater Kruger National Park - GKNP (privately owned game reserves) offers a fitting example of a public-private association upholding the principles and values of conservation, sustainable land use and local community development. It simultaneously ensures free movement of animals across boundaries increasing grazing area, extending their natural habitat and by extension the potential gene pool. The private game reserves strictly governed by park entry rules offer exclusivity and uncrowded safaris, night drives, walking safaris and more luxurious accommodation setting it apart the experience in lodges in Kruger National Park (KNP). Together GKNP and KNP offer a wide range of choices, price points and experiences for travellers and wild life enthusiasts visiting from across the globe. Other key success elements are the number of domestic visitors and the amount of repeat guests that sustain year-round revenue inflows.Parks Entry Traffic and FeesThe volume of visitors to game reserves has always been a topic of debate. Rules and regulations have only been made stricter in most cases to allow for conservation goals to precede tourism. A news headline maker was a law suit in India that provisionally banned all wildlife tourism in India in 2011. It was based on the claim that tourism was adversely impacting wildlife rendering many parks and lodges to suffer temporary closures. While it is necessary to maintain a balance, it is imperative to study the impact of tourism on wildlife before setting a ceiling or a blanket-ban. Tourism can actually contribute to the conservation, local community and long-term sustainability of the reserves. There is always a case to manage the visitation and still extract the highest yield from tourism activities. Kruger National Park has amongst the highest tourist visitation to a game reserve in Africa with over 1.7 million tourists every year. This may well change in a few years if demand increases beyond the endurable levels. KNP may actually have to control day visits to park or allow for guests which contribute more (spend more) to the park revenues.The entry fees to parks are also a major tool to control park visitation. Park fees across Africa can vary from US$10 to US$80 per day. Governments and park authorities must use park fees to effectively manage the visitation across peak and low months of the year to manage expected/target visitation. Government in Kenya for example aims to promote Masai Mara as a high-end tourist destination focussing on 'quality over quantity' and has to that effect increased park entrance fees every few years (currently at 80$ for non-resident foreign tourists) to keep the quantum of tourists in check. Park entry fee for residents, however, is relatively low as US$12.Accessibility is Key As travel patterns shift from one long holiday in a year towards multiple short trips, the accessibility of lodges (and the national park itself) from major cities or ports of entry is critical for the lodge industry. The availability of flights, maintenance of airstrips, national highways and motorable tracks within reserves are all crucial factors that impact seasonality in wild life destinations.Managing peaks and troughsMarketing the wildlife destinations as year-round destinations (where applicable) is essential to ensure a steady and sustainable operation. Seasonality trends have been reducing for most developing markets as accessibility improves, however, showcasing the best of all seasons and managing non-peak occupancy/income through engaging repeat guests and price sensitive markets is essential in sustaining operations financially.Human ResourcesStaffing in remote leisure locations without access to everyday city facilities is always a challenge. On site accommodation for a majority of the working staff is a very effective tool in retaining rangers and hospitality personnel. Additional facilities (recreational, canteen, creche) go a long way in ensuring low attrition. A 6-weeks on 2-weeks off policy for staff is the accepted norm at the better managed luxury wildlife lodges and ensuring work life balance is more than essential. From a development cost perspective, this means that in effect you are developing two hotels as the staff village is likely to accommodate an equal number of people as the guest accommodation, if not more, and will need access to resources such as a food store, water, electricity and recreational facilities of their own.Do you Stand Out?The experience is what drives the industry, it is not just the physical attributes of the accommodation/lodge; it is important to ensure a friendly yet non-intrusive service philosophy. The guest experience starts from and includes the interaction while booking, sense of arrival, quality of safari vehicles, number of guests per vehicle, surprise elements, 'wow' factors and customised experiences. Similarly, rangers and naturalists need to know their trade and have the right skill set to tell the story and educate/engage the guests. The ultimate question is whether you can deliver an unforgettable guest experience and customise experiences for families, couples, wild life enthusiasts to earn their loyalty, keep them coming back for more and turn them into active conservationists.Looking at the opportunity aheadTravel trends are, to an increasing degree, not being carved by successful middle-aged or the retired wealthy but by the millennials who are looking for an 'Authentic Experience' not just comfort and luxury. Luxury travel is no longer about pampering and spoiling yourself at a hotel with a heated pool and Egyptian cotton sheets, it's about 'experiencing' the world and moments that are social media worthy. The African safari experience and the excitement of spotting something natural and unexpected is unique and not available on every continent. The popularity of tourism in the plains of Serengeti, or the dotted landscape of Mara, the vastness of Kruger, the deltas and deserts of Botswana are examples of this trend. We anticipate this momentum to grow as tourism and connectivity in African wildlife destinations continues, presenting a strong investment potential for passionate developers/wildlife conservationists especially in upcoming wildlife destinations in Africa (reserves of Botswana, Namibia, Rwanda and Zambia among others).Bird's Eye ViewFinding the optimum mix of facilities and accommodation types/numbers to maximise revenues while matching the available seats on safari vehicles for an "uncrowded" game drive experience is crucial for lodges especially at a higher positioning. Structuring the Concessions/land leases is a very important element and must be investigated as it can be an important factor in determining profitability and return on investment.Factoring an incubation period is very important as these projects require strong funding and are usually not profitable in the initial years of operations.ConclusionEven as game reserves continue to fight the challenges of poaching and efforts are being made to ensure that tourism is secondary to conservation, it is important to educate and involve the travel community from across the globe into preserving the rich wildlife on the planet. Patronage from travellers can go a long way in ensuring the availability of resources for conservation, and hence, responsible tourism should be viewed as an important instrument in the preservation of wildlife reserves.Conservation & TourismAs per the WWF's Living Planet Report, the global populations of vertebrates have declined by 58% between 1970 and 2012 and without immediate intervention global wildlife populations could drop two-thirds by 2020. There are less than 98,000 giraffes left in the world (a 40% decline from the estimated 163,000 in 1985); the global rhino population is down to just 30,000 and the lion population is estimated to be less than 30,000 in Africa today. As per a recent study, the Cheetah population in the wild is down to just 7,100 from an estimated 14,000 in 1975 and a 100,000 a century ago. Most of these declines in populations have come about largely due to human activities and unless we invest into conservation we may well be the last generation to see some of this stunning wild life as it exists in the wild today.Air connectivity to and within Africa is improving and more people are now travelling within their countries in Africa. The African game drives present a truly rewarding holiday and are likely to remain in high demand in future. With practical development costs and financial structures, you can help preserve some of the planets most valuable resources and build a high value asset with a return on your investment in the long run.Lessons from Past ExperiencesGet there early - Understanding the micro-climate and ecosystem, identifying and procuring rights for conservation and lodge development can give you a head start.* Collaborate - Including the local community as both a partner and a beneficiary will go a long way in the success of the project.* Conservation is important for sustainable growth - At no point should the importance of conservation be secondary as it is the very basis for the game lodge industry and its sustainability.* Accessibility is important - All-year access to the parks and lodges and easy connectivity can open avenues for tapping into global tourism.* Experience over product - Game lodges and wild life safari experiences are driven by the overall guest experience and not just the physical attributes/comforts.* Managing peaks and troughs - To sustain lodge operations financially one must adopt marketing strategies to manage low season.* Service philosophy - The guest interaction upon arrival, in a restaurant, stories with rangers can create a wow factor for the guests and keep them coming back. * Get the business plan right - Building the right facilities mix and structuring the investment to account for a gestation period is important.* Everyone is a conservationist - The safari experience leaves every guest enthralled and aware of the need to preserve our planet's wildlife. The lodging industry needs to act as a facilitator to engage the guests and turn them into conservationists contributing to the cause.
HVS - 20 July 2017
Israel's hotel sector saw a relatively stable performance during 2016 with significant potential for future growth due to a rise in incoming tourism and expansion in the sharing economy, according to our latest report, Trends and Opportunities: Israel Hotel Market Overview.Despite the volatile geo-political situation in Israel and its neighbouring states, hotel occupancy in 2016 averaged 67%, with average rates and RevPAR remaining steady at US$202 and US$136.Israel, whose large number of business start-ups and booming technology sector make it the world's second most innovative country, saw significant GDP growth of 4% in 2016. The country is currently seeing large-scale improvements to its infrastructure, including a new airport in Eilat and a high-speed train link between Tel Aviv and Jerusalem.A further boost to international tourism in Israel came in 2012 with the signing of the EU Open Skies agreement, increasing the number of flights into Israel and lowering their cost.Hotel performance still varies from one region to another, and with relatively high room rates the country is still expensive to visit compared with other Mediterranean destinations. Israel's regions also have a pronounced divide between international and domestic markets, with resorts such as Eilat and the Dead Sea more reliant on the domestic market, while Jerusalem and Tel Aviv remain the favourite destinations for international visitors.However, the emergence of alternative accommodation in Israel, such as Airbnb, could become a game-changer for both locals and travellers to Israel with currently more Airbnb listings in Tel Aviv than hotel rooms.'There is potentially room for further growth in the budget segment, which would attract different types of travellers who can already benefit from lower air fares. This would have the effect of reducing overall average rates making the destination more affordable,' commented HVS analyst Lionel Schauder, co-author of the report.With the number of airlines adding flights and the country's hotel pipeline remaining strong, there remains real potential for substantial tourism growth, particularly if security concerns in the region can be overcome.'The first half of 2017 reached a record in terms of tourist arrivals with an increase of 26% over the same period last year,' added co-author Russell Kett, chairman, HVS London. 'The 3 million arrivals mark could conceivably be reached for the first time in the country's history by the end of the year.'
HVS - 12 July 2017
HIGHLIGHTSWe conducted a new survey this year, which analysed a number of different operating characteristics and, while some show a clear commonality across the participants, many vary according to the brand and are therefore heavily driven by the operators' strategy, were it to target the traditional long-stay market or, contrarily the short-stay market, bearing more characteristics with a hotel operation.Operators seem to get more creative with their product offering as they grow their portfolio. Recent additions to the sector showed that some have added more common spaces with communal dining areas at the expense of in-room kitchens, marketing them as a more affordable experience (or microapartments).The branded serviced apartment sector is getting more crowded. Almost every established hotel group now has an extended-stay product and new kids on the block are rapidly appearing such as Base in Switzerland and Cityden in Amsterdam. Other, more distribution-focused groups such as Saco and Bridgestreet are also rapidly increasing their portfolio of managed properties.Our analysis of Gross Operating Profit (GOP) margins revealed some impressive results. Nevertheless, the bandwith of GOP margins remains broad, confirming that some properties operate less profitably.The serviced apartment pipeline remains strong and focused on Western Europe. As brands get more traction, new projects increasingly also appear in secondary cities and new markets. Franchising aids expansion; however, only the larger companies have so far relied on this while many groups manage, own or lease their properties. Ascott recently announced its move to franchising in Europe with two contracts for future Citadines in France.Transaction evidence for serviced apartments exists but remains limited and often with little transparency in terms of the sales price. However, institutional investors are entering the sector, eyeing mostly brands with a solid track record.We would like to thank all of the survey participants for their generous input into the study. Your opinions and experiences are crucial in facilitating understanding of this thriving sector. We urge more operators in the sector to recognise the value of sharing data to enable serviced apartments to gain more attention from potential investors.Much has been announced in terms of product and brand expansion in the past year; we take a look at what has actually materialised.CREATIVE SPACE: INNOVATIONS, OPENINGS, ANNOUNCEMENTSBridgestreet opened its first Studyo serviced apartment in Paddington, London in March 2017. The affordable brand offers rooms fitted with the essentials and shared common spaces (including kitchen). Later this year, Bridgestreet will open its STOW property in Waterloo consisting of 20 prefabricated modular microapartments.Saco Apartments rolled out its first Locke properties in Aldgate, East London, in October 2016 and Edinburgh in June 2017. The design-led brand takes inspiration from the local neighbourhood and community.Visionapartments has become the first serviced apartment provider to accept payment in Bitcoins and, as such, follows a global trend of making the 'digital currency' more readily usable. Long-stay travellers (a month and more) can equally benefit from a new partnership with topbonus, Air Berlin's frequent flyer programme.Go Native has recently strengthened its position in the private rented sector (PRS) with a series of management contracts secured in London and Manchester. According to Guy Nixon, the brand's CEO, it is likely to see other serviced apartment brands move into this space, as PRS constitutes an enormous market and has many similarities to the operation of serviced apartments.NEW BRANDS AND CONCEPTSAdagio, a comparatively 'historic' aparthotel brand, revealed its new look with the opening of the Adagio Edinburgh Royal Mile in November 2016. Not only is the interior design of the units more contemporary, Adagio has also added an open lobby concept, demonstrating that it remains up to date with recent hotel trends.Ascott has announced its new lifestyle brand lyf (pronounced 'life') 'designed for the millennial market, including technopreneurs, start-ups and individuals from music, media and fashion'. To accurately cater for this segment, lyf properties will be managed by lyf Guards, millennials themselves, acting as community managers, city and food guides, bar keepers and problem solvers. The pipeline will focus on key gateway cities in Australia, France, Germany, Indonesia, Japan, Malaysia, Singapore, Thailand, China (where the pilot property will open in 2018) and the UK, aiming at opening 10,000 units by 2020.A new concept - Livinghotel - has been implemented in Visionapartments' newest additions to the portfolio. The apartments in Vienna and Vevey (both former hotels) will not have in-room kitchens, but will offer access to large public spaces with a shared kitchen where tenants can eat together; an interesting move, considering that an in-room kitchen was the original USP for the serviced apartment concept!SURVEY RESULTSDuring May 2017, HVS analysed data from 17 individual serviced apartment providers with a combined total of 17,150 units. The following paragraphs present our analysis of the aggregate data. Wherever there are sufficient data, we have provided more detailed or market-specific results.Unit MixThe room mix of a serviced apartment block plays a crucial role in optimising performance results. Some brands have therefore implemented certain ranges of apartment types to standardise their products  or to best adapt to their desired market segmentation . Others remain more flexible and adapt to the opportunity and the market. On average, our sample suggests that almost 60% of units are made up of studios and approximately a third are one-bedroom apartments, with the remainder falling into larger unit types. Units with more than two bedrooms are rare and only exist where the appropriate target market is present.The breakdown by country provides further insights.1 Residence Inn's typical room mix comprises 90% studios and 10%one-bedroom apartments (Source: Brand Factsheet)2 Adagio assumes approximately 60% Business and 40% Leisuretravellers (Source: Brand Factsheet)While the rooms mix of serviced apartments in France and Germany is broadly in line with the aggregate of the sample, Switzerland has a considerably larger proportion of studios, and serviced apartment units in the UK have a much smaller percentage of studios but a relatively high proportion of one- and two-bedroom apartments. Serviced apartments in the Netherlands (mostly Amsterdam) present the largest proportion of two+ bedroom units.Minimum Stay RequirementsServiced apartments were originally conceptualised for extended stay guests, often because of planning restrictions, but this has changed considerably and apartments have become popular with more transient guests as well, if local planning regulations permit it. It is therefore not surprising that more than 90% of our sample is reluctant to introduce minimum-stay requirements. The short-stay business also enables rooms to be filled between longer-staying tenants. Some providers impose a minimum stay of two nights over the weekend; one of our survey respondents, focused on the long-stay market, has a three-night minimum stay at all of its properties. Other, more specialised and upscale providers which cater to the traditional long-stay market require a minimum stay of 90 days.Average Length of Stay (ALOS)In relation to the minimum stay requirements, we also analysed the average length of stay.The very low minimum of often one night confirms that certain serviced apartments operate much like a hotel, whereas the maximum of just under two months is more in line with the extended stay market definition and expectations. The following graph displays the distribution of stays across different bands of overnights.The largest block is made up of stays of between four and nine nights; 75% of the respondents had an ALOS of fewer than 20 nights in 2015 and this proportion increased to 80% in 2016.It is apparent that vast differences exist in the average length of stay between different providers and locations. It is therefore difficult to conclude what dictates this key performance indicator in a serviced apartment unit. Our data show that certain brands put an increased focus on the short-stay market and therefore operate very much like a hotel. They run the risk of failing to benefit from the economic advantages arising from longer stays.StaffingOur data suggest that, on average, 17 guest-facing staff members (full-time employees - FTEs) were employed for every 100 serviced apartment units in 2016. No particular regional differences were apparent in our sample. Budget figures for 2017 indicate a slight increase in the average number of FTEs to 17.8. Staffing at serviced apartments can vary significantly; our sample covers a range of 2.3 to 32.1 staff members per 100 available units. These differences stem mainly from different operating models, such as having a more substantial food and beverage outlet (serving breakfast, for example), as well as a 24-hour manned front desk.Travel Agent CommissionA substantial portion of serviced apartments, especially smaller, non-branded units and apartments focused on the transient market, are highly dependent on travel agents (including online travel agents - OTAs). On average, the commissions paid by serviced apartments represent 7% of rooms revenue with the majority falling within the 6%-10% range (52%) and the 1%-5% range (37%). We found no meaningful correlation between the commission percentage and the average rate or size of the property, although it is likely that brands with a strong track record or substantial supply are able to negotiate lower percentage commissions than the somewhat punitive 15%-25% paid by some.Occupancy and Average Rate PerformanceThe following charts present an overview of the recent occupancy and average rate performance in the UK and the rest of Europe, as provided by our survey respondents 3 We recognise differences between our survey's data and those from STR's benchmarking services are be due to sample differences.Overall, the performance is encouraging in light of recent political events. The UK Regions and London recorded marginal growth in occupancy in 2016 and average rate growth of 3% and 4% for London and the regions, respectively. The devaluation of the pound in H2 2016 may well have helped the average rate, making the UK more affordable to European and US travellers. The outlook, however, remains more modest; flat growth is forecast for the regions and London's serviced apartments are aiming at another 3% growth in average rate in 2017. The UK's decision to leave the European Union could affect certain serviced apartments in the longer term, especially those focused on the corporate market, some of which may choose to move away from London eventually. However, it is too early to jump to such conclusions.Our European sample has shown less movement; a small drop in occupancy in 2016 was offset by some growth in average rate. The sentiment for 2017 seems to be positive with budgeted growth in both occupancy and average rate.TrevPARUnsurprisingly, the difference between TrevPAR  and RevPAR is marginal as many serviced apartment providers do not offer significant restaurant and bar options. The difference between TrevPAR and RevPAR (that is, ancillary spend) appears to be slightly higher for the serviced apartments on the Contnent. While we do not have complete figures for 2017, operators seem to budget for a larger spend on other income with a widening gap between RevPAR and TrevPAR. With a growing trend of adding open lobby spaces and flexible food and beverage concepts, this dynamic may well become more significant in the near future.4 TrevPAR represents total revenue per available room and, compared to RevPAR, can give a more complete view of a hotel's performance.GOP MarginConventional wisdom suggests that serviced apartments achieve a higher profit margin compared to hotels due to the reduced service offering and often the absence of any food and beverage outlets (and the associated labour cost). Our sample showcases a large range of GOP margins, from the high teens to the low eighties which is somewhat worrying (for the weaker performers). The median of the sample is approximately 60%; the trend in the first and fourth quartile indicate that the bandwith of margins is becoming smaller.Naturally, the GOP margin is positively correlated with average rate, RevPAR and the average length of stay. We found that the weighted average GOP margin for short stays (less than 5 nights) is 40%, 57% for stays between 5 and 15 nights and 78% for stays longer than 15 nights, confirming that longer stays make the operation more profitable. A negative correlation was found between the size of the units and staff members which is reasonable as labour costs can be a major expense in certain markets. Unsurprisingly, a strong positive correlation (~80%) was found between RevPAR and GOPPAR; that is, the higher the RevPAR the higher the GOPPAR.EUROPEAN PIPELINESome 10,000 serviced apartment units are currently in the pipeline in Europe, focused mostly on Western Europe. Eastern Europe, although becoming a hot spot for hotel investment, has so far benefitted little from the rise in serviced apartments. The majority (37%) of the pipeline should materialise in the remainder of 2017, 28% in 2018 and 25% in 2019. The fact that most projects we listed in last year's article can still be found in this year's update is reassuring and shows that little speculation exists when it comes to new developments. However, a considerable number of serviced apartments we were aware of last time experienced delays and are now scheduled to open at a later date. The size of the planned projects varies from as little as 18 units to blocks with 300 apartments; the average size is 120 units but the median of 80 suggests that the average might be skewed by larger projects.Unsurprisingly, the UK and Germany lead the pack, accounting for 41% and 32% of the pipeline, respectively. While London is the top spot for development in the UK (44% of the UK pipeline), Manchester, Edinburgh and other regional cities will also see openings in the near future. It appears that brands with a large presence in the UK are now venturing into Ireland, where development activity is heating up in Dublin. Germany presents a more balanced spread with Hamburg and Berlin (each at 14% of the German pipeline) representing the top destinations. Further, more hotel groups are jumping on the bandwagon to establish an apartment brand, such as Novum LikeApart by Germany's fast-growing Novum Hotel Group. Switzerland comes third in the country ranking and the pipeline is almost exclusively driven by Visionapartments, which is already by far the largest serviced apartment provider in the country, but new providers such as Base are also appearing.Residence Inn by Marriott currently has the largest pipeline with approximately a dozen hotel projects in Europe. The majority are franchised, allowing more rapid expansion, a contrast to the Marriott Executive Apartments where only a handful exist in Europe. Franchising can also help overcome certain expansion challenges in Europe, such as the fact that every European country has different planning laws (and potentially a different language and currency). With the recent Starwood takeover, Marriott also inherited the sustainability-friendly Element brand (currently only in Frankfurt and Amsterdam), but it remains unclear how its expansion will continue. Staycity is solidifying its position in Dublin, the UK and France while also expanding into Germany. Saco and Bridgestreet are now steadily bringing on stream their own concepts which were announced last year. Quest Apartment Hotels, an established serviced apartment provider in Australasia (recently backed by Ascott), is also eyeing a European expansion, focusing on primary and secondary cities in the UK, although no concrete project has been announced. Some of the more aparthotel-type brands are well suited for dual-brand projects, of which there are a few in the pipeline, especially if they are part of a larger brand portfolio, such as Residence Inn (Marriott) or Staybridge Suites (IHG).TRANSACTION AND INVESTMENT ACTIVITYThe following table outlines recent, single-asset, serviced apartment transactions in Europe over the last 18 months, which are available in the public domain.The investor landscape is represented by developers, operators and institutional investors. The initial hesitance from the last towards serviced apartments is fading, especially when collaborating with well established brands with a good track record, as was the case for the Adina transaction in Nuremberg at the beginning of the year. Nevertheless, there is still limited transparency as few of the sales prices (or even the buyer/seller in some cases) remain publicly disclosed. SACO Property Group has secured a number of development sites, such as the Zanzibar nightclub in Dublin, where it plans some 100 units, as well as the Whitworth site in Manchester, subject to a complete refurbishment. Cycas Hospitality continues its expansion with the acquisition of the Staybridge Suites properties it operates in Liverpool in February 2016 and Newcastle in October 2016. On a corporate level, Ares acquired a 70% stake in Go Native in December 2016 for an undisclosed sum. US headquartered Ares is a publicly traded company and, with $100 billion of assets under management, one of the largest alternative asset managers worldwide. Its investment focus lies on three groups: credit, private equity and real estate.CONCLUSIONThe serviced apartment sector is steadily finding its place in the investors' community as the pipeline is larger than ever and increasingly including secondary and tertiary markets as well as countries where the concept is somewhat novel. Survey results confirm that this product can be operated very efficiently with high GOP margins, a result of low staffing levels and few additional services. Nevertheless, more 'hotel' type services, such as open lobby or communal spaces, may become popular in the future. The high profitability, combined with the fact that many guests today recognise the benefit of apartments (in terms of size and pricing) bodes well for the continued growth of the serviced apartment sector.
