Our specialist hotels and leisure team highlight the key factors and trends at the forefront of discussions at the recent International Hospitality Investment Forum (IHIF) 2023 conference in Berlin.
Fortune favours the bold
The conference theme this year was ‘Fortune favours the bold’ and, on the morning of Tuesday 16 May, Professor Ian Goldin left many attendees considering exactly how bold one needs to be with the multitude of global risks at play, including:
- the shift in economic gravity from west to east;
- the talent war;
- the stifling effect of some countries seeking to reduce migration;
- the post-COVID instability or tension caused by mistrust between superpowers; and
- the impact of the Ukraine war on inflation and consequently interest rates.
Despite these factors contributing to slow economic growth, Professor Ian Goldin shone some light on the position by noting how “hospitality is the bright spot of investing” when compared against other real estate classes. This was echoed by many throughout the three-day conference, and it’s clear that there is considerable confidence in hotel investments – in the right locations – with the UK being a target location for many external investors.
The cost of debt
Speakers noted that the cost of debt has impacted the fluidity and progress of transactions. While this may provide opportunities for the ‘bold’ that are willing to take on the increased cost, or with the capacity to inject equity, many investors will be looking for debt either to de-risk, or to spread risk against multiple investments; or to manage a pipeline of transactions.
As a result, investors continue to wait and see how the lending market evolves and are seeking sufficient stability in finance costs to provide longer term confidence. As overall pricing between mainstream and alternative lenders has converged in the past 18 months, flexibility is becoming a material differentiating factor.
The flip side of this is how existing owners will address impending refinancings and the consequent impact on operational costs. Diversifying use to react to new trends or demands and stricter control of operational costs – including making use of all capital allowances available for hotel owners and operators – will assist in preserving value in this inflationary environment.
Another consequence, which has been evolving for some time, is greater owner involvement and participation in management, with more incentive-driven arrangements, to drive operational efficiency.
A people-focused industry
In the CEO panel discussion, Dillip Rajakarier of Minor Hotels, presented his vision to “not be the biggest, but the most profitable”. He spoke about the importance of culture and people and being authentic in this industry.
Oliver Bonke of Deutsche Hospitality spoke of the need to cater for the ‘emotional needs’ of employees and travellers.
Behind the various economic drivers of profit and loss, it goes without saying that investment in the right people – in a people-centred business – is critical to growth and this has always been at the core of hospitality.
While some may treat this as a given, it does appear that changes to working patterns and attitudes in the labour market need to be considered more carefully, both to manage costs and to preserve talent.
ESG strategy within the hotel sector
It appears to be universally acknowledged that an environmental, social and governance (ESG) strategy is an essential component of the business of managing a hotel.
Owners recognise the importance of implementing a strategy to enhance credentials as a responsible business and to enhance exit flexibility and liquidity. Lenders may have governance requirements that impact their decision-making to some extent.
However, it is perceived that there are two significant barriers to implementation (particularly of significant carbon reduction measures):
- owners are not currently incentivised (to a material extent) to deploy capital on ESG measures through favourable lending terms; and
- operators are not incentivised to building in strategies that impact their costs as customers are not currently willing to pay more for enhanced ESG credentials.
ESG, therefore, remains like a cloud above the industry, where owners may have experienced a light sprinkle but have not yet had to open their umbrellas.