• 14 December 2018
Why Hotel Owners are Uniting

Why Hotel Owners are Uniting

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There are many types of investors in hospitality real estate around the world.  They range from listed, tax-efficient REITS, through specialist investment funds to specific hotel-owning companies, property developers and high net worth individuals.

While some of them also manage and brand their own properties, the majority do not and usually such “pure” owners find themselves at a disadvantage when dealing with the major brands. Why? Because the big brands are larger companies, with experienced legal departments and reams of information.  They also see the hotel’s results before the owner does, which gives them something of an advantage in any discussions.

Moreover, while many owners of managed hotels are experienced – or have hired consultants who are experienced – in tackling the main, visible, fees levied by the operators, it is still easy for them to fall foul of the multiple other recharges that the brands levy.  One of HOFTEL’s legal sponsors, Mayer Brown JSM, recently identified 26 types of charges or recharges levied by the various brands whose management contracts they had reviewed.  While some of these may have been obvious to owners when they signed the initial memoranda of understandings with their partners, at least some of them will not have been.  Indeed, while base and incentive fees usually end up at around 5-7% of total revenues, the total fee/charge take of the big brands is usually in the 12-15% range. That’s often well above the share of revenue the owner gets to take home as profit, despite having put a massive amount of capital to work in buying or building the property.

To make matters worse, the OTAs are getting a stronger grip on many sources of booking, and they in turn take 15-25% of the room revenues they provide.  If you add in sales taxes, it can be seen that as very hefty proportion of an investor’s revenue disappears before they can even see it.

In a normal year that’s bad enough, but when results are hit by a recession or a sudden shock, the owners get to see only the residual profits, if any, after funding operating expenses, servicing bank debt and paying taxes.  The brands’ and the OTAs’ fees are linked to the top line and so are far less vulnerable.

That’s not to say that either the brands or the OTAs are bad for the industry overall.  The reason that the big hotel brands continue to expand is that they add value via name recognition, proprietary distribution systems, training and technical service expertise.  Similarly, the additional advertising resources and visibility provided by the OTAs has undoubtedly increased occupancies industry-wide.

Nonetheless, owners do often feel frustrated with the way the industry had developed and look around for a forum in which they can share their concerns with, and learn from the best practices of, others in their field.  Until recently, this has been quite difficult to achieve.  Owners might meet with their friends from the same city; or they might get together under the umbrella of one particular brand’s owner network.  However, to meet owners from other countries and who operate under different brands was not easy, and if it happened at all, was limited to a fleeting conversation in one of the many hotel investment conferences around the world – which are also dominated by the branded operators who sponsor them.

That all changed a few years ago with the rise of HOFTEL, a specific association for hotel property investors who pay management or franchise fees to the brands.  Beginning in Europe with just six companies, the group has now expanded to 65 members with a total holding of around US$ 80 billion of hospitality real estate.  Many major ASEAN groups are members including Boutique Asset Management and Amburaya in Thailand; three REITS in Singapore (Frasers, Ascendas and CDL) as well as three funds that invest in hotels, SC Capital, LaSalle Investment Management and Alpha Investment Partners; two large Vietnam funds and the biggest hotel investor in Malaysia, Tradewinds.   HOFTEL holds meetings in Asia, Europe and the Americas and is set to continue its expansion to be a major voice of hotel real estate companies around the world.  Founder and Chairman Simon Allison notes:  “I used to be the CFO of a US$ 500 million hotel investment platform in Europe and, even though we were one of the Continent’s largest dedicated owners, we often felt we were getting fobbed off by the operators when we asked meaningful questions.  We wanted to join a group like HOFTEL, but it didn’t exist.  It does now.”

Coming together certainly helps owners to get better visibility of their own sector and especially a better understanding of how owners from other countries think about their shared challenges.  Despite that, there is a lot of struggle ahead – the rise of AirBnb and other sharing economy sites, the power of the OTAs (Priceline’s advertising budget was 6x InterContinental’s in 2014 and growing exponentially), new taxes, minimum wage hikes and still, all too often, the lack of transparency of their most important operating agreements.

Why do people still build and buy hotels with all of those obstacles?  Firstly, because world travel is one of the unsung long-term growth industries, expanding by around 5% in year in volume terms, on a compound basis, since the Second World War.  Secondly, because if you can get it right in terms of build cost or acquisition and disposal timing, you can make very good returns.  And finally because it’s a lot more fun than other classes of real estate!

If all those attractions can be enhanced by a sector that has a united voice in tackling its problems, hotel property investment has a rosy future ahead..

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