HVS - 10 July 2017
The publication continues to serve owners as a reference for which operator has a strong presence in their home market and in potential future markets further ashore as well as key feeder markets across the region.
HVS - 10 July 2017
The following article looks at hotel supply, demand, and other factors impacting Richmond's hotel industry.State of the Market TourismFrommer's named Richmond the "Top Destination for Travel" worldwide in 2014, and the city earned the number three spot in Travel + Leisure's top places to visit last year. Some 7 million visitors to Richmond spent more than $2 billion in the city in 2015. The same year, tourism accounted for 22,800 jobs and salaries totaling $506 million. Richmond collected $64 million in tourism-related tax revenue in 2015, according to the U.S. Travel Association. The table below illustrates visitor spending across the greater Richmond area.The Richmond tourism market is active year-round, with an uptick in the spring and summer.Richmond's leisure and tourism assets include the Kings Dominion theme park, the Virginia Museum of Fine Arts, the Richmond Raceway Complex, the Lewis Ginter Botanical Garden, and the Virginia State Capitol. The graphic below illustrates Greater Richmond's top ten tourism attractions by number of visitors.Special events also bring in visitors during key weekends. Richmond hosts two major NASCAR weekends, including the Monster Energy NASCAR Cup Series and Xfinity Series races, which take place in April and September, respectively.Richmond's EconomyRichmond's 62.5-square-mile expanse sits at the center of the Richmond Metropolitan Statistical Area (MSA), which recorded a population of 1.3 million in 2016. The Richmond MSA's population is expected to grow by 15% between 2010 and 2020. Multiple transportation options are a key to the region's growth. More than half of the U.S. population is within a day's drive of Richmond. Three major interstate highways cross the area. AMTRAK provides weekday passenger rail service. CSX and Norfolk Southern operate commercial rail services in the MSA, along with more than 100 motor freight companies. The Port of Richmond also links the area to major shipping routes worldwide. Richmond International Airport (RIC) recently underwent a $280-million expansion, making it one of the most well-equipped airports on the east coast. Just a ten-minute drive from Downtown, RIC carries more than 3.5 million travelers and about 85 million pounds of cargo annually. The following table illustrates recent operating statistics for Richmond International Airport.EducationRichmond's five institutions of higher education include the University of Richmond, Virginia State University, Virginia Union University, Reynolds Community College, and Virginia Commonwealth University, whose student body totals more than 32,000. More than 60% of Richmond residents have attended college in some form, and more than 38% hold an Associate Degree or higher, which is above the national average. This highly educated labor pool allows businesses to easily find the necessary talent, especially in Richmond's target industries of technology and health and life sciences.Economic HealthRichmond's economy is supported by the five pillars of state and federal government; advanced manufacturing; finance, insurance and real estate (FIRE); transportation and logistics; and health and life sciences--an industry that is rapidly expanding in Richmond. The Virginia BioTechnology Research Park is a 34-acre commercial life sciences hub adjacent to the VCU Medical Center, home to over 60 public and private bioscience companies and research institutes including the Richmond-based Altria Group, the Virginia Office of the Chief Medical Examiner, and the United Network for Organ Sharing. The park's nine buildings house over 2000 scientists, engineers, and support staff. When compared to other MSAs with a population of approximately 1 to 2 million, Richmond ranked second for the total number of Fortune 500 companies, behind Silicon Valley's San Jose. Below is a list of the Fortune 1000 companies headquartered in Richmond, with Fortune 500 companies highlighted in bold.Commercial DemandCapital One Financial Corp. has bought a 36,000-square-foot building in Richmond's Shockoe Bottom neighborhood, with plans to turn the space into an incubator for local startups. Startup Virginia, which will run the new business incubator, recently created a new program to educate local aspiring entrepreneurs; its nine-week CO.STARTERS Virginia course launched in April 2017.Meeting & Group In fiscal 2015/16, over 174,500 room nights booked in the greater Richmond area were attributed to the meeting and group market. Destination Marketing Association International estimates the annual economic impact of meetings in greater Richmond to be at just under $119 million. Sports tournaments and groups accounted for 45% of meetings booked by the local Convention and Visitors Bureau. Major sporting events include the two NASCAR weekends at the Richmond International Speedway in April and September, the NCAA Atlantic 10 women's basketball tournament, and various youth sports, including lacrosse, soccer, swimming, and field hockey. Richmond's midway point on the eastern seaboard makes the city a popular destination for regional tournaments. Religious groups form the next largest source of group business for Richmond-area hotels, with Jehovah's Witness groups booking six full weekends during the traditionally slower summer months, bringing in 7,000 guests each weekend. According to Richmond Regional Tourism CEO Jack Berry, no large-scale changes are expected to affect the overall dynamics of meeting and group demand in Richmond in the near term.New Hotel SupplyAn 87-room Moxy Hotel, Marriott's innovative boutique brand, is under construction in Richmond. Shamin Hotels purchased the brick building at the corner of Fifth and Franklin Streets for $2.5 million from the Richmond Economic Development Authority, which had previously used the building as a downtown business incubator. Having launched the brand in Milan in September 2014, Marriott expects to have nearly 150 Moxy hotels operating around the world over the next decade. Standout features of the Moxy brand include a 24/7 lounge and bar, hookups for all kinds of phones and electronic devices, keyless-entry guestrooms, in-room screen-casting, elevators that double as photo booths, and motion-sensor lighting. Neil Amin, President and CEO of Shamin Hotels, expects this adaptive-reuse construction project to be completed by February 2018. Jack Berry noted the "the Moxy reinforces that [Richmond] is a high-profile destination. This shows we are among the who's who of cool destinations." Existing Hotel SupplyA total of 529 rooms have been added to the greater Richmond hotel inventory since 2014, which brings the total number of hotel rooms in the area to 10,056. Richmond-based Apple REIT was behind the December 2014 openings of two downtown hotels: the 135-room Courtyard by Marriott Richmond Downtown and the 75-room Residence Inn by Marriott Richmond Downtown. These two hotels are located within the First Freedom Center complex, a combined hotel and education center. The Quirk Hotel, a luxury, 75-room, boutique property in Richmond's thriving arts district, opened in the fall of 2015; it is owned by regional supermarket chain scion Ted Ukrop. Original works of art are featured in each guestroom of the exquisitely remodeled 1916, Italian Renaissance-style building, which was formerly a J.B. Mosby & Co. department store. In addition to the proposed Moxy Richmond, Shamin Hotels was also behind the early 2017 opening of the first dual-branded hotel in Downtown Richmond: the 100-room Homewood Suites by Hilton and 144-room Hampton Inn & Suites, housed in a 20-story former office tower at 700 E. Main Street. This dual-branded property is also home to a rooftop bar and restaurant, Kabana.Richmond's world-renowned Jefferson Hotel is one of only 51 hotels in the nation to earn a Forbes Five-Star, AAA Five-Diamond rating. The Jefferson recently underwent a three-year renovation project that refreshed the hotel's communal areas and public spaces. The hotel's room count was reduced by about 80 rooms, allowing for a 500-square-foot expansion for each of the remaining 180 rooms. The 410-room Marriott Richmond remains the largest hotel in Richmond (by number of rooms). Below is a breakdown of Richmond area hotels by STR chain scale.ConclusionOverall, Richmond's hotel market has recovered well and achieved growth since the last recession. The presence of federal and state government institutions in the city has helped stabilize the local economy and attract new businesses to the market. The cautious and calculated introduction of new hotels over the past few years has ensured the market is not over-supplied, and demand for room nights continues to expand, allowing for growth in average rate. The continued strength of the local business community and Richmond's diverse economic base, including some of the nation's largest companies, bodes well for future hotel development in the next few years. Figures are for 2015 or fiscal 2015-16. A visitor traveled at least 50 miles one-way to the region. Data from Richmond Region Tourism, U.S. Travel Association, Longwoods International and Virginia Tourism Corp. "New Marriott-branded boutique hotel - called Moxy - planned for downtown Richmond." Gregory J. Gilligan. Richmond Times-Dispatch. October 7, 2016.
HVS - 5 July 2017
Below are some key takeaways from the 2017 SEAHIS conference:Rise of the Millennials and the Experience EconomyHoteliers have been aware of the rise of the Millennials for a while now, and the shifts in consumer behaviour brought about by this generation. This particular topic was a recurrent theme throughout the summit as developers and owners have started thinking out of the box on how to provide a stronger sense of community within their premises, as well as integrating collaborative spaces in the design. Taking advantage of the Millennial trend, many companies are creating products focussed on "experiences", for instance, Rowsley Ltd. with the Hotel Football brand, centred strongly around football, with themed F&B outlets, conferences and locations near renowned stadiums such as Old Trafford Stadium, Manchester, England.Political UncertaintyWhile volatility due to terrorism and political instability has been an issue throughout the world, investors find that the Asian market has been able to bounce back strongly and the outlook remains positive. A panel dedicated to the turbulence in Thailand shed light on its effects on arrival figures and tourist confidence in the country as well as the consequences of the delayed political elections. With 11 crises from 2001 to 2015, Thailand has witnessed an average of one event every 16 months (although only 5 out of these 11 crises had a Thai origin). As a result of this political instability, Thailand has been missing out on the MICE market with event organizers preferring to set up in more secure locations in the region. Local resort destinations such as Phuket have proven to be more tolerant; the island is in fact becoming the focus point of new MICE facility development in the country. Despite these disturbances, overall hotel demand in Thailand has continued to grow, especially in the Midscale and Economy tiers as a higher "terrorism tolerance" can be seen both from within Thailand and on a global scale.Khin Sanda Win, founder of Sanda Hotel & Services from Myanmar shared her experiences on how the volatility resulting from the Junta closing the country and the sanctions from the United States led to her choices and where she is today. Local executives who chose to invest outside the region also explained their motivations for doing so and the opportunities seen to expand their brands internationally, while also exploring the difficulties and rationale for location. Some see this political uncertainty - particularly in the UK - as an opportunity to take advantage of the influx of tourists due to the weaker pound. Hostels strive to capture their share of the pie as well, with Montara Group expanding into the "poshtel" market through affordable accommodation in heritage buildings. The new generation of boutique hostels and "poshtels" also acknowledge the importance of community co-working and co-living spaces as well as including local experiences such as Muay Thai and Thai cooking classes. They share their common goal of educating the market on the new era of hostels, focussing on cleanliness and safety as well as recreating the guest experiences. Not wanting to be left behind, serviced apartment developers are also tapping into the trend by encouraging more of a "community feel" through regular functions and events to introduce new residences.OutlookAs local investors in South East Asia presented their plans for the future, we see a bright young generation of hoteliers looking further to develop their portfolios by diversifying into other hospitality-related programs such as co working spaces and the experience economy. Despite unsettling political events, the outlook remains optimistic, with many owners and investors finding innovative ways to stay ahead of trends and developing new revenue generating opportunities.
HVS - 4 July 2017
The Imperfect PastHotels today are associated with unmanageable levels of debt, often leading to an NPA (non-performing asset) classification. The following causes stand out:Supply glut - Over the last ten years, branded hotel supply in India grew from 39,285 rooms in 2006/07 to 1,13,622 rooms in 2015/16; at a CAGR of 12.5%;Weak demand patterns - For the same period, RevPAR saw a de-growth from Rs.5,049 in 2006/07 to Rs.3,512 in 2015/16; at a CAGR of -3.95%;Project cost overruns - while the first two are macro factors, there are a significant number of loans that have turned bad because of internal issues like inadequate planning and inefficient project execution, leading to project delays and cost overruns.The Future: A Perfect AntidoteIncreased scrutiny and tighter lending norms have brought the focus to merit-based lending for hotel projects. Our interaction with investors and lenders that are currently active in the hospitality space points to the following factors fueling their interest:Business risk has replaced construction risk;Muted supply growth in most markets;Perceived upcycle for hotel industry.Essentially, what this means is that selected lenders do share the general optimism surrounding hotels in India and are willing to listen to your point of view and win your business.Why Should One Refinance Existing Loans?Simply put, refinancing can help correct the dichotomy of financing a high capital, high gestation business (like hotels) with a short loan term. The refinancing exercise can improve cash flows and push back the cost of capital as well as principal repayment to a time when the business has stabilised. It can also free up valuable equity for investors who want to deploy funds into other uses rather than filling up the gap in debt service.I. To claim benefits without re-structuring:According to the circular released by RBI in 2014 on 'Framework for Revitalising Distressed Assets in the Economy - Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures', the holder of an existing loan can apply for seeking a longer repayment tenure with certain caveats. However, the exercise will be termed as refinancing and not as a restructuring exercise only if:It is a standard loan on the books of the bank;50% or more of the loan has been taken over by a new financial institution;The repayment period is in congruence with the project life cycle.Clearly, this means that the promoter/ borrower must approach a new bank to refinance the transaction and the existing lender cannot be of much assistance.II. For additional leveraging of assets:As explained above, reduced risk on existing hotel brings in additional bargaining power for the borrower. Based on the payment history, the borrower can enhance her/his existing loan. The reasons to seek this additional leveraging might be numerous:Funds could be used for general corporate purposes, as permitted by the lender;There might be bullet payments due and the hotel might not have sufficient cash flows to honour those;The borrower might be looking for a cash-out refinance to free up some funds for repair or renovation.The key is to put together a case which presents to the lender a transaction with high financial potential and relatively lower investment risk.III. For reduction in the cost of borrowing:The existing lender may not be willing to reduce the Rate of Interest (RoI) by lowering the spread on the Prime Lending Rate (PLR). However, another lender might value the diminished risk on the asset and offer a reduced RoI.Case StudyA project loan was sanctioned in the year 2012 on the following basis:Tenure: 15 yearsROI = Prime Lending Rate (PLR) + Applicable SpreadROI = 10.0% + 3.5% = 13.5%If we assume that the hotel became operational in 2015 and the PLR also dropped to 9.0%, the new RoI would be set to 12.5%. The borrower requests the existing lender to reduce the RoI by lowering the spread. On being denied that advantage, the borrower may approach another bank which might be more than willing to refinance the loan at PLR + 2.0%, i.e. at 11.0%.IV. For increasing the loan tenure: A stabilised hotel with consistent cash-flows may also be in the risk of defaulting on existing loan repayment. The key issue here is the relatively shorter amortisation tenure for an industry that is characterised by high capital stock and the cyclicality of business. Hotels in India have historically seen a door-to-door lending period of 10-12 years. Of this time period, 30% is typically spent in construction and another 30% in the ramping-up phase. A balance of 5-6 years is just not sufficient for interest and principal repayment.A stable hotel is a superior candidate for refinancing loans for a longer tenure. The dynamics of lending to an operational hotel are different because of its proven track record, which in turn reduces the risk outlook and makes the entire refinancing exercise possible. A twelve-to-fifteen-year refinance programme along with an additional disbursement (at higher LTV) can be procured at a reasonable rate of interest. This exercise may provide huge relief to the promoters who are not keen to infuse more equity to service shortfall in repayment.The following exhibit illustrates two scenarios for a 300-room hotel. This is the actual example of a refinance assignment recently undertaken by us. In the first case, the hotel may service the debt for the balance five years (from the original ten-year sanction) but, with a gross deficit of INR 176 crore, would need equity infusion by the promoter. In the second case, the promoter opted for a refinancing scenario with a longer tenure (15 years). We have illustrated the impact of this exercise without changing RoI or any key commercial term. Though the net outflow is higher to the bank, it frees up equity for the promoter and makes the asset debt-free in a reasonable time frame.V. Changes in the scope or specification of the project: There are cases when, after receiving debt capital, the scale or quality of the hotel project had to be altered. Clearly, a higher project cost will most often necessitate a larger debt capital outlay. In most cases, existing lenders are averse to enhancing loan amounts and, therefore, the need to approach a new lender for take-over and enhancement of the loan amount.Existing relationships with banks are a huge support system. Yet your regular banking network with years of relationships might be falling short of your expectations. They may be unable to lend enough or offer satisfactory terms. At the same time, many hotel projects are vying for the attention of a few willing lenders. In this rather unique credit market, three factors are essential to get ahead in the queue:A worthy project with rational cash flow projections;Excellent relationship with banks, based on mutual respect;High quality data presented proficiently.We believe that hotel development and acquisition financing needs specialised solutions and good projects certainly benefit from expert guidance. Over the next two years, we anticipate laws related to bankruptcy getting strengthened to penalise the laggards. If you are still deciding on the 'hows' and 'whens' of refinancing your existing loans, you are leaving money on the table and also treading on thin ice.
HVS - 4 July 2017
Branding, anchored by the management expertise and distribution power that operators bring to a hotel property, is becoming more and more critical. In the face of increasing competition, non-branded properties often perform at a discount to their branded peers due to lack of awareness and quality assurance. Running a hotel is no easy task and owners have a tendency to view operators' fees as unjustified for the value they deliver. It is essential that owner and operator align their interest from very early in the process and work towards a common goal, rather than start their long-term relationship from conflicting standpoints.In this fourth edition, we have captured close to one million existing and more than half a million pipeline rooms spread over 6,930 properties. This publication features major operators and we look forward to have more brands included in forthcoming editions. Our analysis covers 30 countries and territories in Asia-Pacific (excluding India) and 901 markets with existing hotels as well as 574 markets with proposed hotels.
HVS - 4 July 2017
Traditional resort spas cater to relaxation through a variety of services including aesthetics, facials, and massage. Some also offer salon services for hair and nails. Wellness-focused resort spas cater to diet and nutrition, spiritual counseling, and naturopathic health- and prevention-oriented services that extend beyond the scope of a traditional spa.This article looks at the scope of growth for traditional and wellness-focused spas worldwide, as well as the physical and operational keys to building stronger bottom-line performance.Asset Attributes Both traditional and wellness-focused spas are considered effective operating models that can add value to a guest's hotel or resort destination experience. Moreover, they add value to the hospitality operation itself. These models have begun to merge, presenting a new subdivision of resort and hotel wellness-driven spa environments.The nuances and specifications of these spas vary extensively, as each property has its own unique selling points, specialties, and demographic advantages. One thing hotel and resort wellness spas have in common is that they are at the epicenter of one of the fastest-growing spa and wellness market segments. They are also charted for tremendous rolling growth for their marketability and the increasing demand for experiential and leisure travel.Coupled with new tactics for aiding prevention, increasing happiness, and relieving stress, this new spa "type" brings immediate benefits along with long-term opportunities for client engagement and retention. The Millennial generation and its relatively younger, health savvy members are a prime demographic for the wellness-oriented hotel and travel space. However, the Baby-Boomer market still comes in strong seeking longevity, anti-aging, and lifestyle services to improve overall quality of life.RevenueTraditional spas generate cash-based revenue for elected services. These services are priced based on treatment type, quality, duration of service, and packages. Additional revenue sources for spa services can include a daily fee for spa facility use and auxiliary services, such as poolside massage or treatment provisions provided in other areas of the hotel and guest spaces.While spas are a cash revenue producer, wellness centers comprise a mix of cash, insurance, memberships, and payment plans. Diversifying spa modalities and treatment options can abundantly increase the scope of treatment revenue. This can be a unique advantage based on the goals of the property, client demand, and guest profiles. While luxury resort spa pricing can come at a premium, spa and wellness-center costs are equally competitive, making the move to diversify services more intriguing and ultimately more lucrative.Owners and operators need to have a wide view of the potential revenue generators for a hotel or resort's spa operation. This includes services, new modalities, and technology as well as retail sales. Whereas treatments and services are core to revenue performance, a well-performing retail segment can add meaningful value to a spa's bottom line with an average continuum percentage between 10% and 35% of a spa's annual revenue. Therefore, operators need to maximize efficiencies in the retail space to make it a high-acting outlet. This also requires sales talent and retail training that backs the process of creating higher product rotation and stronger retail sales growth.The following table charts the nearly $5 billion in overall growth of the global spa market between 2013 and 2015. As stated above, this growth has come in the form of new and innovative spa services, as well as product lines that appeal to a wide variety of wellness travelers, including corporate and leisure demand.Global Market GrowthAccording to the Global Wellness Institute's (GWI) 2017 Global Wellness Economy Monitor, the global spa market grew 2.3% between 2013 and 2015, resulting in a $98.6-billion market. Once considered an amenity (the pejorative term for what spas provide was "pampering"), spa facility revenues in 2015 were worth $77.6 billion globally, while revenue from supporting market sectors that enable spa businesses was reportedly worth $21 billion. These are big numbers, and they're moving upwards.Between 2013 and 2015 alone, the number of new spa locations increased worldwide from 105,591 to 121,595, adding more than 16,000 new spa facilities and over 230,000 individuals to its workforce. Spa segment growth is anticipated to flourish by an additional 6%, to be worth $103.9 billion by 2020.The GWI study also reports that global wellness tourism revenues grew to $563 billion, a striking 14% rise from 2013 to 2015. The U.S., the #1 wellness market in the world, represented $202 billion of these revenues, nearly triple that of the #2 market. The GWI estimates that wellness tourism will grow another 37.5%, to $808 billion, by 2020.Katherine Johnston, a GWI fellow and senior researcher, speaks of "a profound shift in the way people consume wellness." She refers to the "infusion" of wellness--in the form of fitness, nutrition, stress reduction, prevention, and other modes--into people's everyday life, as opposed to a luxury or indulgence taken on once or twice a year.Today's $3.72-trillion global wellness market presents new value propositions for hospitality and travel. "The spend on proactive healthy choices," says Johnston, "will continue to comprise a greater percentage of massive multi-trillion-dollar industries, [including] real estate, food and beverage, [and] travel."There is a profound upward shift in spa and wellness throughout the hospitality market. Data back this forecast and growth, and these features are no longer the counterpart of temporary trends. This momentum is escalating and long-lasting, led by increasing consumer awareness and higher experiential expectations.Investment Value The force of the spa and wellness industry's success in recent years has changed the way hoteliers approach the expanse of demand for spa and wellness offerings at their hotels and resorts. Hyatt's recent acquisition of wellness pioneer the Miraval Group illustrates the enthusiasm behind spa and wellness investment in hospitality."Hyatt's growth strategy includes a continued focus on growing wellness experiences and super serving the high-end traveler," said Angee Smithee, Senior Director of Spas for Hyatt. "For several years, wellness has been a key area for the company as it strives to continue to better care for and understand our guests. Our recent acquisition of Miraval Group provides a proof point for Hyatt's growth strategy, but more importantly, it is also a demonstration point around our core purpose of care. Hyatt is committed to increasing the lens through which we view our core customer desires," said Smithee, "and clearly the $420-billion wellness tourism market is one where we are well positioned to capitalize on those opportunities."The increase in wellness-related travel (transient and group) is leading hospitality giants like Hyatt to pursue spa and wellness models as a wise value-add to hotels and resorts. Corporate wellness programs and executive meetings have also diversified the growth in leisure and wellness tourism.New hotel developments, capital improvements, and spa and wellness program investments continue to rise in the global market. At the same time, there is powerful positioning bringing in stronger and swifter returns on investment. These investments and actions are driven by innovation and new technological options that back the design of substantial new program possibilities.ProfitabilityA hotel spa that caters to wellness can provide a strong competitive advantage for the leisure and wellness-minded customer, as well as corporate groups. However, achieving an operational flow alongside profitability often presents a challenge, making it crucial to understand industry benchmarks that support this evolving market.Some key factors to consider include the square footage of the spa and the allocated square footage for treatment rooms. It is also important to factor in the square footage of a property's fitness area(s) and the space created for wet and dry amenities. These can include steam rooms, showers, dry saunas, hot tub and pool space, and the spa's dedicated space for relaxation and retail.In addition to square footage, there are multiple scenarios pertaining to auxiliary services, hotel occupancy rates, and a property's unique selling points. Guestroom ratios based on seasonal or annual performance can represent upswings and dips in overall utilization. However, the ratios between internal and external marketing and promotions can also significantly sway the range and relationship of services between distinct departments. Done well, these assets can overlap, providing mutual support.Labor costs also affect profitability. Hence, operators must manage staffing logistics, employee satisfaction, and anticipate turnover to achieve a well-tooled operational structure and the most profit from their spa operation. Understanding how to leverage new tools, such as automation and technology, can foster more efficiency, reduce costs, and substantially increase spa revenue.Conclusion Spas and wellness-oriented operations have had a meteoric rise over the past several years and continue to make waves in the lodging industry, particularly at resorts. Hyatt and other hospitality companies highlight the shift toward wellness operations. While traditional performance methodologies still apply, the complexities surrounding the proper implementation and execution of the spa and wellness components remain keys to maximizing the asset's revenue potential. Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com
Key Takeaways: 2017 NYU International Hospitality Industry Investment Conference | By Chris Fernandes
HVS - 13 June 2017
A Call to ActionNo time was wasted skirting around discussion of the current White House administration, with conference chairman Jonathan M. Tisch's keynote discussion addressing the industry's primary concerns head on. Mr. Tisch initiated a call to action for industry participants to become actively engaged in the current political discourse, citing the threat of "A Second Lost Decade." Leading contributors to this threat include the United States' lagging infrastructure and outdated airports, compared to other leading nations, as well as foreign policy issues such as the widely publicized travel ban. Although travel statistics usually lag several months, Mr. Tisch cited anecdotal evidence that the perceived travel ban has already had an impact on foreign travel counts, and pointed to the fact that the United States ranks outside the top 20 in nations with the highest perceived "openness to travel." The largest contributor to this threat, however, is the Trump administration's proposed budget, which would eliminate all funding of Brand USA. Brand USA is the United States' travel marketing organization, with an estimated total economic impact of $8.9 billion per year and a $1.2-billion tax revenue contribution annually. Sentiments that the current policy propositions of Washington stand to hurt the travel industry were reverberated throughout morning sessions of day one. Katherine Lugar of AH&LA and Katie B. Fallon of Hilton also took strong positions on the importance of maintaining Brand USA's funding, while industry CEOs also spoke to the importance of infrastructure improvements going forward and the importance of maintaining that America is "open for business." Ms. Fallon, a former White House Director of Legislative Affairs and head of the White House Office of Legislative Affairs under President Obama, remained optimistic that Brand USA stands to regain its stake in the White House budget, citing it as a bipartisan issue with undisputed ROI in the face of the numerous partisan issues that presently challenge Washington.The State of the Current CycleAmanda W. Hite, President and CEO of STR, presented the latest available year-to-date data on the U.S. lodging industry, highlighting that the nation has experienced 86 consecutive months of positive RevPAR growth. In the trailing-twelve-month period through April 2017, nationwide RevPAR increased 3.1%. Demand growth outpaced supply increases only modestly through this period, however.Following up Ms. Hite's presentation was HVS's own President and CEO, Stephen Rushmore, Jr. Mr. Rushmore spoke to expectations in value trends, citing that no significant market-influenced appreciation in value is expected for several years. Thus, owners that are looking for the market to give them significant value appreciation will need a holding period of another eight to ten years. Rushmore noted "It's too risky to assume the market is going to give you upside, so owners need to think about ways to create value at the asset level." He also spoke on HVS's updated Hotel Valuation Index. Overall, U.S. hotel values are forecast to remain relatively flat in the three-year period from 2017 through 2019. Cities anticipated to register above-average value increases are largely the tertiary markets like Wilmington, DE, and Cleveland, OH, where supply growth has been restrained. Below-market performers are affected by oversupply, and that includes Portland, Seattle, and Denver. HVS forecasts overall U.S. RevPAR growth of 2.5% in both 2017 and 2018, followed by an increase of 2.8% in 2019.Following a U.S. overview, Mr. Rushmore reflected on the market climate in New York City, specifically, which is expected to register the largest increase in supply for the U.S. over the next few years. Although demand levels in New York City continue to grow in line with supply increases, average rates have declined in recent years given operators' response to increased competition. HVS predicts RevPAR recovery for the New York City market in late 2020. While supply continues to grow at record levels in select top-25 markets, such as New York, many secondary markets are poised for continued strengthening and RevPAR growth given solid demand fundamentals and a lack of similar supply increases.Throughout the conference, hotel operators were tasked to provide their prediction on the remaining length of the upcycle, but challenged that we may continue to experience a state of prolonged, modest recovery for many months to come. It remains difficult to point to any one indicator for industry performance, whether it be CPI, GDP, number of travelers, or the likes, though a consensus existed among many panelists that corporate profits maintain the strongest correlation to the performance of the hotel industry.The transaction market continues to be strong, and the select-service product remains at the forefront of investor interest. Although challenges exist in the current market for construction financing, debt remains available in large quantities and at competitive prices for existing assets, with lenders readily available to leverage stable, positive cash-flow hotels. Industry experts anticipate a return in select-service portfolio sales for 2017 and 2018, as these products continue to deliver high margins with relatively low volatility for investors. REITs are also expected to return to the buying market over the next 12 to 18 months, after a largely dormant period in 2016.Continued Brand ExpansionAs has become customary in recent years, NYU served as a platform for several new brand reveals. The continued expansion of brands is largely viewed by leaders as a mitigation strategy for the next down-cycle, which brands seeing the benefit of scale in diversifying risk. After its reveal of a new four-star brand (Scion) at last year's conference, Trump Hotels announced the addition of a three-star hotel chain, American Idea, to its portfolio. The brand is expected to fall into STR's midscale or upper-midscale chain segment, and is anticipated to target flag conversions for existing midscale hotels. Trump Hotels also announced Cleveland, Mississippi, as the first location of its Scion brand, with plans to announce four additional locations in the following months. InterContinental Hotels Group (IHG) also teased at the upcoming reveal of a new midscale brand, which will be formally announced at the company's upcoming IHG Americas Conference, to be held in Las Vegas June 19-21. The brand is expected to fill a void in the company's transient portfolio down the chain scale from the Holiday Inn Express, serving as a counterpart to the extended-stay Candlewood Suites. Wyndham Hotel Group and Hard Rock Hotels also announced brand expansions. Wyndham will launch a soft brand, Trademark Hotel Collection, following the success of other hotel companies in recent years, such as Marriott and Hilton. Hard Rock's brand, known as Reverb, will operate on a select-service platform. The brand is anticipated to play off the company's existing music-centric-themed properties.ConclusionThe tone of the event can be summed as comforting with modest, steady growth projected to continue. Although the growing supply pipeline remains at the forefront of concerns for front-line operators, industry leaders reiterated the importance of other more macro-oriented factors that could affect the health of the long-term landscape, particularly surrounding the current domestic and international political environments. Overall, however, the long-term industry outlook remains healthy.
HVS 2017 Hotel Cost Estimating Guide | By Warren G Feldman, Scott P. Rosenberg and Christine Shanahan
HVS - 13 June 2017
HVS Design and Jonathan Nehmer + Associates (JN+A) are proud to announce the completion of the 2017 Hotel Cost Estimating Guide. The Guide is a comprehensive listing of capital expenditure construction and FF&E costs for hotel renovations in the USA.
HVS - 8 June 2017
Legislative Issues Affecting the Hotel and Lodging IndustryWhile the LAS event focused on a few 'call to action' pieces, the industry is facing issues on a much wider scale than brought up at LAS or within this article. Issues that may or may not have been addressed during LAS but are important for industry professionals to be aware of are matters such as, immigration, illegal hotels, human trafficking, wages and benefits, per diem rates, resort fees, OTAs, tax reform, Americans with disabilities, and joint employer models. The following sections briefly describe only some of the main points and issues addressed at LAS this year.Online Booking ScamsAs technology advances and online travel bookings grow, the risk of running into a scam is reportedly high. Obviously, hoteliers and brands are doing the best they can to educate guests on how to successfully book their stay, while also protecting their reservations, information, and ultimately their experience at a property. It is understood that fraudulent websites and call centers posing as the hotel, without the consumer knowing, have led to the guest not being assigned to a room type they were expecting, their private information being stolen, a lost or cancelled reservation, the loss of a down payment, extra or hidden fees charged to their account, or forfeiting their reward loyalty points. The Stop Online Booking Scams Act would help protect these consumers from scams by prohibiting websites from pretending to be a certain hotel. With this bill, these websites would need to prominently display that they are not affiliated with the hotel in question and are in fact a third party. This would help to increase consumer confidence in the hotel industry's legitimate booking channels.Americans with Disabilities Act Drive-By LawsuitsThe widely supported Americans with Disabilities Act (ADA) has protected people with disabilities for over 25 years within the hotel industry. This act ensures that guests and employees alike are able to access and positively experience hotel facilities and amenities. In recent years, a growing number of lawsuits, reportedly over 11,000, have been filed under the ADA that target businesses. These so-called "drive-by" lawsuits occur when lawyers aim to extort settlements from business owners. In many instances, these suits are filed against hotels when neither the lawyer or their clients have ever been to the hotel. Legislation titled as the ADA Education and Reform Act aims to provide a defined period of time for the hotel owner to address an ADA violation before a lawsuit can move forward. Hotel business owners expressed their concerns on the Hill, asking Congress to act and help eliminate predatory litigation, while still protecting the ADA.Transparency for Commercial Short-Term RentalsHotels play a vital role in supporting local economies. In fact, the AHLA reported that over $170 billion is generated in federal, state, and local taxes, not including all the additional money and taxes being accumulated through guest spending within a community. As short-term rentals grow in popularity, commercial operators are being provided a platform to offer and run illegitimate and unregulated hotels. It has become a full-time business for many and the rentals are not being held to the same accountability and taxing measures as hotels. Guest safety is often compromised and the owners are able to dodge full tax payments. While no federal legislation presently exists, the industry is asking that a level playing field be provided and that the government ask for transparency from short-term rental companies regarding commercial activity on their platforms.In ClosingRegardless of one's role in the hospitality industry, or political affiliation, it is important to be knowledgeable of the issues affecting the industry. Being well versed in the potential effect of legislation and regulation on hotels is important when considering return on investment and value. We hope this article has shed light on how hoteliers and lodging professionals are hoping to shape our industry's future. We encourage all Americans that are associated with our industry to be informed about our issues and exercise our constitutional rights to "peaceably assemble" and "petition the Government."
HVS - 1 June 2017
Generating over US$ 200 Billion in revenue and providing over 40 million people a livelihood in 2016, the Travel & Tourism industry contributed almost 10% to the nation's Gross Domestic Product, earning India the 7th rank in the world, according to a recent report by the World Travel and Tourism Council (WTTC). The hospitality sector provides for a critical and inherent part of this contribution. The honorable Prime Minister has repeatedly spoken about Tourism being an intrinsic part of his vision from an economic growth perspective. Measures such as the 'Make in India' campaign and the provision for E-Visas to most of the planet were met with applause and cheer by stakeholders in the business. One almost began to believe that the Travel & Tourism industry had finally begun to receive the attention it rightfully deserved. In recent events, including the highly contentious highway liquor-ban and the just declared Goods & Services Tax announcement, it appears that while sectors such as aviation and tour operators are likely to be satisfied with the slabs extended to them, the Hospitality business has been extended the second fiddle treatment.Hotel projects tend to be highly capital intensive, necessitating laborious & tedious years from a construction standpoint, require extended gestation periods for breakeven and are frequently plagued by tribulations such as a very high cost of borrowing, relatively short repayment schedules as well as a maze of licenses, permits & approvals that are often marred with red-tapeism and bureaucracy. Hotel performances are easily and instantly impacted by altering socio-economic and political forces and the business is inherently cyclical from a performance stand-point to begin with. It would be fair to say that the brave hearts who choose to invest in this business aren't necessarily signing up for an easy ride.A couple of months ago, the courts, in their wisdom, imposed a blanket ban on vending of alcohol within 500-meters of all national and state highways. While the premise and the sentiment behind the argument that 'right to life must take precedence over the liberty to drink' was never in question and in fact makes eminent sense, the hope was that selling bottles of liquor from road-side "thekas" would be curbed in a bid to avoid drinking & driving accidents. The interpretation, however, has ended up impacting free standing restaurants & hotels as well, resultantly making hundreds of such establishments dry. The impact of this is not limited to loss of revenue by way of liquor sales. It has caused a ripple effect on consumer choices from a lodging standpoint - the primary generator of revenue for hotels. It's a classic case of the presence of alcohol not necessarily aiding in revenue enhancement, but its absence almost certainly harming the ability to attract guests. Hotel owners now must contend with an unexpected an unforeseen environment that has made an immediate and significant impact on their ability to earn revenue and it will not be surprising to see more Non-Performing Assets (NPAs) in the months ahead.The matter of GST is now slated to further add to the sector's woes. Hotels with a realized rate of Rs.5000 and above shall be required to levy 28% GST on the bill. The argument is that this level of spend points to 'luxury'. The hotel sector was traditionally marred with a variety of taxes and these varied by state. Luxury Tax ranged from 0% in certain parts of the nation to 20% of published tariff in others. Figure 1 below provides a comparison between the existing luxury tax rates across all the states to the GST rate of 28%. If one were to put aside other costs (such as service charge, municipal tax, Cess etc.), on an 'apples to apples' comparison, not a single state was levying such a high tax on its guests as will now be the case with this new tax regime.Figure 2 provides a quick comparison to the primary tax levied by prominent cities across the globe. Again, we are slated to be the most expensive.The basic premise of creating slabs for hotels (No tax below Rs.1000, 12% GST between 1001 & 2500 & 18% GST between 2501 and 5000) is flawed. India has about 120,000 organized or branded hotel rooms. Approximately 65% of this inventory averaged a realized room rate of Rs.5000 or more in 2016. Essentially, two-thirds of the branded supply in India is now left with no option but to brace itself for tough times ahead. Hotels may be forced to reduce their room rates in a bid to woo guests, who will most certainly not be keen on paying an extra 10% to 16% tax on their room rate. Besides, treating the need for a lodging accommodation (A roof on your head when you are traveling) as a luxury doesn't seem to make common sense. The government's inability to view the hotel sector as a provider of infrastructure rather a source of luxury is at the root of the issue. Over 70% of hotel accommodation is presently consumed by corporate or business travelers. Hotel rooms are thus a "need" and not a "luxury". Decisions such as these are matters of serious concern for the stakeholders in the hospitality business and one can only hope that the 'powers to be' shall realize that no good shall come out of breaking the camel's back.In conclusion, the hospitality sector has been displaying a steady growth in demand over the past eighteen months and the next three to five years are expected to witness an overall up-cycle. However, considering recent decisions by both the Judiciary & Executive branches of the nation, it almost seems like the hospitality sector will probably grow not because of the support provided by government, but in spite it.
HVS - 26 May 2017
Development StrategiesSince the end of the Great Recession, all asset classes have fared well, which, in turn, has led to a significant influx of new supply throughout the country, especially in submarkets of major metro areas. The challenge, particularly within the upper-upscale and luxury segments, is developing a hotel that goes beyond well-appointed guestrooms; travelers now want a hotel to entertain them, whether by featuring a chef-driven restaurant, offering a spa, or housing an art gallery. Although these types of add-ons to a development could be costly, the current low interest rates help to mitigate these extra expenses.Historically, brand requirements among the major hotel companies have largely prevented hoteliers from adapting to the needs of a specific market. However, with the recent success of lifestyle and independent boutique hotels throughout the country, the major hotel companies responded by introducing the "soft brand" concept. These hotels, including Marriott's Autograph Collection and the Curio - A Collection by Hilton, among others, allow hotel owners to develop a property that meets the needs specific of the market in which it will operate; in a sense, the handcuffs have been taken off regarding rigid brand requirements for the soft brands. Additionally, by allowing owners to customize development according to market demand instead of a checklist of brand requirements, more development options become available, such as the conversion of historic buildings to hotel use.The "soft brand" concept has also provided a stronger borrower profile to lenders, especially for construction loans. Debt funding can be difficult to obtain without the weight of a brand behind a hotel project, as lenders put substantial weight on the ability of national reservation systems and sales teams to deliver revenue streams that lead to consistent cash flow over a hold period. With the advent of soft brands, a symbiotic relationship between owners and lenders now exists; experienced hotel owners can design, develop, and operate a lifestyle or unique boutique hotel product that a specific market dictates, while possessing a brand license that is attractive to the capital markets.Hotel Values and Transaction ActivityIn a presentation of the Hotel Valuation Index (HVI), an annual study developed by HVS and STR, Stephen Rushmore, Jr., MAI, CRE, FRICS noted that values across most primary markets in the United States should rise through 2017. However, in 2018, with the significant increase in supply coming, overall values for the U.S. are forecast to decline for the first time since the Great Recession, although in a much less drastic fashion. Select cities, such as Atlanta, Dallas, Detroit, and San Francisco, should realize continued value gains through 2018 and 2019, while markets such as Austin, Los Angeles, San Antonio, and Seattle will need to wait until 2019 before values increase. Overall, average rates are forecast to be the driving force behind the projected growth in value in the coming years, as occupancy levels are anticipated to dip on the heels of increased supply and the end of the current cycle.The well-attended presentation by Suzanne Mellen, MAI, CRE, FRICS, ISHC on the status of transactions and capitalization rates painted a similar picture. While transaction activity has continued to fall by approximately 5% in the year-to-date period, values on a price-per-key basis have increased by 2%, confirming the initial results of the HVI. A limited number of portfolio sales thus far in 2017 represents one of the primary reasons for the recent dip in the number of transactions. The biggest decrease in transaction activity has occurred in New York City, which typically has the highest volume in terms of total dollar amount of any metropolitan area in the country. However, year-to-date data illustrate that New York City has been overshadowed by the San Francisco, Los Angeles, and Washington, D.C. metropolitan areas in both the number of transactions and the total dollar amount.Overall capitalization rates for full-service and luxury hotels rose by roughly 50 basis points in 2016, while the select-service, extended-stay, and limited-service segments realized less volatility in their rates. HVS expects cap rates will rise among all asset classes in 2017, and the recent data regarding REIT cap rates, which illustrate a 0.3% increase between the year-end 2016 and year-to-date through April 2017 cap rates, support this projection.Hotel Development FinancingAs the current cycle continues, the recipe for successful hotel development is ever-changing. With many of the top markets saturated with new supply, it has become increasingly difficult for lenders, developers, and other market participants to execute hotel deals. The consensus across the industry is that obtaining capital sources will become gradually more challenging, as the cost of capital will rise while leverage falls, and lenders must now "check every box" in terms of their due diligence. With so many current and proposed hotel deals involving new or pioneering brands targeting an evolving demand base, only time will tell which deals are proven to be successful. In some cases, the type of construction, such as modular construction, can make or break a deal given that the "time to market" can be much faster than traditional construction; however, the concept of modular construction itself is evolving, and thus may not be appropriate (or may not provide for time/cost savings) for unique upscale and luxury properties. Overall, as the supply pipeline across the U.S. continues to expand, and as the development cycle advances, obtaining creative sources of financing will be imperative for many projects to be developed successfully.OutlookAs echoed throughout the conference, hotel owners, lenders, and investors should feel a sense of optimism in the near term. While RevPAR growth is forecast to slow in most markets, RevPAR is projected to grow nonetheless, and the cost of money is expected to remain relatively low in the near term. Additionally, the 'Trump Bump" in the economy could be sustained by more favorable tax laws, looser lending standards, and reduced regulations. The overall future of the hospitality industry looks bright, despite the looming uncertainty that the influx of new supply, as well as several industry disruptors, such as Airbnb, could have on the sector.
HVS - 26 May 2017
IntroductionTuscany is a region in central Italy with an area of about 23,000 km2 and a population of about 3.8 million (2013). The regional capital and most populated town is Florence with approximately 370,000 inhabitants while it features a Western coastline of 400 kilometers overlooking the Ligurian Sea (in the North) and the Tyrrhenian Sea (in the Center and South).Tuscany is known for its landscapes, traditions, history, artistic legacy and its influence on high culture. It is regarded as the birthplace of the Italian Renaissance, the home of many influential in the history of art and science, and contains well-known museums such as the Uffizi and the Pitti Palace. Tuscany produces several well-known wines, including Chianti, Vino Nobile di Montepulciano, Morellino di Scansano and Brunello di Montalcino. Having a strong linguistic and cultural identity, it is sometimes considered "a nation within a nation".Seven Tuscan localities have been designated World Heritage Sites by UNESCO: the historic centre of Florence (1982); the historical centre of Siena (1995); the square of the Cathedral of Pisa (1987); the historical centre of San Gimignano (1990); the historical centre of Pienza (1996); the Val d'Orcia (2004), and the Medici Villas and Gardens (2013). Tuscany has over 120 protected nature reserves, making Tuscany and its capital Florence popular tourist destinations that attract millions of tourists every year.AccessibilityBy AirTuscany has two international airports, the "Galileo Galilei" in Pisa and the "Amerigo Vespucci" in Florence. Located only 80 kilometers apart, the Pisa airport is the larger of the two.Pisa airport is located right next to a dual carriageway linking to the A1 motorway around Florence for easy access to destinations in Tuscany. Pisa airport receives a larger amount of visitors as it handles all the intercontinental non-stop flights reaching Tuscany. Florence airport is the nearest airport for most locations in Tuscany. It is a small but modern airport located is very close to the A1 motorway around Florence. Smaller planes fly into Florence due to its location. Inspite of the presence of these two airports, Rome Fiumicino , continues to attract a high number of visitors due to the big amount of international flights that land there.By CarAir travelers can fly into Milan or Rome and get transportation from there to Tuscany, about a three-hour drive by car from either direction. Roads are generally in a good state of repair throughout Tuscany and the system is comprised of regional, provincial and state roads and motorways. While there are major cities in Tuscany, the majority of the area is made up of small towns and villages that are best traveled to by car.For travelers entering the country by car the main points of entry into Italy are the following:Mont Blanc tunnel from France at Chamonix which connects to the A5 for Turin and MilanGrand St. Bernard tunnel from Switzerland which also connects to the A5Brenner Pass from Austria which connects to the A22 to BolognaBy TrainThe main train stations are located in Grosseto, Pisa and Florence. These cities as well as Siena, Lucca, San Gimignano, Arezzo and Volterra can be easily reached by train. Some train stations also have a connecting bus service that reach some of the more rural areas.By SeaTuscany features a good port infrastructure with the main ports being the following: Livorno Harbour which has developed traffic with all the major ports in the world with the main destinations of the passenger turistic traffic being Sardinia, Corsica and Barcellona; the Port of Piombino in Livorno which provides many services for passengers and travellers who can take ferries towards Sardina, Corsica, Elba Island; and the Viareggio Harbour in Lucca. Additional smaller harbours or marinas are: Marina di San Rocco Port in Grosseto, Dockyard of Cinquale in Massa-Carra, Forte dei Marmi Touristic Pier in Lucca, Marina di Punta Ala in Grosseto and Port of Marina di Carrara in Massa Carra.Provinces and Attractions Tuscany is divided into ten provinces, each of them with its own distinctive identity: Arezzo, Pisa, Lucca, Prato, Siena, Livorno, Florence, Pistoia, Massa-Carrara, and Grossetto. At this point it should be mentioned that as the city of Florence constitutes a crucial market for the region of Tuscany that is fairly different from that of the countryside, we consider it necessary, for constistency purposes, to exclude from this article all data relevant to Florence and instead focus on the evolution of tourism in the countryside. Florence and its market pulse has been thoroughly presented in a past publication.Some of the most famous attractions of Tuscany scattered throughout its provinces are the following:Piazza del Duomo and Renaissance Florence;Pisa's Leaning Tower and Campo dei Miracoli;Cathedral of Santa Maria Assunta in Siena;Lucca's Centro Storico (Historic Center);The Towers of San Gimignano, Etruscan and Roman Volterra;The island of Elba;The village of Montepulciano;The Medici Villas and Gardens and the small hilltop town of Arezzo.EconomyThe standard of living is generally higher than the national average though there are certain zonal differences. The rural and mountain areas (Maremma hinterland, countryside around Siena, upper Apennines) are less advantageous than the areas with high industrial concentration and the best communications networks (lower Valdarno, Florence, Lucca, Versilia, Leghorn).Primary sectorAlthough its contibution is falling year by year, agriculture still adds significantly to the region's economy. Tuscany, because of Chianti, is widely known as one of the most prominent wine regions while olive cultivation and vegetable production is worthy of note. Its products have received numerous awards while they are often proteceted under the quality assurance labels DOP/DOC (Protected/Controled Designation of Origin).Secondary sectorThe secondary sector is often characterized as the backbone of the agriculture of Italian industry. Given the abundance of underground resources, the industrial sector is prevailed by mining, though the specific activity has sharply declined compared to a few decades ago. Other activities of the secondary sector include the metallurgical (Piombino, Leghorn, Florence, S. Giovanni Valdarno), engineering (Florence, Pontedera, Pistoia, Arezzo), chemical (Rosignano Solvay, Leghorn), textile (Prato, Florence, Empoli), food (Sansepolcro), printing (Florence), tanning (S. Croce sull'Arno) and glass, making (Empoli) sectors. Craft industries flourish all over this region (faiences, lace, rush-weaving, wrought-iron). Special attention must be drawn on the textile industry prevalent in Prato which is one of the leading centers for luxury fabric manufacture worldwide. Tuscany is home to some of the most world renowned fashion stylists operating in the apparel and leather industries who focus on the export of niche market and luxury products accounting for approximately one quarter of European production. Its turnover is calculated at over EUR25 billion while it is the third largest supplier of clothing after China and Japan.Tertiary sectorIn the services sector, banking commerce and tourism are of the utmost importance. With regards to tourism Tuscany represents one of the most established touristic markets in Europe and the third most visited region in Italy after Lompardia and Veneto. Most visits in Tuscany are derived from its laid back lifestyle and its "Dolce Vita" way of living which urges all travelers to enjoy the region's exemplary cuisine, its welcoming climate, its unique architecture and culture and its long history. The main tourist destinations by number of tourist arrivals are Florence, Pisa, Montecatini Terme, Castiglione della Pescaia and Grosseto. Additionally, the Chianti region, Versilia and Val d'Orcia are also internationally renowned and particularly popular spots among travelers.The rich cultural heritage of Florence from one hand and the idyllic scenery of rolling hills and cypress trees that dominates in the exquisite countryside on the other, has given rise to another important market, that of real estate and has established Tuscany as one of the most prominent second-home markets, especially for overseas buyers who took advantage of the favorable currency rate conditions that were created due to the economic crisis.Demand for Transient AccommodationPassenger movements at Tuscany's two major airports have been increasing at a good pace over the past 12-year period. The Compound Annual Growth Rate (CAGR) for the period was 5.3% for Pisa Airport and 5.1% for Florence Airport, whereas the total number of passengers moving at both airports grew in 2016 by 31.8% when compared to the respective number for 2009 (when a slump in traffic occurred due to the international economic downturn). International movements are more than domestic movements at a roughly 70:30 ratio for 2016 showcasing the international touristic nature of the region.Toscana Aeroporti S.p.A is the new management company for Florence and Pisa airports. It was created in June 2015 through the merger of Aeroporto di Firenze S.p.A. (the management company of the Florence Amerigo Vespucci airport) and Societa Aeroporto Toscano S.p.A. (the management company of the Galileo Galilei airport of Pisa).The merger between the two companies represents a crucial step towards the creation of a unified Tuscan airport system, in line with what is set forth in the National Airport Programme approved by the Italian Ministry of Transport. The synergy between the two airports, and the dovetailing of the global offer of the system, will make it possible to expand the number of destinations that can be reached and the airlines operating within them, via adaptation of the respective infrastructures.The long-term targets of Toscana Aeroporti, to achieve by 2029 are: 130 destinations all over the world, 45 airlines and 160 daily flights. The two airports will maintain their specific air traffic specialisation. The Vespucci airport will continue to develop business and leisure traffic through the full-service carriers, linking the main European airports. The Galilei airport will, on the other hand, continue to deal with the tourist traffic managed by low-cost carriers and cargo flights, also focusing on the development of intercontinental flights.Through the integration of these two companies, Tuscany will be able to rely on one of the most important airport systems in Italy, capable of acting as a driving force for the economic development of one of the best-known and best-loved regions in the world.Pisa International AirportFlorence International AirportBasic Visitation FactorsTuscany is one of the best known and most sought after tourist destinations in the world. With its diverse cultural heritage, landscape, environments and ecosystems, it can meet a wide range of needs and provide a variety of destinations to visitors such as art and historical locations, hills, mountain and beach resort destinations, spa and sport facilities. Today, tourism accounts for more than 10% of regional GDP and Tuscany is one of the areas that have coped better than others with the global economic crisis. Figure 3 depicts domestic and international visitation and accommodated bednights for the wider area of Tuscany's coutryside for the years 2008-15.It is evident that during the examined period Tuscany's (the data exlude the city of Florence but include the country side and the sea front destinations) has been visited almost equally both by domestic and international visitors who accounted for an average of 55.0% and 45% of total arrivals respectively. The high number of international visitation to the region and its slow but steady growth can be attributed to the fact that Tuscany is one of Italy's prime summer destinations for international travellers. Overall, the number of total arrivals at hotels in the region has experienced a CAGR of 1.1%. This upward trend was mainly driven by the steady increase in arrivals of international nature and at the same time the stagnation in growth of domestic tourism. During the examined period, international accommodated nights increased in absolute numbers by approximately 800,000 while domestic ones diminished by more than 100,000. The main cause of the stagnation in the performance of domestic tourism is the shrinkage of income that Italian citizens experienced as part of the economic crisis that affected most Mediterranean countries. Moreover, among Italians, Tuscany is considered as a rather expensive destination so they seek to visit alternative places. Nonetheless, during 2014-15, domestic figures in the region witnessed a steady cumulative growth of 7%. Albeit the lack of official data for 2016, press releases indicate an increase by 3% in total arrivals during the past year, an upward trend driven by the increase both in international and domestic arrivals by 3.5% and 2.5% respectively. For 2017, it is expected that tourists number will continue to rise while the percentage growth will be in line with 2016.Main Source CountriesTuscany had always been a popular desination among Americans who ranked first in arrivals for 2015 with almost 700,000 Americans visiting the region representing 7.6% of total arrivals in the region. During 2009-15, arrivals from USA have experienced a CAGR of 5.0% , the third biggest growth rate after China and Brazil with CAGRs of 27.5% and 12.3% respectively. Tuscany is increasingly becoming one of the favorite destinations for new emerging Chinsese social classes while in 2015 the number of Chinese travelers visiting the region almost reached 700,000, closely competing the American travelers. If Chinese tourism growth continued with the same pace in 2016, we expect to see China not only picking up the slack from other countries but also leaving them far behind. Moreover, by considering various factors such as the limited amount of direct flights connecting Italy to China, the inefficient management of the visas, the cultural and operational shortcomings of national and regional promotion have severely limited the incoming flows, the margins for future growth get even more remarkable. Another emerging market that is growing with a remarkable pace but did not manage to enter the top five source countries is that of Brazil with almost 140,000 incoming visitors in 2015. Other nationalities like Germany, France and United Kingdom have traditionally travelled to Tuscany and constitute some of the most significant source countries but given the stability problems in Europe, their growth rate is diminishing year by year.SeasonalityTuscany displays a typical seasonality pattern for a summer destination (the data exlude the city of Florence but include the country side and the sea front destinations), with high-season extending from May-June to September, shoulder season in April and October, and primarily city destination demand in the remaining months. Most hotels in the region that are situated outside a city have seasonal operations, and usually open in late-March or early-April and close for the season in late October. Recently there have been efforts from some hotels located in the wider region of Tuscany, and especially those in the coutryside that in most cases feature also wineyards into their premises, to expand the operation period by keeping their properties open for business by the end of December and try to take advantage of the influx of visitors arriving in Tuscany to celebrate Christmas holiday.The Significance of the Wine IndustryWine is believed to have been produced in Italy as far back as recorded history. Being one of the oldest wine regions in the world, it is often referred to as an "old world" wine region, in comparison to regions such as Australia or California that are often referred to as "new world" wine regions. This old-world region is believed to have origins in wine tracing back to between 4,000 and 3,000 B.C.There are 18 major wine producing regions in Italy and one of them is the region of Tuscany which features one of the most prominent sub-regions, that of Chianti. The region boasts several wine estates spead out from border to border making wine tourism one of the most important experiential activities for visitors, several of who are already characterized as oenophiles touring the area to expand their knowledge on the Italian wine industry. Since the wine business is not considered anymore a niche market, but a commonly used practice to increase revenues, a new model has been established, that of a winery with lodging facilities where new techinques are being implementing to attract and engage all types of tourists mainly by enhancing the local agricultural element while empasis is given on the production and tasting of wine. Some of the most common practices are: weddings which take place in wineries, themed guided tours which peak at the grape harvest season during which visitors enjoy mini courses on viniculture, wellness vacations featuring vinotherapy, spa treatments and thermal baths or the integration of cooking schools inside the wineries were they provide cooking lessons and wine tastings.The Significance of the Second Home MarketThe combination of a timeless charm and a favorable currency rate is what inspires a lot of overseas buyers to acquire a house in the countryside of Tuscany. Being one of the longest-established and best-known places to enjoy a sense of "dolce vita" it has some of the highest-priced country properties in the world. Buyers tend to choose among the following option: restore and old property (commonly referred as Casali) according to their taste and specifications (by keeping the exterior architecture in line with specific regulations), buy one ready-restored or one newly-built. At the same time prices tend to range accordingly; depending on the region and the state of repair they may start from EUR100,000 for a village house or EUR250,000 for a good-sized country housed in the mountainous areas north of Lucca and may reach one million for a restored farmhouse located in central Tuscany while in terms of value per m2 ,prices range from EUR3,500 per m2 to EUR10,000 per m2 for restored Villas and Casali depending upon the location. Buying a property in Tuscany remains a valuable investment decision as the market is considered to be strong and stable. The reasons for that is firstly the resilience that the specific market demonstrated towards the recent economic turbulence due to its priviliged location and its prestigious lifestyle but also the strict planning laws and architectural regulations enforced by authorities to protect the traditional and authentic character of the region.Hotel SupplyDuring 2008-15, although total hotel supply displayed CAGR of -0.4%, total room and total bed supply recorded growth of 0.3% for both categories. This means either that new properties built featured more rooms than the historical average or that a need for expansion of existing properties may has emerged. During the same period, five-star hotels increased significantly to 40 from 24 but it still remains the category with the lowest rate of market share. Four-star hotels also grew in number, whereas a drop was recorded in the number of three-, two-, and one-star hotels. The hotel market outside Florence features properties with relatively low average capacity of only 30 rooms and 65 beds mainly due to the fact that the market is dominated by small familly-owned-and-operated businesses. For 2015 the average five-star hotel featured 58 rooms and 133 beds while the same numbers for a four-star property were 54 and 120 respectively.Growth in the higher market segments is attributed to the increasing number of guests looking for higher quality services and at the same time to the awareness of the hoteliers that in order to stay competitive they ought to keep their properties in line with the new requirements that have emerged from the growing trend of the luxury segment in the region's market share. The five-star segment's growth can also be associated to the needs arising from the tourism outflow of affluent travelers from countries with booming economies (e.g. BRIC countries). Despite the growing demand for luxury properties and services the presence of upscale international brands is limited with only a few of them operating hotels. More specifically the only high end international brands who have penetrated Tuscany's countryside market are: Timbers Hotels and Resort with Castello di Casole, Rosewood Hotels and Resorts with Castiglion del Bosco and Belmond Hotels and Resorts with Villa San Michele. Various other hotels are affiliated with Marketing Consortiums (e.g. il Borro, Castello di Velona and Relais La Suvera, Borgo Santo Pietro with Small Luxury Hotels, Borgo San Felice and Villa Mangiacane with Relais & Chateaux, Castel Monastero and Castello del Nero with Leading Hotels of the World, Castello Banfi il Borgo with Tablet Hotels). Tuscan hotel industry did not suffer greatly during the crisis. Nonetheless it displayed a similar picture to other destinations, registering a supply fall from 2012 to 2013 - it is generally accepted the Italian crisis reached a peak in 2012.New Supply for high end propertiesToscana Resort Castelfalfi has just announced the opening a new 120-room five-star hotel. It is the newest five-star hotel being developed in Tuscany and will be built on the 1,092 hectare estate in Tuscany, located in an 800- year old Medieval village. The new five-star property is owned and managed by TUI AG, a multinational travel and tourism company which invested EUR23.5 million in the hotel that is also affiliated with Preferred Hotels and Resorts.Rosewood Castiglion del Bosco has granted the permits to further expand the Hotel by almost double its size (currently featuring 23 suites). The project is in its early development is expected to be concluded in 2019.Various other projects are in the process of obtaining the permits for development or construction of high-end resorts but no official announcement has been made yet.High-end Hotels PerformanceFigure 7 summarises the important operating characteristics of a sample of high-end hotels in the broader region of Tuscany's countryside with a focus on the following zone (Pisa, Siena and Firenze). The chart sets out the average occupancy, average room rate, and rooms revenue per available room (RevPAR) for a sample of 13 major upscale hotel properties representing in total 434 hotel rooms. For consistency reasons, despite the seasonal operation of the specific hotels (with a seasonal occupancy from April to October of approximately 65%) all occupancy percentages refer to 365 days of operation.Performance of the selected hotels in Tuscany throughout the examined period is showcasing a constant improvement. During the last four years occupancy and average rate witnessed a CAGR of 5% respectively leading to cumulative increase of the RevPAR by 33.3%. This phenomenon could be attibuted to the fact that, given the region's cosmopolitan character, executives are pushing for higher rates while at the same time occupancy is increasing as Tuscany gets introduced to new markets. The limited new additions to current supply also helps existing properties to achieve higher occupancy levels. Nonetheless, the region lacks a significant number of international hotel brands which could boost its upscale profile and recognition, thus leading to even higher levels of sales efficience and operating performance.ConclusionTuscany's coutryside is clearly a popular tourist destination because of its abundance in historical sightseeings, cultural attractions, art exhibits as well as many experiential activities. Local authorities, investors, tourism organizations and its citizens have managed to preserve througout the years the region's unique character, irrextricably connected to the landscape, the notion of "well-being", the natural resources and the history. Elegant yet authentic it attracts all sorts of leisure travellers from all over the world. By focusing on localhood, tourism professionals add value to the visitor's journey resulting in making them feel as temporary residents and achieving an unconditional engagement. This is the reason most of the visitors in Tuscany's countryside would consider it as the ideal second-home destination and consequently real estate market is booming. The region is currently constrained by its seasonality, which is a seven-month period that experiences a high-point in August. Albeit one of the most sought-after destinations for high-spending tourists there is almost trivial presence of international hotel brands mainly because of the difficulties facing in their effort to obtain necessary licenses and permits. Increased demand from the USA and BRIC, are expected to have a positive impact on international visitation to the area.
HVS - 17 May 2017
If you would like a detailed hotel performance data for all of Canada, STR offers their Canadian Hotel Review. The Canadian Hotel Review is available by annual subscription. For further Information, please contact: firstname.lastname@example.org or +1 (615) 824-8664 ext. 3504.HVS Canada performs major portfolio appraisals and single-asset consulting assignments and valuations from coast to coast. Our professional team is expert in appraisal work, feasibility studies, market studies, portfolio valutaion, strategic business planning, and litigation support. The managing partners in both the Toronto and Vancouver practices have their AACI, MAI, and MRICS/FRICS appraisal designations, and all associates are candidate members of the Appraisal Institue of Canada. HVS partners and associates are also members of the Appraisal Institutes of Alberta, New Brunswick, and Nova Scotia. Our bilingual associates enable us to work in French, which is of utmost importance in the provinces of Quebec and New Brunswick.
HVS - 16 May 2017
The term "modular construction" once conjured images of small construction trailers or antiquated mobile home clusters just off the highway--not the most alluring draw for high-end developers and top-tier hotel companies, nor for their gentried clientele. Today, however, the concept of modular construction has evolved, with developers across the U.S. adopting a modular approach to building 2- to 4-star select-service, full-service, and even boutique hotels. This article gives a brief overview of the evolution of modular construction, as well as the potential benefits and challenges in terms of cost, timelines, and financing when harnessing this method to build hotels.What is Modular Construction? What are Its Benefits?Modular construction involves a process in which individual "modules" or "pods" are constructed or pre-fabricated off site within a controlled plant environment. The modules are then fitted together in ways that allow the unit to function as a unified structure.Sounds simple. But it's important to understand how flexible modular construction is in practice. Developers can implement hotel bathroom pods or they can pre-fabricate an entire guestroom. Entire integrated, steel-framed hotel structures can be fabricated, transported, and stacked and sealed through the modular process on sites around the world. While modules are being built at the factory, developers are busy breaking ground, laying the foundation, and performing grading operations at the building site. When the modules are complete with all fixtures and fittings, they arrive at a fully prepared site for installation and final finishes. The method's many benefits include: Quality Control. Their assembly within these standardized facilities allows each module to achieve exact design specifications while meeting the same codes and standards as conventionally built structures. Efficiency. According to Palomar Modular Building, a full-service modular building contractor, modular construction can reduce build time by up to 50% versus the time it would take to complete a project with traditional construction methods.  Reduced Costs. By reducing the construction timeframe, developers can significantly reduce the costs of a build. In the past, transporting the modules was far more expensive than it is today, with a growing number of factory locations and improved techniques in packaging driving down costs. Stronger Structures. Structurally, today's modular buildings are designed to be both strong and durable. Each module is engineered independently and built to withstand the rigors of transportation and craning onto foundations. No more worries about loosely fitted walls coming apart in high winds. Other Benefits. In addition to quality management and time savings, modular construction provides other benefits to the developers. By building most of the structural elements in a factory, developers avoid site disruption and vehicular traffic at the site. Safety and security are improved, as well. Modular construction also steers clear of issues such as scarcity of materials, problems securing skilled labor in certain areas, and weather conditions--all of which that can adversely affect the construction process.Notable High-End Modular Hotels in the PipelineModern-day modular construction doesn't just apply to simple, budget hotel projects in rural or domestic markets. Here are some examples of high-end modular hotel construction on the rise.citizenM Hotel, ManhattanOn Bowery Street in Manhattan, citizenM, a boutique and "affordable luxury" hotel brand, and Brack Capital are constructing a 300-room boutique hotel utilizing pre-fabricated guestroom pods built in Poland and shipped to New York. When completed, the 20-story hotel will comprise 210 stacked and sealed modular components. For the Bowery project, modular construction has allowed for a significant reduction in the number of trips for delivery of materials through the congested streets of Manhattan, reducing construction time by several months. The hotel is scheduled to open mid-year 2017.AC Hotel by Marriott, Oklahoma CityFarther west, NewcrestImage, a privately owned hotel development and construction firm, is planning to build its first hotel in Oklahoma City using modular construction technology. The 142-room AC Hotel Bricktown will be one of the first modular constructions in the Oklahoma City hotel market. All rooms and finishes will follow Marriott's AC Hotel brand specifications, and the pre-fabricated construction will reportedly be indistinguishable from other AC branded hotels. The hotel's ground floor will be built using traditional construction. Dozens of pre-fabricated hotel rooms will then be lifted by crane and placed atop a one-story steel base forming the hotel's lobby floor. The hotel, one of many modular hotel construction projects in Marriott's development pipeline, is scheduled to open in the third quarter of 2017.Xanterra Parks Project, Yellowstone National ParkIn Wyoming, Xanterra Parks and Resorts is amid a 20-year, $134-million contract to rebuild and renovate lodging facilities throughout Yellowstone National Park. When all five buildings are completed, the Canyon Lodge & Cabins will comprise 410 guestrooms. Modular technology has allowed the developer to assemble the first three buildings in six months, a far shorter timeframe than stick-built construction, while avoiding seasonal challenges. This has led to lower labor costs and helped the project achieve LEED Silver certification.International Markets for Modular Hotel ConstructionModular construction is even more popular overseas. A couple of years ago, Hilton teamed with modular provider CIMC to build a Hampton Inn at Bristol Airport in the United Kingdom. This was Hilton's initial push to build multiple properties using a new, more comprehensive modular technique where entire guestrooms are factory-built then shipped globally.In October 2016, Hilton announced plans to build Africa's first modular hotel, the 280-room Hilton Garden Inn in the Ghanaian capital of Accra. Patrick Fitzgibbon, Senior Vice President of Development, EMEA, for Hilton Inc. recently spoke to the company's efforts at "pioneering hotel growth on the [African] continent" over the past half century. Mr. Fitzgibbon called the new hotel in Ghana "...a fast-paced construction solution that we feel has huge potential in Africa, with quicker returns for investors and a world-class hospitality experience for guests."  Similarly, InterContinental Hotels Group (IHG) recently launched its Innovation Hotel 2.0 concept, presenting ideas in sustainable tourism including the use of modular construction methods to reduce waste and energy consumption. Because these modules are factory-constructed, IHG believes it can deliver a more consistent product and include the use of environmentally friendly building materials and energy-saving technologies. In the age of sustainability and consumer awareness, this move could raise the company's profile among potential commercial and leisure guests.Potential ChallengesLaborThe use of pre-fabricated modular construction in markets where construction is predominately controlled by unionized labor can pose certain challenges. However, even in New York City where construction workers are heavily unionized, modular manufacturers are beginning to employ trade union members and work closely with local unions to ensure everyone is educated in the modular process. In cities like Boston and Chicago, other heavily unionized markets, developers need to find ways to include union participation early on to avoid any opposition that can eat into the efficacy of the process. Again, this can prove tricky, with shortened construction times needing to be balanced by more projects to keep work volume consistent. Developers of high-end residential and luxury hotels often find that highly detailed custom finishes are better left to skilled labor at the construction sites. Nevertheless, even high-end development projects have utilized combinations of pre-fabricated construction for the base building, with detailed finishes performed on site.CostsMeasuring the cost of modular versus traditional construction is far from simple. The cost is based on a per-unit basis, and the savings can run from minimal to many millions of dollars, depending on the hotel product type, design, location, presentation, and amenities. Given the efficiency of modular construction described above, some of the greatest savings are seen in areas with high labor costs. Furthermore, improved technology and quality control, reduced construction nuisances, and less general disruption in the neighborhood of the site can all contribute to overall cost savings. However, there is an element of give and take. A savvy developer must weigh these benefits against any potential risks such as cost of packing and shipping the modules to the construction site, unexpected delivery delays, and possible conflicts with permits and inspections.Financing and InsuranceFinally, is modular construction more difficult to finance or insure? Not necessarily, according to developers. Promise Buildings, a provider of modular structures, notes that as far as appraisal and financing institutions are concerned, these buildings are delivered as real properties.  Accordingly, banks, lending agencies, and insurance agencies can treat modular hotel buildings the same as typical hotels that are constructed from the ground up.ConclusionMore and more commercial contractors are adopting modular construction, and for good reasons. Given the higher quality control, faster built times, environmental benefits, and cost savings, it is no surprise that modular construction is gaining prevalence in the hotel industry. As major hotel companies like Marriott and IHG sign on for high-end luxury and boutique modular hotels, the industry should see these products come into even greater prominence in the near future.  "The Benefits of Modular Building." Palomar Modular Buildings. http://palomarmodular.com/industries/hotels-motels/. Retrieved April 13, 2017. Hilton Worldwide. "Hilton Builds for the Future at AHIF with Its First Modular Hotel in Africa." Newsroom.Hilton.com. Retrieved April 13, 2017. Promise Buildings. "Common Questions about Modular Hotels." www.promisebuildings.com. Retrieved April 13, 2017. Republished from the Hotel Business Review with permission from www.HotelExecutive.com
HVS - 15 May 2017
Malaysia - Country OverviewLocated in Southeast Asia, Malaysia comprises 13 states and three federal territories covering a total area of 329,847 square kilometres across Peninsula Malaysia and East Malaysia.Malaysia's population is approximately 31.7 million (2016 government estimate) with 60% being of Malay heritage. The country's diversity is reflected in the share of different ethnic groups, such as Chinese, Indians and Indigenous, in its total population.Kuala Lumpur, the administrative and commercial capital of Malaysia, is rapidly developing its service sector (banking and finance), IT and high-tech manufacturing industry to diversify from its historically strong oil and gas industry.With significant efforts made to attract multinational companies to Kuala Lumpur resulting in newly generated job opportunities, Greater Kuala Lumpur's (or Klang Valley's) population is expected to grow from 7.2 million in 2016 to 10 million in 2020.Economy HighlightsFrom 2012 to 2016, Malaysia recorded a Compound Annual Growth Rate (CAGR) of 5% in real Gross Domestic Product (GDP) growth.The expansion of the service sector, construction and manufacturing have strongly contributed to Malaysia's GDP growth in 2014.Since 2015, Malaysia's economy has suffered from the decline in gas prices, being one of the biggest producers of liquified gas worldwide.2016 was overall a difficult year for the world, as well as for Malaysia, which was impacted by weaker exports of electronic and electrical goods. Real GDP growth declined to 4.2% from the 5.0% previously achieved in 2015.EmploymentImpacted by the stalling economic growth, unemployment rose from 2.9% in 2014 to 3.5% in 2016.Malaysia's implementation of the new minimum wage (+11% for workers in Peninsula Malaysia and +15% in Sabah, Sarawak and Labuan) from July 2016 onwards has raised some profitability concerns among various businesses as it could trigger less employment creation in the future.International RelationsMalaysia's international relations are expected to strengthen in 2017 to 2021.With joint infrastructure projects between Malaysia and Singapore and 14 Memorandums of Understanding signed between China and Malaysia with investments worth MYR144 billion, Malaysia's construction, agriculture, education and finance sectors are expected to grow rapidly.OutlookDue to weak world trade growth and the country's dependence on exports to the USA and China, Malaysia's economy is expected to grow its real GDP by 4.4% in 2017, a minor improvement compared to 2016 supported by its agriculture and service sector.Adaptive monetary and fiscal policies during the period from 2017 to 2021 could strengthen private consumption, which will be the key force for GDP growth.InfrastructureUpcoming DevelopmentsMalaysia has extensive plans to improve its accessibility. The proposed infrastructure projects highlighted below will not only improve the country's accessibility but will also strengthen Malaysia's economy.Tourism Market OverviewToday, Malaysia is the 12th most-visited country in the world and the third most-visited country in Asia after China and Thailand. The Malaysian government has made great efforts to ensure that tourism plays an important role in the country's economy. In 2016, travel and tourism directly contributed MYR58 billion to the country's GDP equaling 4.7% of total GDP, according to the World Travel and Tourism Council's economic forecast.International ArrivalsTourism Malaysia's extensively promoted campaign 'Visit Malaysia' positively contributed to the country's 2014 international arrival numbers, which touched a record at 21.7 million. Impacted by the repercussions of two Malaysia Airlines incidents as well as severe haze observed towards the end of 2014, a 6% decrease was recorded in international tourist arrivals in 2015.In 2016, however, foreign arrivals recorded an upward trend and a healthy rebound for the overall Malaysian market was observed as figures for international arrivals closed at 26.7 million, a 4% increase from 2015.Tourist ReceiptsIn line with a decrease in total tourist arrivals, tourist expenditure dropped by 4% in 2015 to reach MYR69 billion.Despite the decrease in total tourist receipts in 2015, average per capita expenditure increased by 2.4% to reach MYR2,687.While the average length of stay decreased significantly by 16.7% from 6.6 nights (2014) to 5.5 nights (2015), average spent per diem increased by 26% to reach MYR489 in 2015.For the future, Tourism Malaysia has ambitious plans with a target of MYR114 billion in tourist receipts for 2017 and MYR168 billion for 2020. A total growth in tourist receipts of 143% from 2015 to 2020 is being aimed for.Asian countries account for 92% of international arrivalsStrongest CAGR from 2009-2016: China with 10%, reaching 2 million arrivals in 2016Changes to Top 10 international arrivals:Highest 2016 Y-o-Y increase: Thailand with 26.4%Highest 2016 Y-o-Y decrease: Philippines with 18.6%, decrease for the second consecutive yearUK is the strongest European country with 415,000 arrivalsSaudi Arabia is the strongest Middle Eastern country with 0.5% share and 22.8% increase from 2015 to 20162020 Tourism TargetWelcoming 36 million international passengers (expected 35% increase from 2016)Increasing arrivals from China to 8 million, a 300% increase from 2016, with support from Alibaba's Fliggy OTA, which has recently integrated Malaysian travel and tourism products to its e-commerce platformDomestic Arrivals and Tourism PromotionDomestic tourism dominates Malaysia's hotel market with 63.2% of total arrivals to hotels in Malaysia in 2015.Five new domestic tourist information offices will replace the 14 recently closed Tourism Malaysia offices to better promote Malaysia amongst domestic tourists as well as to avoid job replication with state owned agencies.Also, following the discontinuation of Malaysian Airline flights to Perth, New York, Stockholm and Johannesburg, Tourism Malaysia will shut-down these offices in 2017. However, plans to open new offices in stronger source markets such as China, India and European key cities are under review.Hotel PerformanceFrom 2011 to 2013, demand for Malaysian hotels remained stable despite the continued increase in tourism accommodation*. In 2014, however, the additional supply (+978 hotels) with 52,500 rooms (25% growth) could not be absorbed by the rising number of incoming tourists leading to a simultaneous drop in hotel occupancy and average rate.The repercussions of the significant addition to supply combined with the Malaysian Airlines incidents impacted Malaysia's hotel performances even further in 2015 leading to a RevPAR decrease of 6%. While rate continued to decrease for the third consecutive year in 2016, occupancy gained 2 percentage points.Malaysia's hotel performances had a solid start into the new year. With occupancy increasing by 2 points and ADR recording 4.8% increase, RevPAR in Malaysia was up 7% as of March 2017.Hotel SupplyFrom 2015 to 2016, hotel supply in Malaysia increased by 18 classified hotels to reach 4,817 hotels and 309,369 rooms.To accommodate the estimated growth in tourist demand projected for the upcoming years (as highlighted in Figure 3), a significant number of hotel projects is expected to enter the market.As of April 2017, an addition of 98 hotels, with 25,537 classified rooms have been publicly announced for the period of 2017-2021.Classified Hotel Supply by SegmentMalaysia's upcoming hotel supply will re-shape the country's tourism accommodation.Upscale and Upper Upscale hotels entering from 2017-2021 will account for 46% of total room supply, while this segment will dominate the new room supply with 53%.While luxury supply shows an equal distribution amongst total hotels and rooms entering, we noted that the classified budget and economy segments are basically non-existent in Malaysia's hotel pipeline from 2017 to 2021.Setting the focus on hotel openings by location, Malaysia's key business and leisure cities, as highlighted below, account for 55% of total future hotel supply and 54% of new room supply.Lifestyle hotels and the need to adapt to the Millennial's travel behaviorThe young hotel guest wants to enjoy local culture, design and stay connected - with high expectations on service quality. The millennial generation's travel behavior and how hotel chains need to adapt to the new trends has been discussed at every major hotel conference.The population of Millennials is surpassing that of the Baby Boomers. It has been estimated that by 2020 Millennials will comprise half of the global work force.When it comes to choosing hotels, an underlying difference between the age groups is their spending power. While Baby Boomers allocate a higher share of their travel budget to the hotel, Millennials tend to spend less and look for accommodation offering great value for money. With Millennials' increasing curiosity and enthusiasm for overseas travel despite their limited spending power, hotels face a new task to attract young travellers.Millennials are greatly drawn to the idea of a unique and distinctive experience. For this young generation, travel implies the possibility to engage with local culture, learn about the history of a place and sample local food and drink.Convenience and the ease of booking is a top priority for this segment of travellers. The rising number of mobile applications available to manage hotel reservations or to proceed with online check-in has changed the hospitality tech-world in the past three years. Applications centralising hotel bookings and transportation have especially gained in popularity.Adapting to Millennials' expectations and today's worldOver the past 20 years, lifestyle brands such as W, Edition, Autograph and Indigo were created to cater to the rapid-changing travel behavior and guest demands. These hotel brands have seen great success and solid growth rates across the globe. Their success, together with the need to adapt to a changing consumer economy, travellers' behavior and the trend towards personalised as well as sustainable travel, led to the launch of several new lifestyle brands in 2016.Important trends when developing hotels in MalaysiaAdjustment to country: To cater to both domestic and international markets, international chains adapt hotel facilities to the local culture of the country to generate better results.Choice of hotel brand: With Malaysia's dense existing supply and upcoming projects, the affiliation, the classification and the design of the hotel need to be carefully selected to cater to the right customer.Value for Money: Limited spending power does not necessarily mean lower expectations. Millennials in particular look for good quality hotels at a low cost.Lifestyle brands: International operators feel that lifestyle-branded products will perform better in locations such as Kuala Lumpur, Penang and Malacca.Quality of service: While high-tech lobbies and automated check-in counters are decorating hotel entrances, the presence of staff overseeing the check-in process and assisting when needed is still highly appreciated.Experience: It is not only about a good night's sleep. Millennials are looking for a memorable experience influenced by decoration, architecture and photogenic views or objects.Moreover, other generations, too, are placing increasing value on distinct experiences and actively seek them when travelling.InvestmentBetween the period of 2012 and 2016, hotel investment in Malaysia (publicly available) peaked in 2014 recording a transaction volume of more than MYR1,300 million. Over the analysed period, the majority of hotel investments was transacted by foreign buyers, with the majority of sales occurring in the capital Kuala Lumpur.The most recent noteworthy transaction:The Renaissance Kuala LumpurTransaction price of MYR765 millionMYR840,660 per keySold to Canali Logistics Pte Ltd.Aloft Kuala Lumpur SentralTransaction price of MYR419 millionMYR868,670 per keySold to Sino Prosper Group HoldingsOutlookMalaysia's tourism target for 2020 is ambitious with the goal of welcoming 36 million international arrivals and generating MYR168 billion in tourist receipts, considering a recorded CAGR of 1.6% of international tourist arrivals from 2012 to 2016.With the younger generation seeking cultural happenings and unique adventures, Malaysia can offer a unique experience from eco-tourism in rainforest reserves to heritage sites and upcoming theme parks such as the 20th Century Fox Park in Genting or the Ubisoft in Kuala Lumpur. While Kuala Lumpur and its surrounding Klang Valley, Kota Kinabalu, Penang and Malacca are expected to mature with numerous hotels currently in the pipeline, Ipoh should not be overlooked.Despite low rates and sporadic hotel development to date, Ipoh shows potential for Millennials travelling from Penang to Kuala Lumpur. With its revamped shophouses, new cafes and heritage buildings, Ipoh seems to be a city that millennial travellers are looking for: a cultural experience, unique architecture and good value for money.Going forth, we expect the tourism industry in Malaysia to grow albeit at a slower pace. Existing hotels will feel the pressure from incoming supply in the next three years; however, we believe Malaysia has great potential to further develop its tourism industry, especially amongst millennials looking for new, more affordable lifestyle concepts.
HVS - 12 May 2017
Soft Brands Versus Hard BrandsSoft brands represent the movement of brand affiliations into the independent hotel market, bringing distinctive properties into an affiliation that expands the franchise company's audience while nurturing the creation of unique property-specific experiences for guests. By associating an independent property with a soft brand, the hotel is able to benefit from the expansive distribution channels and marketing reach associated with a brand. At the same time, the soft brand allows the hotel the freedom to define and shape the product offering. For the traditional hard-branded hotel, the core selling feature is the highly controlled, uniform guest experience across every hotel with the same name. In contrast, the soft brand allows the hotel to be special, characterized by the geography and culture of the region in which it is situated and the history of its own creation; only service standards and soft touches are maintained across all properties stamped with the same soft brand. In short, the soft brand creates a synergistic relationship between the service standards associated with a brand and the character of an independent hotel.Through soft brands, franchise companies are expanding their product range and moving into previously untapped markets without compromising the long-established service standards that they have become expert at efficiently implementing and enforcing across multiple locations. But a growing shift in consumer needs is also driving the increasing popularity of soft brands. Soft brands are able to tap into the desire of consumers wanting a personal experience that they can document and relate to others through social media. At the same time, these same consumers prefer the ease of access and convenience that brand distribution channels and loyalty programs offer, along with the assurance of dependable service standards that a brand brings to a hotel stay.Soft brands have become a hot commodity around the world as franchise companies aggressively move to stake territory in the independent hotel market where they previously had little presence, and expand into markets that have become saturated with traditional brands. In Canada, however, the movement towards soft brands has been relatively slow to get going. Currently, only 2,200 existing hotel rooms in the country belong to soft brands. The Canadian lodging market in many ways represents an untapped opportunity for converting independent hotels to soft brands. To effectively take advantage of this opportunity, however, one must understand not only the forces that are driving the growth of the soft-brand market in general, but also the conditions that are shaping the slow market uptake of soft brands in Canada.Canadian Soft Brand HistoryIn Canada, only three franchise companies currently have soft-branded hotels in the market: Ascend Collection by Choice Hotels, Autograph and Tribute by Marriott, and Best Western Premier Collection. Their major competitors--Hilton, Hyatt, IHG, and Wyndham--have yet to drive a stake into Canadian soil in the soft-brand category.The first soft-branded hotel to enter the Canadian market was the Ascend Collection Inn on the Lake in 2009. This property, located in Fall River, Nova Scotia, was a conversion from an independent hotel. It was another four years before the second soft-branded hotel to come to Canada, when Autograph opened its first property in New Brunswick. The BW Premier Collection came to Canada in 2015, and Tribute followed in 2016. As of 2017, there are roughly 2,200 established rooms belonging to soft-branded properties, the majority of which belong to the Ascend Collection.All the major franchise companies are actively seeking Canadian properties for conversion to a soft brand, but only Autograph Collection has confirmed properties in the pipeline: four properties with a total of 641 rooms are being introduced to the Autograph Collection name in 2017. Other soft brands, Unbound by Hyatt and Tapestry by Hilton, are expected to open in 2018; however, no contracts have been confirmed. Meanwhile, Ascend Collection is actively scouring the country for appropriate properties to brand.The Appeal of the Soft BrandIndividuality is central to the soft-brand concept. Each property remains distinct within the brand portfolio while still representing the essential quality that is the hallmark of the brand. For the traveller, soft brands function as a risk-management tool. As Jeff Cury, Senior Director of Development for Hilton, puts it, "There are a lot of adventurous travellers that enjoy the experience of an independent hotel but recognize there's risk in that, so soft branding alleviates a lot of the risk because it's still a brand, and if there's a problem, there is brand assurance."The hospitality industry has shifted towards being a consumer-led market in which buyers are becoming more transactional and less sentimental. In other words, travellers are caring less about the hotel and more about the collection of loyalty points. Soft brands appeal to the transactional-hungry market by offering loyalty points while also serving experience-oriented travelers.From an owner's standpoint, independent hotels lacking the distribution capabilities of a brand often rely heavily on Online Travel Agents (OTAs) to sell their product--a costly technique. One core feature of soft brands is the access they provide to the internal functions that largely contribute to the success of a branded hotel: global marketing, central reservation systems, customer-relationship management, revenue- and yield-management support, and loyalty programs. "Soft brand memberships are all about value. Hotels are able to increase their revenue while lowering their distribution costs, resulting in higher profitability and value appreciation of the hotel," says Juan Duran, Director of Membership Development for the Ascend Collection.The idea of a soft brand revolves around connecting independent hotels with brands without compromising the hotel's independent nature or undergoing extensive renovations to abide by traditional brand standards. In the past, independent hotels looking to convert to a brand have been rejected due to unfeasible property improvement plans and too wide of a gap between the standard brand requirements and their offerings. For these properties, soft brands are a viable option, providing a brand identity under which they are able to exist while still allowing them to keep their distinct features.Why Aren't Soft Brands Growing as Fast in Canada?Three main factors are causing the slow uptake of soft brands in Canada: the lack of suitable independent properties, a dearth of appropriate locations, and the current stage of market maturation.In Canada, there tends to be a larger discrepancy between the quality of the independent supply relative to that of the United States and other countries. The branded properties are historically modular, and the independent properties that are suitable for conversion to a soft brand either have already become established with a brand or are hesitant to lose their independent status because they are already achieving success without brand support. While there are many reasons behind the limited supply of suitable upscale to luxury independent inventory, the main cause is that Canada is a risk averse market that foregrounds known yield for investors at the expense of creativity. For franchise companies, the limited supply of upscale independent properties in Canada is raising the value of the few upscale independent properties that currently exist. Many hotel investors and major brands are eyeing the same highly sought-after independent properties, making the soft brand-market in Canada highly competitive at the same time that it is severely restricted by a lack of inventory.With the focus that soft brands have on celebrating the unique characteristics of each property's location, franchise companies are mainly looking for primary, urban, and resort destination markets to establish their soft brands. In Canada, these types of markets are few and far between, which makes the selection pool more limited, thereby increasing competition. "In Canada, there aren't as many urban destinations that would support soft brands, and the ones that do are currently being aggressively pursued, specifically major cities such as Vancouver, Toronto, and Montreal. As far as secondary and tertiary markets, as of right now they aren't a good fit for collection properties" says Michael Morton, Vice President of Owner Relations for Best Western.Historically, Canada has lagged the United States in hotel trends. Canadian hoteliers tend to take action only after a concept has proven successful, which inevitably leads to a slower initial buildup. "The American hotel market is more mature than Canada, and historically there is a natural five- to ten-year delay in the adoption of niche segmentations," says Scott Richer, Vice President of Real Estate and Development for Hyatt. Only once concepts have a proven track record does the Canadian hotel market embrace a new product. Given that the first soft brand entered the Canadian marketplace in 2009, we can expect a boom in soft brands to take place sometime around 2020 if the pattern of the ten-year lag behind the US holds true.PipelineHotel pipeline reports are not only a strong indicator of which markets are expected to see growth, but they can also be used to see which brands are expanding along with trends that are shaping the industry, such as an increase in soft branded hotels. In Canada, the pipeline of traditional brands continues to grow, while currently, the soft brand pipeline is small.In January 2017, Hilton launched its fourteenth brand and second soft brand, Tapestry Collection. Tapestry Collection is an upscale brand that focusses on keeping the hotel unique while providing Hilton standards and systems. As Jeff Cury, Senior Director of Development for Hilton, puts it, "Hilton gives owners the ability to be part of a hugely recognized brand, while still maintain a certain level of standard that doesn't require the hotel to be so prescriptive." Tapestry belongs to a lower scale than Curio, which is Hilton's more upper-upscale soft brand. Although neither Hilton soft brand is currently open in the Canadian market, Hilton's soft-brand presence in Canada is expected to grow in 2017.The Unbound Collection by Hyatt was launched in 2016 but has yet to make a mark on the Canadian market. This upper-upscale soft brand was developed as an expansion of the Hyatt value proposition, creating an experience not otherwise available in the company's traditional hotel format. Each Unbound Collection property is known for its picturesque location and original identity. No announcements have been made for an Unbound Collection in Canada, but this brand is expected to enter the market by 2018.Currently, Autograph Collection by Marriott is the only soft brand with confirmed properties in the Canadian pipeline for 2017. However, many of the major franchise companies with soft brands in their portfolios are actively seeking properties in 2017.Expected GrowthWith soft brands picking up pace in the US, Canada is expected to follow this lead and become more actively involved in this space, albeit to a lesser extent given the previously mentioned limitations. Once soft brand success is proven across the country, existing soft brands will push strongly to further increase their presence by expanding more rapidly across Canada. Moreover, brands who took a more reactive approach by not entering the soft brand market immediately will likely begin pushing their products into the Canadian hotel market.To appeal to more market segments within soft branding, there is potential for major brands with established soft-brand collections to create additional lines that will cover the full range of chain scales. Launching additional chain scales for soft brands is a means for franchise companies to increase their reach, as a larger array of products has the potential to capture a wider range of consumers.ConclusionThe Canadian lodging market is slow to act on new trends because the current stage of market maturation creates an environment that makes hoteliers wary of adopting untested innovations. Because of this, the soft brand concept has yet to be fully embraced in Canada, although this is expected to take place in the near future given the successful market uptake of soft brands in the United States and abroad.In this stage of market maturation, Canada is still witnessing the growth in core brands because it is at heart a stakeholder-focussed market that places the greatest emphasis on yield for investors, leaving less room for creativity and entrepreneurial development. As the market matures and hoteliers are required to adapt to trends to stay competitive, there will be a shift from a stakeholder-focussed market to a customer-focussed market, which will contribute to the growth of soft brands. The slow growth in the uptake of soft brands in Canada is due to the current degree of market maturation, the lack of suitable upscale independent inventory, and the limited number of appropriate primary markets that fit the soft-brand concept. As more unique properties are introduced across Canada and the soft-brand concept gains some traction, it is expected that many of the leading hotel brands will expand their product range into Canada, spurring the growth of soft brands.
HVS - 11 May 2017
Budget hotels now account for nearly two-thirds of the UK's top 10 brands as global hotel companies continue to diversify from their traditionally more up-market offerings to the ever-popular budget sector.According to Hotel Bulletin Q1 2017, published this week by HVS, AlixPartners, STR and AM:PM, Premier Inn and Travelodge between them account for 52% of all branded rooms in the UK's top 10 and are also the most active in terms of future growth.The bulletin compares the list of the UK's top 10 hotel brands in terms of room numbers with the top 10 in terms of new rooms pipeline. It finds that Premier Inn, the largest in terms of room numbers with 67,515, and Travelodge, number two with 39,531, also represent almost half of the UK's active hotel pipeline with 5,086 and 2,660 rooms planned, respectively.In third place in terms of supply is Holiday Inn, with 20,707 rooms but a pipeline of only 430, while fifth-placed Hilton (14,793) has only 200 rooms in its development pipeline.Overall, it is the emerging brands that have amongst the most aggressive opening plans such as Hampton by Hilton (active pipeline of 1,881 rooms), Hub by Premier Inn (1,396) and Holiday Inn Express (1,244)."Only six brands have an active pipeline of more than 1,000 rooms and all are at the budget end of the market as the smaller budget brands continue their relentless drive for greater distribution whilst the two giants slug it out to maintain their growth trajectories," commented HVS chairman Russell Kett."Whilst attention is clearly focused on developing other IHG and Hilton brands, and growth by rebranding existing hotels is not included in this analysis, it begs the question as to whether the 'core brands' are in danger of stagnating if nothing is done to address this," he added."However, as many rooms as are being actively developed remaining currently on the drawing board, there is potentially healthy future growth in supply as time progresses and planned projects become firmer," he concluded.Download the Hotel Bulletin: Q1 2017 containing the full top 10 lists by clicking http://www.hvs.com/article/8003/hotel-bulletin-q1-2017/?campaign=email
HVS - 11 May 2017
Introduction to Purchase Price AllocationsAs the name implies, the objective of a purchase price allocation is to allocate the purchase price of an asset to its component parts. Unlike a cost-segregation study, which allocates cost for tax purposes, PPAs allocate fair value for financial reporting purposes. More specifically, PPAs are performed for companies complying with Accounting Standards Codification Topic 805, Business Combinations (ASC 805) under US GAAP. Unlike appraisals for financing purposes, which are governed by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), PPAs are performed in accordance with the Accounting Standards Codification (ASC) promulgated by The Financial Accounting Standards Board (FASB); therefore, PPAs have intended uses and intended users that are distinct from financing appraisals.The fundamental objective of a PPA is to allocate the entity's purchase price to its tangible and intangible components for US GAAP basis reporting (not income tax reporting). The acquiring company will use the PPA to place the acquired assets on their US GAAP basis fixed asset register and balance sheet. With the exception of land, which does not depreciate, the allocated tangible and intangible asset values will serve as the basis of the assets' depreciation schedules for US GAAP reporting.Before the allocation can begin, the appraisers must determine whether the purchase price is consistent with fair value. If the purchase price is below the entity's fair value, then the sale is classified as a "bargain purchase," which FASB describes as an unusual and infrequent event. Assuming that the purchase price is consistent with fair value, the next step is to determine the fair value of each of the entity's tangible and intangible components.The Finer PointsFor some hotels, the purchase price can simply be allocated to tangible assets, such as land, personal property, and real property improvements. These assets can be valued using the sales comparison approach, income capitalization approach, and cost approach, as applicable. Land can be valued using the sales comparison approach or ground-rent capitalization approach, depending on market norms. Due to a dearth of comparable "dark" hotel sales, the real property improvement value is often ascribed based upon the depreciated replacement cost new (DRCN). Likewise, the personal property is often valued using the DCRN.For more complex hospitality assets, additional tangible or intangible asset (or liability) allocations may be necessary. These additional assets and liabilities might include in-place leases, favorable/unfavorable leases, advanced bookings, assumed debt, and goodwill.If a portion of a hotel is leased to third party, such as a restaurant or retail shop, that agreement should be analyzed. Lease agreements can create an asset, in the case of an above-market lease rate, or a liability, in the case of a below-market lease rate. Additionally, a lease that is in place at the time of the acquisition can have an intangible value to the buyer because that space produces a cash flow immediately, and there is no loss of rent or expense reimbursements while a tenant is found. Unamortized leasing commissions and tenant improvement allowances associated with tenant leases should also be analyzed. Additionally, if the hotel is situated on a ground lease, that lease agreement must be analyzed to determine if it is favorable (an asset) or unfavorable (a liability) to hotel ownership.The hotel's advanced bookings, management agreement, and franchise agreement should also be analyzed to determine whether these agreements are material to the acquisition, thereby creating an identifiable intangible asset or liability. For example, if the hotel has an agreement to host a large meeting on a long-term recurring basis, it might be necessary to ascribe value to that agreement. Similarly, the hotel's management agreement might create an asset or liability if the management fee results in an operating expense that is above or below the market norm. When the management agreement is terminable upon sale, there is neither an asset or liability. While the existing franchise agreement should be examined, the franchisor needs to approve the buyer upon a sale, and if the buyer is approved, a new agreement will be written between the buyer and the franchisor at the franchisor's current fee structure.Goodwill arises when the total fair value of the hotel exceeds the total value of identifiable tangible and intangible assets and liabilities. Goodwill is only observed in rare cases for hotels, primarily in situations where a hotel has an iconic status that results in an outsized purchase price. In addition to the tangible and intangible assets discussed in the preceding paragraphs, other potential assets or liabilities are evaluated on a case-by-case basis.Wrap-UpGiven the unique nature of both hospitality assets and ASC 805 PPAs, it is important to engage a valuation firm with experience in both areas. No two hotels, or PPAs, are identical; therefore, HVS professionals are happy to discuss the intricacies of a potential hotel PPA project with both the client and their audit partner. Additionally, HVS can often complete the PPA in tandem with the financing appraisal, creating a more streamlined closing process for the buyer because there is only one data request and one site inspection.
2017 Middle East Hotel Survey - Chaos, Consolidation & Opportunity | By Aaron Laurie and Hala Matar Choufany
HVS - 11 May 2017
The region continues to face distraught; dwindling economic conditions, changing demographics and source markets, and a saturation of luxury hotels pose an opportunity for developers to build mid-market.
HVS - 28 April 2017
While hotel lease contracts have traditionally been very popular in Europe and continue to be preferred or required by many institutional investors, management contracts have become increasingly prevalent as many other investors have sought to share further in their hotel's trading profit and, at the same time, most major international hotel operators have become far less willing to offer leases.A hotel management contract is defined as an agreement between a management company (or an operator), and a property owner, whereby the operator assumes responsibility for managing the property by providing direction, supervision, and expertise through established methods and procedures. The operator runs the hotel, on behalf of the owner, for a fee, according to specified terms negotiated with the owner. Negotiating the terms of a hotel management contract should not be approached lightly, as it can characterise the property's identity for decades and produce differing results for owners. A well-negotiated management agreement should align the interests of both parties. As an owner, the major goals should be to select the management company that will maximise profitability and therefore the value of the asset, and to secure the best possible contract terms with that operator, while at the same time ensuring the operator is properly incentivised to maximise profitability.As a result of a gradual shift in hotel investment trends over the past 30 years, owners have generally developed a much greater understanding of hotel operations, and have become more sophisticated in their selection of operators and in the negotiation of contract terms, often with the help of specialist advisory firms. It has become increasingly common in recent years for institutional and financial investors and private equity funds to invest in hotel assets. Such investors typically aim to separate ownership of the physical hotel asset from operation of the business. In addition, the investment interest and associated increase in the amount of capital available for hotel investment from this wider pool of investors has further contributed to the increased sophistication of hotel investors, who often have in-house hotel asset managers or engage speciality consultancies or asset management companies to help monitor and drive peak performance from the operator.The most common of the management contract terms are listed below and described further in the following sections.TermOperating feesOperator performance testApproval rightsFF&E and capital expenditureTerritorial restrictionsNon-disturbance agreementsOperator guaranteesOperator key moneyTermination rightsPlease also refer to the comprehensive 'HVS Hotel Management Contract Survey' article written by Manav Thadani, MRICS, and Juie Mobar, based on a sample of 76 management contracts in Europe totalling 19,200 rooms. This survey is available in the HVS Bookstore.1. TermThe term of a management contract is the duration the agreement is to remain in effect, generally calculated from the opening/effective date until the expiration of a specified number of years. Initial terms typically last between 15 and 25 years, depending on the brand and the positioning of the hotel as well as on the negotiating power between the owner and the operator.More upscale operators, such as Four Seasons and Ritz-Carlton, may require longer initial contract terms, often ranging from 30 years up to 50 years, or even sometimes longer. As a general rule, the higher the market positioning of the hotel, the longer the initial term. In Europe, the average length of the initial term is 21 years; the average initial term length has shortened in recent years. The following table shows the average length of the initial term for hotel management contracts in Europe by market positioning, according to the HVS Hotel Management Contract Survey.Renewal terms are usually based on either the operator having further extension rights, or upon the mutual consent of the owner and the operator. Renewal terms tend to occur in multiples of either five or ten years. Most contracts offer two extension terms (sometimes more) on the condition that six months' written notice is given prior to the end of the current term.For commercial reasons, brand operators prefer longer contract terms with renewal options in their favour, whereas flexibility is likely to be more important for owners and thus there is a preference for a shorter initial term and renewal options ideally only by mutual consent.There has been a noticeable decrease in the average length of initial terms across Europe, which can be attributed to the following factors:The proliferation of private equity vehicles in the hotel investment market in recent years has placed pressure on operators to offer more competitive, shorter initial terms, although these are generally coupled with more renewal options;The increasing competition amongst hotel operators seeking to broaden their distribution network;An increase in hotel investment in emerging markets along with the associated risks in such markets have led both operators and owners to negotiate contracts with shorter terms, to provide the opportunity to exit in the event of disappointing market conditions.2. Operating FeesOperators are remunerated with fees for the performance of their duties detailed in the contract. These management fees should be structured in such a way that they encourage the operator to maximise the financial performance of the hotel. Fees can be calculated by reference to various formulae. Typically, the operator's fee will be split as follows:A base fee, generally calculated as a percentage of gross operating revenue (ranging typically from 2% to 4%). While many owners would argue that an operator should ideally only receive fees based on the profit, not revenue, that the hotel generates, operators have successfully argued that they need to be protected with a certain amount of virtually 'guaranteed' income in order for them to be able to subsidise the costs of operating their organisations even during a severe market downturn when hotels' operating profits may be significantly reduced or even, in the worst cases, non-existent for a period of time. There is evidence of the base management fee decreasing with a higher market positioning, as highlighted in the table below:An incentive fee based on a percentage of the hotel's operating profit. While the base fee encourages the operator to focus on the top line, the incentive fee ensures that there is also an incentive to control operating costs. Incentive fee structures have a wide variety of forms in practice. These incentive fees are generally based on a percentage of either the gross operating profit (GOP) before the deduction of base management fee or, more usually, the adjusted GOP (AGOP), calculated by deducting the base fee from the GOP. The incentive fee can be structured differently, with examples including:A flat fee structure, where the incentive fee is calculated as a percentage of GOP/AGOP. This percentage may be constant or scaled upwards throughout the term of the contract (usually by way of a 'build-up' in the first few years until the hotel's expected year of stabilisation).A scaled fee based on the level of the GOP or AGOP margin that is achieved. This fee structure certainly rewards the operator for a more efficient performance and is becoming increasingly common.A fee linked to the available cash flow after an Owner's priority return. The Owner's priority return can be a fixed amount or a percentage of the initial (and sometimes future) capital investment. The operator will not receive its incentive fee until the owner's priority return has been achieved for that year. This incentive fee structure is usually accompanied by provisions whereby the operator's incentive fee is not 'lost', but only 'deferred', and then recouped in later years if and when the Owner's Priority is exceeded by a sufficient amount to cover that year's incentive fee as well as some or all of those incentive fees deferred from previous years. As deferred fees can create complications during the sale of a hotel (with purchasers often seeking a price reduction so they can cover this potential future liability that would 'transfer' to them), these types of incentive fee structures are becoming less popular with owners.Other fees and charges can be claimed by the operator, and are related to items such as centralised reservations, sales and marketing, loyalty programmes, training fees, purchasing costs, accounting or other costs. These fees are often defined as a percentage - between 1% and 4% - of total revenue or rooms revenue (as applicable, and varying between different operators).There is a rising trend observed in the industry where operators are accepting lower base fees in return for higher incentive fees of up to 15% of GOP, which are designed to more closely align the operator's interests with that of the owner - to maximise the operating profit of the hotel, regardless of the revenue.While a fixed incentive fee percentage ranging from 8% to 10% of AGOP was typical, it is becoming increasingly common to have scaled incentive fees. The tendency towards higher or scaled incentive fees versus higher base fees, rewards effective operators but also provides some protection for the owner's cash flow/return in the event of poor operator performance or a market downturn.3. Operator Performance TestPerformance tests allow an owner to terminate the management agreement should the operator fail to meet the agreed performance criteria after a period of build-up (test periods commence in the fourth year on average).Two types of performance tests are typically used, often jointly:Room revenue per available room (RevPAR) as a percentage of a mutually agreed upon competitive set (in Europe, the test is generally set somewhere between 80% and 95% of the weighted average RevPAR of the competitive set);The GOP level for an operating year should not be less than the mutually agreed budgeted GOP level (usually starts at 80%, up to 90% of the budgeted GOP, depending on the negotiation strength of both parties).As highlighted in the following graph, these two performance tests are often used jointly in European management contracts.A performance test usually starts from year thee or year four, after stabilisation of the new hotel, generally known as the commencement year. The performance test is usually deemed to be failed if both the RevPAR and the GOP tests have been failed for two years in a row.However, some unscrupulous operators have been known to sometimes artificially inflate RevPAR performance to meet the required standards, so the RevPAR test is not held as a reliable measurement tool by experts. It can also be challenging to agree the right competitive set and sometimes to find reliable RevPAR data for the competitive set. Furthermore, in case of a force majeure event or any peculiar event that is beyond the operator's scope, then the performance test would not be applicable and the right of termination of the owner is not exercisable. Good performance tests are the ones that are enforceable, sensible and that truly reflect the relative position of the hotel.Major operators usually negotiate a clause with a 'right to cure' in the event of a failed performance test, allowing the operator to make a compensation payment to the owner. The typical right to cure usually includes a specific/limited number of times that the operator has the right to cure during the term of the agreement.We have seen recent management contracts which include performance tests based on TripAdvisor ratings and commentaries. However, these ratings are potentially influenceable by non-guests or biased by messaging bots. Other non-financial performance tests include the ones based on the number of materialised reservations generated through the operator's distribution systems versus those that are generated by online travel agencies (OTA) or third parties.For more information on management fee structures and performance clauses, please refer to the HVS San Francisco article 'Hotel Management Fees Miss the Mark' by Miguel Rivera, September 2011.4. Approval RightsApproval rights define the extent to which the owner's consent is required for decisions impacting the hotel's operation. This allows the owner to remain involved in key decisions regarding cash flow. In addition, if stipulated, an owner can place restrictions on expenditure (that is, purchasing systems, concessions or leases). These owner approval rights generally comprise:Budget - the operator should submit an annual budget for the owner's approval, usually 30 to 90 days prior to the start of the fiscal year. Owner approval of the annual budget is usually negotiated, but such approval may depend on the conditions of the performance test, and may therefore exclude certain line items. If both parties do not come to a consensus on a specific line item, an increasing number of agreements have provision for an independent expert to be appointed to adjudicate and provide a determination. In the meantime, the budgeted amount will be calculated using the last year's approved amount, multiplied by the increase in the Consumer Price Index for that year. The annual budgeting exercise is one of the most collaborative activities between the owner and the operator during the life of a management contract;Employment of key senior management positions - the management contract will specify whether the hotel's employees are employed by the owner or the operator. Generally, each party prefers to pass the responsibility of employment to the other, because of liability issues. For most cases in Europe, the staff are officially employed by the owner. However, generally the operator has the responsibility of hiring and training the line-staff personnel. In a significant proportion of management agreements, owner approval is only required for the hiring of certain key management positions (that is, general manager, financial controller and, sometimes, director of sales and marketing and director of food and beverage). With the owner in most cases being the employer of the hotel's staff, this enables continuity of employment - and the hotel's operation - if and when the contract is terminated. Some senior management may be employed by the operator, with the payroll for those staff being charged back to the hotel operation. By and large, all contracts that require the owner's prior consent for the appointment of senior personnel usually restrict the number of rejections by the owner to two or three candidates presented by the operator each time such a position is to be filled;Outsourcing - this clause affects the decisions involving the appointment of an external service provider in relation to the hotel's operations, such as engineering services or housekeeping. Usually, the terms of such contracts are no longer than 12 months. Owner's consent is rarely required, unless the contract is significant and above a certain amount (similar to capital expenditure, for which consent is required) or has a duration longer than, say, 12 months;Capital expenditure - detailed in the next section;Leases and concessions - such clauses relate to the leasing out of hotel space to third parties, such as restaurants, spas, gift shops, beauty salons or retail outlets. Most owners will require restrictions on such agreements, as long-term agreements may complicate a future sale and may not always be the most profitable use of the space with the passing of time, or even in the first place.5. FF&E and Capital ExpenditureTo maintain the asset in a marketable condition and replace the furniture, fixtures and equipment (FF&E) of a hotel at regular intervals, a 'sinking' fund is created to raise capital for this periodic FF&E replacement, which is usually a percentage of gross revenue and somewhat dependent on the positioning/level of the hotel. Included in this category are all non-real-estate items that are typically capitalised rather than expensed, which means they are not included in the operating statement, but nevertheless affect an owner's cash flow. Generally, management agreements include a reserve for replacement of FF&E of between 3% and 5% of gross revenue per month, with the lower percentage more likely to relate to budget hotels and the higher percentage to upper upscale and luxury hotels. This percentage often increases during the first few years of the hotel's operation, until it reaches a stabilised amount, usually by year five but sometimes not until year ten, as shown in the following table.In some cases, the amount to be reserved may be dictated by the lenders financing the hotel. Typically, capital improvements are split into two categories:Routine capital improvements: funded through the FF&E reserve account and required to maintain revenue and profit at present levels;Discretionary capital improvements (also called ROI capital improvements): investments that are undertaken to generate more revenue and profit, such as the conversion of offices into meeting rooms. These require owner approval and are in addition to the funds expended from the reserve account. Capital expenditures are typically made in lump sums during hotel renovations. In general, soft goods for a typical full-service hotel should be replaced every six-eight years, and case goods should be replaced every 12-13 years.Within a management contract, the owner is responsible for providing funds to maintain the hotel according to the relevant brand standards. If management chooses to postpone a required repair, they have not eliminated or saved the expenditure, but merely deferred payment until a later date. A hotel that has operated with a below average maintenance budget is likely to have accumulated a considerable amount of deferred maintenance. An insufficient FF&E reserve will eventually negatively impact the property's standard or grading, and may also lead to a decline in the hotel's performance and its value.6. Territorial RestrictionAn integral component of a market area's supply and demand relationship that has a direct impact on performance is the current and anticipated supply of competitive hotel facilities. By including a territorial restriction (also sometimes referred to as an 'area of protection') in a management contract, an owner is assured that no other property with the same brand is allowed to open within a certain radius of the subject hotel, for a certain period of time (ideally being for the whole duration of the agreement) in order to minimize or even pre-empt any form of cannibalisation from the same brand, or sometimes also from another brand of the same company.Depending on the location, the city size and the type of brand, this clause may vary significantly. Upscale/luxury hotels tend to have a territorial restriction area for a larger radius and for a longer period of time than budget/mid-market hotels. Additionally, operators with a larger portfolio of brands may be more agreeable to a larger period of time, or a shrinking restricted area for the exclusion of certain brands, or the exclusion of all brands. Operators will inevitably seek for a more flexible scheme, so that such a constraint does not interfere with the development of the operators' other brands which are not direct competitors (for example, upscale brands compared to budget brands).Therefore, to define the territorial restriction, the negotiations should be centred around the area of the exclusion clause, the brands that will be included in the clause, the period of time and also the provision of an independent impact study of the development of a similar brand on the subject property's performance.With the recent consolidation of the hotel industry (the Marriott/Starwood merger, the purchase of FRHI by Accor Hotels) negotiations are more and more focused on the risk of chain acquisition carve outs, the prospect for any hotel that is a member of a chain of hotels where it is intended that one or more of the hotels of the chain will be rebranded to the same brand as the subject hotel.7. Non-Disturbance AgreementHotel management contracts often include a non-disturbance agreement. This is an agreement between the hotel operator, the owner and the owner's lender. In the event of default or the owner's insolvency, the lender takes over the ownership of the hotel, agrees not to terminate the existing management contract and remove the manager after a foreclosure. At the same time, the hotel operator agrees to stay and operate the hotel for the lender in case of insolvency or enforcement.The hotel operator can be confident in keeping the value of the management contract, and in having a direct contractual relationship with the lender. On the other hand, the lender knows the operator can't leave the contract immediately on insolvency or a default, which is potentially disruptive to the business.8. Operator GuaranteesAn operator guarantee ensures that the owner will receive a certain level of profit or net operating income. If this level of profit is not achieved by the operator, the operator guarantees to make up the difference to the owner through their own funds. For example, if the contract states a guarantee of EUR1,000,000 per annum, and the operator only achieves EUR800,000, the operator will then make up the remaining EUR200,000 from their own resources.Operator guarantees are not to be confused with an owner's priority return, which reflects the hurdle of a particular performance (such as GOP) before receiving the incentive fee. For example, if the owner's priority return is equal to EUR1,000,000 and the GOP achieved in a particular year is EUR800,000, then the operator will not receive an incentive fee. If the GOP in a particular year is EUR1,200,000, then the incentive fee will be payable.It is typical when such guarantees exist that there is a provision for the operator to 'claw back' any payments made under a guarantee out of future surplus profits. Equally typical is the tendency for the operator to place a limit ('cap') on the total guaranteed funds within a specified number of years. When the operator fails to receive an incentive fee, this is sometimes referred to as a 'stand aside'. Some contracts allow for this to be paid once future profits are earned to cover the shortfall.The current trend is for a shift away from operator guarantees. Over the last 15 years, operators have been placing limits on guarantees to exclude force majeure factors in order to cover their future liability. As such, operators will generally require higher fees in return for an operator guarantee and this may not always be cost-effective for the owner. In addition, most contracts will include a cap on the level of operator guarantee, as noted above.9. Operator Key MoneyA more prevalent way to incentivise owners and secure contracts is when operators use their balance sheet to offer either key money or sliver equity.Key money, in the context of management contracts, can be defined as a financial contribution from the operator to the owner's investment cost related to the development of the hotel. Often regarded as an evidence of the operator's genuine interest in the engagement, key money can be a valuable resource to help a brand expand into new markets without the high development costs and to seal the deal for trophy assets.Many operators offer the key money as a 'loan' to the owner, which could be either towards the hotel's development or its preopening, or to cover part or all of a renovation in the case of the re-branding of an existing hotel. However, key money comes at the expense of something else, usually higher fees and/or a longer term.Moreover, almost all operators require the owner to repay a prorated amount of the outstanding key money, with or without interest, if the contract is terminated prior to the end of the term or an agreed part thereof.For existing properties, key money may be offered at the time of signing or after the capital improvements (recommended by the operator) have been completed. Conversely, for new hotels, key money is mostly offered as the last funding available to the owner, paid on the opening of the hotel.According the the HVS Hotel Management Contract Survey, a large majority of the European contracts that offer key money are for upscale/upper upscale/luxury hotels.However, key money does not entitle the operator to an actual equity share in the investment. In today's highly competitive market, some operators now assume an actual ownership position in the hotel. An increasingly common tool is minority equity stake where the operator makes a financial contribution in return of a stake (from less than 5% to 30%) in the ownership of the hotel. Under such an arrangement, if the hotel performs well the operator directly realises a return for the investment. Equity contributions by management companies may help to align the interests of the owner with the management company.The benefit of reducing an owner's need to use their own cash is a powerful incentive. However, owners should also be aware of the potential risks or trade-offs associated with forming equity partnerships with management companies. More partners imply more parties to split the profits, and less owner equity means a higher chance of losing control of the property. In addition, the relationship with the management company as an equity contributor may limit the owner's ability to terminate the management agreement.10. Termination RightsEach party may choose to terminate the hotel management agreement for a variety of reasons: bankruptcy, fraud, condemnation, unmet performance standards, sale. As hotels are becoming more mainstream assets, owners are getting more mature and vigilant on the conditions for termination and the associated operator fees.Owners can negotiate the right to terminate the contract upon the sale of the hotel to a third party. This clause gives flexibility to the owner or to any potential investor as it allows the owner to realise the investment and sell the hotel unencumbered. The operator is compensated with a termination fee from the owner. The termination fee is usually an amount equal to the average management fees earned by the operator in the preceding two-three years (24 to 36 months) prior to the date of termination, 'multiplied by' either (i) the remainder of the term (years/months) or (ii) a multiple of two, three, five or any other as agreed upon.With a more upscale brand, the operator will be more sensitive to not being 'kicked out' because they have substantially invested in sales and marketing to create an upscale brand. Operators will also argue that an early termination could be damaging to their brand.Termination without cause allows the owner to terminate the contract without any justification. The termination fee under this provision is normally calculated in a similar method as for the termination upon sale. Termination without cause, or on sale, is more common in contracts with independent operators.The operator performance test mentioned earlier allows the owner to terminate the contract if the operator fails to meet the performance expectations and does not use its cure rights. The testing periods for most performance termination clauses begin three years after the opening of the hotel or the inception of the contract to allow the hotel to reach stabilised operating levels, and the performance failure usually has to persist for two consecutive years.Other causes for termination consist of operator misconduct, condemnation, bankruptcy and default.We should stress here that management contracts without termination on sale provisions obviously reduce flexibility on exit. It is usually worse when the operator has an equity stake in the property. An owner should always look for the most flexible management contract terms that can be negotiated.Current and Future TrendsWhile owners have become far more knowledgeable in recent years, major global operators have also become larger and more powerful, particularly given the recent consolidation and mergers and acquisition of hotel operators in the industry, and therefore the reduction in competition has made it more difficult to negotiate with them.It is also reasonable to state that there is a move towards agreements with third-party operators. As the hotel is becoming a more mainstream asset and owners are gaining a better understanding and maturity, third-party operators (TPO) are on the rise. Well established in the US market, this model, relatively new in Europe, is now growing rapidly, bringing more flexibility to owners and allowing them in some instances to defer the responsibility of the staff to the TPO's balance sheets. A hotel managed by a TPO is very often combined with a franchise for a major hotel brand.Another trend is the emergence of 'manchises' and hybrid management contracts, whereby hotel owners engage a hotel operating company for an initial period of time, say three to five years, after which the contract transfers to a franchise contract in which the owner assumes management responsibility and retains the operator's brand, in exchange of an annual franchise fee payment. To the outside world, there is no apparent change. This is particularly advantageous to help hotel operating companies launch new brands, enabling strict operating controls to be established in the initial years as the brand is going through its 'ramping up' period.ConclusionHotel Management contract negotiation can be a long and complex process. This negotiation should satisfy both the operator and the owner to help ensure an effective and trustful relationship between the two parties, while taking into consideration the asset value. On one hand, the operator will require stability in cash flow with a longer-term contract. On the other hand, the owner will primarily look for flexibility from an exit perspective, visibility on the profit and loss of the asset and transparency on the fee structure, and from that goal, the owner may use a third-party operator, which could be more aligned with their interests. The main goal when negotiating is to avoid uncertainty and conflict, and look for clarity and trust in order to maximise each parties'returns. This is critical to ensuring that responsibilities and best practices are met and the business is run successfully.Notes:1) The terms mentioned in this article only cover some of the major characteristics of the contract. Today's management agreements are defined by a variety of formats and level of detail. Some contracts are becoming much more complex and comprise new terms not discussed in this article. It is therefore important to review the contract terms in detail. Each party should be assisted by an external independent legal advisor in order to deal with these complex legal documents.2) For an overview of the operating models (leases, management contracts, franchises), please refer to our article titled 'Decisions, Decisions... Which Hotel Operating Model is Right for You'. Click here to view. From a sample of 76 management contracts in Europe with results compiled in the following article: Thadani, Manav, mrics & Mobar, Juie. 'HVS Hotel Management Contract Survey'. HVS India. August 2014. Isenstadt, Todd & Detlefsen, Hans. 'Hotel Management Companies and Equity Contributions: Benefits And Risks'. HVS Chicago. August 2014.
HVS - 24 April 2017
IntroductionReno, "The Biggest Little City in the World," has been rapidly changing over the last decade. Gaming and casinos have taken a back seat to growth in a variety of sectors and industries, including high-tech, health care, education, transportation and distribution, and manufacturing. The growth has been driven by Reno's proximity to California, abundance of developable land, central access to eleven western states, tax and business-friendly polices, skilled workforce, and high (and affordable) quality of life.With local and national economic growth continuing to accelerate and Reno's hotel market reaching beyond previous occupancy and average rate peaks, developers are again moving to build new, nationally branded, non-gaming hotels in Reno.A Brief Look Back at Reno's Hotel IndustryNon-gaming hotels in Reno were particularly hard hit by the most recent recession. Demand fell with the declining economy, and the pipeline of new supply delivered an abundance of new hotels. From August 2006 through September 2009, seven limited-service branded hotels, totaling 693 rooms, opened in Reno. Complicating matters, casino hotels, which have the flexibility of discounted rates, began offering rooms for as low as $20.00 a night. This negatively affected non-gaming hotels, which struggled to capture demand at rates that met the breakeven point for operations.Business & IndustrySince the recession, more than 30,000 jobs have been created in northern Nevada. Companies such as GreatCall, Nutrient Foods, Cenntro Automotive, Switch, and Clear Capital have expanded or relocated to the area, bringing the unemployment rate from a high of 14.5% in January 2011 to 4.2% as of December 2016. Tesla Motors made a highly-publicized announcement to construct its first "Gigafactory" in Storey County, less than a 15-minute drive east of the Reno-Sparks area. Once it operates at full capacity, the facility is expected to employ over 10,000 people. The "clustering effect" of these individual companies moving to and expanding in the area should drive further growth in jobs, population, and the local economy over the near term. A study known as the EPIC (Economic Planning Indicators Committee) Report, completed in 2015, forecasts growth in the Reno metro area from 2015 through 2019. According to the EPIC Report, Reno's continually diversifying economy is anticipated to continue to drive growth in the area. The Reno-Sparks metro area is forecast to gain 52,400 new jobs through 2019, bringing the local workforce to more than 400,000. This equates to an annual growth rate of 2.9% per year over the five years. In addition, the population is expected to grow to 638,302 people, an increase of 42,395, by the close of 2019. This represents an annual increase of 1.4% per year, for a total of 7.1% growth over five years. EDAWN, the Economic Development Authority of Western Nevada, has focused its strategic plan on attracting mid-size manufacturing, logistics, and technology companies, as well as helping local entrepreneurs to grow their businesses. One of the multiple ways this has been done is with the creation of Startup Row, the CUBE at Midtown, and the Reno Collective. Each of these innovative business districts offer shared workspace to foster entrepreneurialism, along with resources from the University of Nevada, Reno, including the Ozmen Center for Entrepreneurship.Reno Tourism and Meeting & Group DemandCasinos are still a dominant attraction for tourism and events in Reno, two demand segments that account for the vast majority of hotel bookings in the area. According to the Reno-Sparks Convention and Visitors Authority (RSCVA), approximately 12% of overnight stays are attributed to business and corporate travel in the Reno-Sparks metro area. The remaining 88% come from leisure and meeting/group demand. Hotel sales teams generate a reported average of 60% of total convention business in the market. The United States Bowling Congress continues to provide a significant amount of meeting and group demand for the market, with major tournaments being held in Reno two out of every three years. The RSCVA has made great strides over the last decade in repositioning Reno around its outdoor activities, arts and culture, and business innovation. Reno is primarily a drive-to market, although new air routes have come to the market in recent years. According to a 2015 visitors profile study, the demographics of Reno visitors are shifting to greater ethnic and geographical diversity. The study also notes increases in visitors aged 35 to 64 years, with more families traveling to the market.Existing and Proposed Hotel Rooms in Reno-SparksThe Reno-Sparks metro area includes 104 hotels with 19,425 guestrooms. The charts below illustrate the breakout of hotels and guestrooms in the four chain scales that currently operate in the market area. There are no hotels in the Reno-Sparks metro area that are considered part of the two highest tiers, upper-upscale and luxury. The Reno-Sparks metro area received no new hotel supply from September 2009 to September 2015. The nearly six-year dry spell coincided with the market's recovery from the 2008/09 recession, following a period of record hotel growth in the years just before.With virtually no new properties vying to compete for rising demand, existing Reno-Sparks hotels have recovered to pre-recessionary occupancy levels, with the market quickly absorbing new hotels over the last two years. Non-gaming hotels, as shown in the figure below, averaged above 70% occupancy in the City of Reno's 2014/15 fiscal year, which runs from July to June. New hotel development is becoming increasingly feasible in Reno as occupancy and average rate levels rise. A 102-unit Hampton Inn & Suites by Hilton and a 104-unit Residence Inn by Marriott near the Sparks Marina broke ground in April 2017; these two hotels, which are expected to open in 2018, were originally planned prior to the Great Recession. A 125-unit Courtyard by Marriott is anticipated to break ground at the Tahoe Reno Industrial Center, near the Tesla site, in the second quarter of 2017. The addition of new supply, including the 86-unit Hampton Inn & Suites Reno West, was the primary reason for the decline in occupancy in 2015/16. More recently, the 135-unit Courtyard by Marriott Downtown Riverfront opened in August 2016. According to HVS interviews with hotel general managers, local developers, and the RSCVA, occupancy and average rates are strong and growth continues for properties in the midscale, upper-midscale, and upscale chain scales. In the summer of 2016, it was announced that the troubled Siena Hotel & Casino, located along the Truckee River in Downtown Reno, was going to be closed, renovated, and rebranded as a non-gaming, Marriott-branded Renaissance Hotel. The Renaissance is expected to open in April 2017. The Renaissance will be the first upper-upscale property in Reno-Sparks. HVS market research and interviews also found evidence of at least three additional non-gaming hotels under development in the Reno-Sparks market.ConclusionWhile the number of new non-gaming hotels opening over the next five years isn't set in stone, the interest from developers in developing these hotels is crystal clear. Reno-Sparks will likely always be a gaming-centered market in terms of the overall attraction of casinos for leisure travelers. But the wider base of demand in the market is diversifying rapidly, with a multitude of employers and outdoor attractions drawing higher levels of visitation. As officials at the state and local levels continue to grow targeted sectors and industries in Reno-Sparks, commercial travel should take on a larger share of local hotel demand, boding especially well for the rising number of non-gaming hotels.
HVS - 11 April 2017
Hotel Market Dynamics in the Minneapolis-St. Paul MSAHotels are a major economic force in the Twin Cities. More than 57% of the total accommodations tax collected in the state comes from the Minneapolis-St. Paul metro area, amounting to $86.1 billion in 2015, per data collected by the Minnesota Department of Revenue. This staggering figure, from 503 properties, equates to nearly three times the average amount per property statewide.The Minneapolis CBD, the St. Paul CBD, and the Bloomington/Airport area have the three largest inventories of hotel rooms in the metro area. While population and office statistics vary greatly among them, all three areas boast strong hotel performance, which has attracted new hotel development in recent years.The following highlights major projects in the three markets, including new hotel construction.MinneapolisIndustry in Minneapolis, Minnesota's biggest city, spans finance, retail, education, and health care. According to the City of Minneapolis, more than $1 billion in construction permits were issued in 2016, the second-highest level since 2000; the highest level was in 2014, driven by the $1.1-billion US Bank Stadium. Downtown developments in 2016 included more than 1,200 hotel rooms, over 2,640 new residential units under construction, and the Target Center renovation.Pro SportsProfessional sports have driven development in Downtown Minneapolis, including the opening of Target Field in 2014 and the new US Bank Stadium, home to the Minnesota Vikings, which opened last summer. The stadium will host Super Bowl LII in 2018 and the NCAA Men's Final Four Basketball Championship in 2019, major events that should draw massive demand. Additionally, a $129-million renovation of Target Center, which began in the spring of 2016, is expected to be complete this fall, in time for the beginning of the basketball season.FinanceIn July 2016, Wells Fargo consolidated approximately 5,000 employees from nine separate buildings, which were spread across Downtown, into one location. This $300-million, 17-story, twin-tower office complex is located near US Bank Stadium. Originally proposed as a $90-million, 50-story, mixed-use tower in October 2015, smaller-scale renovations are now underway at the former TCF Bank building at 8th Street and 2nd Avenue. The approximately $20-million renovation will include two-story, loft-style offices with a redesigned atrium. The new owners expect to have up to 130,000 square feet of office space leased by the end of this year.RetailIn January 2017, Macy's announced it would close its one-million-square-foot flagship store in Downtown Minneapolis in the spring, amid nationwide store closings. A New York developer recently purchased the property for approximately $59 million, with plans to have locally-based United Properties assist in its renovation and conversion into retail and office space. The $50-million Nicollet Mall Project began in 2016. The project will update the sidewalks, streetlights, trees, and artwork along the twelve-block pedestrian mall, in addition to a two-block LED-light display and an outdoor reading room. The makeover has disrupted foot traffic and slowed sales for several stores, but as the project progresses, foot traffic is expected to increase prior to completion in 2018.Hotel SupplyDowntown Minneapolis experienced a six-year dry spell of new hotel construction, with no new developments between 2009 and the beginning of 2015. Since the opening of the Hampton Inn & Suites in April 2015, nearly 940 rooms have come online Downtown through year-end 2016, including the Embassy Suites by Hilton Minneapolis (August 2016), the Hampton Inn & Suites University Area (September 2016), the AC Hotel by Marriott Downtown (October 2016), the Radisson RED (November 2016), and the Hewing Hotel (November 2016).An additional 1,900 rooms are either under construction or proposed for development in Downtown Minneapolis, with historically high occupancies, new commercial developments, and upcoming citywide events, such as Super LII and the NCAA Men's Final Four, driving interest in new hotel development. In partnership with hospitality management company DDK, the furniture retailer West Elm, a division of Williams-Sonoma, recently announced it would build one of its first hotels in Downtown Minneapolis. The 120-room hotel's location in the North Loop has yet to be finalized; the property is anticipated to include a rooftop bar and a "grab-and-go" cafe. West Elm Hotels has also announced plans to build in Detroit, Indianapolis, Charlotte, and Savannah, with most of the proposed hotels set to open in late 2018.St. PaulSt. Paul, the state capital, is known for its European flair and an abundance of cultural arts and entertainment venues. Here are some of the major developments in the city.New Development in St. PaulSeveral projects completed in the past two years have spurred economic growth in Downtown St. Paul. In June 2014, the addition of the METRO light-rail Green Line made transportation to the downtown area and surrounding demand generators accessible and affordable. According to the city, through the second quarter of 2016, more than $260 million in building permits had been issued, with a notable increase in large-scale projects. Furthermore, between 2009 and 2016, there was a 51% decrease in the number of vacant buildings in St. Paul.Sports, Culture, and BusinessThe grand opening of CHS Field, the new home of the St. Paul Saints baseball team, has supported commercial and tourism growth in the area. The construction of a new MLS soccer stadium in the Midway neighborhood near the intersection of Snelling Avenue and Interstate 94 is anticipated to spur additional growth. The Ordway Center for the Performing Arts recently constructed a new concert hall, which is now home to the St. Paul Chamber Orchestra. In addition, the city of St. Paul is nearing completion of a $15.6-million redevelopment of the Palace Theatre into a 2,800-seat concert venue. The theatre is expected to open in March 2017 for the first time in approximately 40 years. Ecolab is in the process of an ongoing headquarters relocation into the Travelers north tower. Travelers sold the north building to Ecolab in the summer of 2015 and plans to move most of its employees into the south building by 2018. The existing Ecolab office building is currently up for sale. Future development and growth continues for Downtown St. Paul as the Minnesota Wild recently signed a lease for a new practice facility on top of the former Macy's building. Macy's vacated the 529,000-square-foot structure in 2013, and the site was purchased by the Port Authority in early 2014. Preliminary plans suggest that the Minnesota Wild will occupy approximately 65,000 square feet, leaving the remaining space open for 550 parking stalls and 120,000 square feet of retail and office tenants.Recent Conversions, Renovations, and New Hotel SupplyBetween 1986 and 2015, only two hotels opened in St. Paul. The InterContinental (former Crowne Plaza) underwent a significant renovation and conversion in 2015. The completion of this conversion and other hotel renovations has contributed to a moderate increase in average rate and RevPAR in Downtown St. Paul.In the fall of 2016, a $125-million project converted the former Eugene McCarthy Post Office Building into a 149-room Hyatt Place hotel, apartment complex, and retail space. In addition, the mixed-use redevelopment of the former Seven Corners Hardware store is nearing completion. The 159-room Hampton Inn & Suites opened in November 2016, and the project's market-rate apartments and all retail bays are scheduled for completion by March 2017. Furthermore, reports from January 2017 describe plans for a proposed upscale hotel along the riverfront on the former site of West Publishing and the Ramsey County jail, in addition to a Residence Inn by Marriott near the hospital, and a boutique hotel in the former Empire Building.The Opus Group and Greco were selected to develop the Seven Corners Gateway site, with plans for a Radisson RED hotel, multi-family housing, and retail; however, a timeline has not yet been established for this project.The following map overlays the new hotel supply in the market with a sample of new demand generators.BloomingtonBloomington's diverse collection of leisure, commercial, and meeting and group demand generators includes entities such as the Mall of America and Minneapolis-St. Paul International Airport; corporate operations for Best Buy, Health Partners, Toro, Seagate, and Wells Fargo; and association, sports, and SMERFE-related events year-round. Retail and Office DevelopmentsThe 5.6-million-square-foot Mall of America complex attracts more than 40 million visitors a year, with up to 40% residing more than 150 miles away. Construction of Phase 1C was completed in late 2015; this phase included the 342-room JW Marriott hotel, 170,000 square feet of office space, and 135,000 square feet of retail space. Plans include a more than $500-million expansion of up to 10 million square feet, incorporating an entertainment/arts venue, luxury retail, and high-end hotels. Other recent changes in the market include the January 2016 opening of the Hyatt Regency Bloomington Central Station and the 2016 opening of the Indigo multi-family apartments. The most recent addition of office space to the Bloomington area was the 170,000-square-foot, Class-A office building known as the Offices @ MOA, attached to the north end of the Mall of America. As of January 2017, approximately 75,000 square feet of space remained vacant, with Cray Industries as tenant for most of the occupied space.New Hotel SupplyThe most recent additions to Bloomington's hotel supply primarily comprise upscale, upper-upscale, and luxury properties. The following chart illustrates the current inventory of hotel rooms in Bloomington by property type.Its diverse mix of businesses and demand generators has led to significant growth in new supply in Bloomington over the past decade, a stark contrast to supply trends in Minneapolis and St. Paul.An AC Hotel by Marriott just opened in late February 2017; it was developed in conjunction with a restaurant, coffee shop, and grocery/pharmacy on a parcel directly northeast of the Mall of America. A 300-room InterContinental Hotel, to be connected to Terminal 1 of Minneapolis-St. Paul International Airport, is currently under construction, with a 2018 opening planned. According to the City and brand representatives, additional smaller, limited-service hotel projects may come to fruition in late 2018/early 2019 on the east and southeast sides of the Mall of America; however, branding and timing for these proposed projects have not been formally announced. Notably, the former Ramada Mall of America hotel was closed and demolished in 2016, and no immediate plans for redevelopment of this site are in place. The Radisson Hotel Mall of America was closed on February 1, 2017; it will be converted to a Great Wolf Lodge. Combined with the closure of the Ramada, this takes more than 650 rooms out of inventory in Bloomington for much of 2017.Looking ForwardMinneapolis, St. Paul, and Bloomington boast strong sources of demand, which has led to moderate growth in RevPAR over the last several years and attracted new hotel development. Low unemployment (3.6% for the Minneapolis-St. Paul MSA), a relatively affordable cost of living, and a plethora of cultural and recreational activities continue to attract employers to the area, fueling the strong economic engine that has further propelled new hotel development. While economic indices are favorable, the recent and upcoming influx of hotel supply is anticipated to result in more normalized levels of occupancy, coupled with modest growth in average rate in the coming years. These new hotel arrivals, however, come after a years-long drought in new builds, and strong hotel performance and upcoming events like the Super Bowl support an optimistic outlook for these markets in the near term. http://www.bizjournals.com/twincities/news/2017/03/02/macy-s-buyer-hires-pohlads-united-properties-to.html/ http://www.twincities.com/2016/12/22/minnesotawildstpaulmacysleaserooftoppracticerink/ http://www.startribune.com/realestatenotebooksiteofformerjailinstpauleyedforupscalehotel/411761916/ http://www.startribune.com/st-paul-grants-developer-status-to-opus-greco-for-seven-corners-gateway/280108612/
HVS - 11 April 2017
OverviewNigeria's new administration has been in power for more than a year now. President Muhammadu Buhari took power on an anti-corruption platform, the total defeat of Boko Haram and a return to significant economic growth. With the country in a state of limbo due to the President's protracted absence from office because of illness, what has been the government's performance record thus far? And how has this impacted the hotel industry?EconomyNigeria's GDP growth over the last five years has been a rollercoaster ride. In 2012, the IMF recorded 4.3% rising to 5.4% in 2013 and in 2014 growth came in at 6.3%. From there the wheels started coming off and 2015 growth dropped to less than half of the previous year's performance at 2.7% until the country experienced a recession in 2016. GDP was recorded at -1.8%.Whilst the Nigerian economy is well-known for its oil production, this resource is only one of several sectors that fuel the country's GDP growth. Nigeria is Africa's largest economy and its position as the most populous nation on the continent ensures that its agricultural product has a captive market. Domestic demand for financial services also helps to sustain this economic sector. Sadly though, oil is the commodity that drives Nigeria's economic performance narrative in global markets and when Brent Crude prices drop, the resulting perception is negative on the overall Nigerian economy. To overcome this, Nigeria has a massive task of marketing its other economic sectors and the tourism industry can play a significant role towards achieving the country's economic goals. The dollar exchange rate picture for Nigeria has been a bleak one, with a rapid deterioration from NGN157 to the greenback in 2012 to NGN317 at the close of 2016. Closer to mid-2016 the exchange rate peaked at NGN350 before settling at NGN317 at the time of writing this article. Media reports are now putting the currency at NGN520 on the black market.The outlook for Nigeria's economy is however positive with projected GDP growth of 0.7%, 1.6%, 3.2%, 3.8% and 3.3% in 2017, 2018, 2019, 2020 and 2021 respectively. The GDP growth picture in the graph below illustrates a steeply rising trend over the four-year period leading up to the end of the decade in 2020.The population of Nigeria is also projected to grow from 183,000,000 in 2016 to 210,000,000 in 2021. All these factors bode well for the economy of NigeriaNigerian Tourism & Its Drivers In LagosWhereas Nigeria is blessed with ample ecological and cultural resources, leisure tourism has however not taken root for a country with such a rich tourism asset base and a large population. Nigeria has a large middle class when one considers the country's high population density, and most of this sector of the populace lives in the cities. In addition to the middle class, Nigeria has one of Africa's highest diaspora, which lives in most of the world's richest countries. Some of the wealthiest of them work in the professions and others are businesspeople. They generate massive incomes which they remit to Nigeria. Many of them also visit home regularly and travel home with their families, during which time they stay in hotels.Nigeria is well-supplied with airports 54 in total, 40 of which have paved runways. Other road, rail, port and marine infrastructure is also well-supplied. The main city centre infrastructure is unfortunately not properly maintained as witnessed by the high levels of gridlock in Lagos. Nigeria's National Tourism Development Corporation (NTDC) is the state entity tasked with the rapid development of tourism in the country. Its programmes are unfortunately not very well-communicated with the world and this creates problems for the industry. Linked to this challenge is the unavailability of reliable data. The internet is awash with tourism pieces from even some of the most respected digital sources, however most of the them refer to point data when the industry is need of time series statistics. For example, the NTDC has recently boasted that Nigeria generated US$1.1bn from tourism in 2015. Whilst this figure is not being compared with any other period, it is still a significant achievement.The African Union has started work on the planned creation of an African Univisa to facilitate seamless mobility between the continent's 54 member states. Nigeria stands to gain much from this initiative as she is reputed to charge one of the world's most expensive visa fees and the acquisition thereof is very prohibitive with many documentary and application process requirements. In Lagos tourism is driven by the corporate and cultural segments. Nigeria has a strong cultural and religious heritage and this type of tourism takes place on weekends as large numbers [LD3] [TM4] of rural [RT5] dwellers flock to the cities for marriage engagements, wedding ceremonies, graduations, festivals and funerals. The strong social scene also makes for a good mix of weekend life the two main religions bring many more people together more frequently. Consequently, Lagos enjoys a significant influx of tourists over weekends, the bulk of whom come from the rural areas.Nigeria's oil deposits are unique in that they have low levels of Sulphur, thus enabling a more efficient extraction of crude. This property makes oil drilling very attractive to oil companies and that is one of the main reasons they continue to do business in the country. Also, the relative proximity of the oil deposits in Lagos, the country's economic and business centre, means that the corporate segment supports a significant amount of hotel industry's weekday demand. More good news, if a little less exciting, is the slow and steady recovery of the price of oil. At the time of writing, Brent Crude was trading at US$55.47, a vast improvement year-on-year, but still way below the peak. The chart on the left with data from Index Mundi depicts Nigeria's oil production trend between 2006 and 2015. The combination of falling output and price is a clear indication [LD6] [TM7] [TM8] that Nigeria needs to diversify its economy away from oil and to urgently look at growing its tourism industry. Armed with a large economy and population, the country is well-positioned to achieve this.Hotel Market Performance UpdateHow has the Nigerian hotel industry performed in the last 12 months? Trading conditions are tough for businesses. Sun International Group has made an early exit out of the Federal Palace Hotel in Lagos. On the positive side, the Marriott International'sRenaissance Hotel has recently been openedIn the third quarter of 2016, Hotel News Now has reported that Lagos experienced[LD9] a double-digit occupancy drop of 11,3% to 44.7%. Whilst this occupancy looks very low, it must be borne in mind that during this period Nigeria's economy experienced negative GDP growth. Revenue per available room was however up by 8,5% to NGN41,487 and this translates to US$136 at a rate of NGN305 to the US dollar as published by the Central Bank of Nigeria.The online booking service JumiaTravel in its recently released Hospitality Report [LD10] [TM11] Nigeria for 2016, has reported that Lagos hotels achieved an average occupancy rate of 58% and an [RT12] [TM13] average room rate during the year of US$78. JumiaTravel conducts bookings for all hotel types in Nigeria, which includes unbranded properties. It is our assessment that the average room rate could have been influenced significantly by the unbranded properties.Nigeria's hotel industry performance was impacted upon by the country's economic recession during the third quarter of 2016 and a deteriorating NGN/USD exchange rate. [RT14] In an effort to mitigate the consequences of the devaluation of the Naira, hotel operators cannot double the price of rooms in Naira to compensate for the loss in value against the dollar, meaning the all-important foreign currency earnings are no longer supporting the industry.Other challenges experienced by the industry include expensive but erratic power supply, a steadily increasing number of hotels entering the market, lack of grading standards and inadequate hospitality skills.If the NTDC and the government can address the challenges listed above, Nigeria's hotel industry performance can achieve its objective of higher occupancy and room rates. For instance, tapping into the massive weekend tourism from the rural areas can help achieve this objective.The Investment ClimateNigeria has dropped one place in the Top 10 African Investment Destinations. The current standings are as follows: South Africa, Egypt, Morocco, Ghana, Kenya, Nigeria, Ethiopia, Ivory Coast, Tanzania and Algeria. One of the main reasons for Nigeria's poor performance is the security situation in the country. The Boko Haram insurgency is growing in its attacks in the northern states. Whilst the country has put in place many ambitious plans of growing the tourism pool through investment in infrastructure, not much action has taken place. A recent government investment in a major housing development has however been very well received by the media. Much as it shows a good response by the state to national needs, this type of investment needs to be accompanied by similar initiatives in public infrastructure expenditure. Foreign direct investment is the favoured vehicle for the creation of much needed tourism facilitation infrastructure on the continent. For Nigeria to take the most advantage of its rich natural and cultural heritage, the government needs to also invest significantly in public access infrastructure and in the upgrading of the country's tourism assets.A few tax incentives for hotel developers have been put in place. For example, investment related guidelines published by the government state that 25% of income derived by hotels from tourists in convertible currencies would be tax-exempted provided such income is put in a reserve fund to be utilized within 5 years for expansion or the construction of new hotels, conference centres, and similar utilities that are useful for tourism development. An additional 100% tax holiday for seven years and an additional 5% depreciation over and above the initial capital depreciation have also been announced. Private sector [LD16] investment in the hotel industry has been robust over the last half decade or so, with Nigeria having the largest hotel development pipeline in Sub-Saharan Africa. The table below lists some hotel developments that are in construction and have been earmarked to enter the Lagos market in the next five years. Building cost per room for a hypothetical four-star hotel in Lagos is estimated between $300,000 and $400,000. As shown in the accompanying room values table above, the value per room of a hypothetical four-star hotel in Lagos is just below $230,000. The difference in these values can be explained by the impact of Nigeria's high inflation rate and the import content premium that developers face for new assets as[RT17] [TM18] most of the development cost elements are unavailable in Nigeria, from construction skills to materials to labour.According to an article in Africa Property News, "private equity investors were the main source of funds in the office and retail sectors. The likes of Actis, RMB Westport and then local funds including Africa Capital Alliance and Landmark have been at the forefront of allocating capital to real estate developments across different sectors and locations in Nigeria." Some of the more notable non-hotel developments in Lagos include the Eko Towers II Mixed-Use Development, phase three of the Victoria Mall as well as The Sphere Office Development. According to Construction Review Online, the Dangote Group of Companies has pushed the construction button on a US$ 100m truck assembly plant. This facility will target an output of 10,000 trucks per annum. The group has also started with the construction of a US$17bn Dangote Refinery, petrochemical and fertilizer plants. The latter is slated to open in 2019 and will have output capacity of 650,000 barrels per day of product.In ConclusionNigeria is a very important market for the growth of the tourism and hotel industry in Africa. To regain its prime position as one of the most attractive markets in West Africa, the Nigerian government must work hard to retake the initiative from [RT20] [TM21] some of the other regional cities like Accra and Freetown. Leisure tourism growth initiatives must be intensified to help the country diversify its economy from oil and gas. All the other initiatives that have been put in place to increase security must also be intensified.There are signs that the worst may be behind us and the beleaguered hotel industry may now enjoy a slow but steady recovery. It may be some years until Nigeria regains its previous stellar status, but steady growth would be a welcome start.