• 16 December 2018
The Conversation : Helping First-Time Owners Build a Hotel

The Conversation : Helping First-Time Owners Build a Hotel

Building your very first hotel? Not sure what to do to or who to talk to? Hotelintel.co has invited a group of experts who will help you not only build your first hotel, but also make it a success.

Joint our conversation today are:
Alexandre Bystrzejewski: Managing Director at Nova Asset Management;
Atakawee Choosang (Eddie): Associate Director - Head of CBRE Hotels, Thailand;
Mauro Gasparotti: Director, South East Asia, Savills Hotels;
Paola Orneli Bock: Vice President, HVS

What's the most common issue first-time owners encounter when they come to you?

Alex: Usually when first-time owners come to us, it is because they are in front of a wall - a wall of questions - a wall of questions that they could hardly answer alone.

There is also the case where owners think that everything is ready to go, and they would like a second opinion, an expert opinion, before starting to move forward and build or redevelop their hotel.

Most of the time, many owners forget to do an in depth market & feasibility study. They underestimate the development cost of a hotel, especially the various soft costs associated to a hotel. They have done a superficial analysis based on unrealistic performance of their hotel once in operation. That means that they are basing their decision to invest on erroneous groundwork. In a nutshell, they are moving forward blind, which is quite hazardous, especially when you consider the risk and capital associated with any real estate development.

Eddie: CBRE Thailand serves clients in most key resort destinations such as Phuket, Samui, Pattaya, Hua Hin, and Chiang Mai. What we find is that most first-time hoteliers do not realize the kind of time commitment, expertise, energy, and experience they will need to successfully own and run a hotel. They are often enchanted by the idea of owning a hotel without understanding the full scope of work that will be involved in making it a success.

In some cases, the owner may understand the work necessary but after starting the project finds that they are lacking is some experience or expertise they need to successfully run and maximize the business. As a result, many people come to us with a desire to sell the hotel property.

For those planning to keep and grow their asset, what they are seeking is how to improve the performance of their asset, by either learning to manage the asset themselves and hire a consultant in addition to key in-house staff to assist or look for a professional group / brand to manage the property for them.

Mauro: first-time hotel developers are usually savvy business people, with a good understanding about the business environment, but lack knowledge on the hotel development process and hospitality industry. The majority of our support is requested in the planning stages, both for greenfield projects or repositioning. Correct planning will have saved a lot of future issues that could arise in the design, construction and management processes. In a fast changing environment like today, owners can no longer predict tomorrow by simply looking at yesterday. They need to have the ability to look into changes and strategize accordingly. The very common mistake that first-time owners do is have the tendency to copy what is existing without aiming to innovate or improve by looking at all the global trends that will completely reshape the industry.

Paola: It really depends on the background of the client. Many have experience in real estate development and are looking to invest in their first hotel venture. As you can appreciate, given the operational component and level of details required, hotels tend to add a lot of complexity and layers to the development process. It’s not as straightforward as they may have experienced in the past.

Also, engaging with hotel operators to enter into a Management Agreement basis is a concept unique to the hotel industry. It takes time to understand how the responsibilities and roles are assigned and enforced.

Lastly, developing and owning hotels are two very different competencies.

What kind of questions should first-time owners be asking Asset Management companies before he / she decides to hire one?

A: They can ask any question, but usually it’s the other way around. NOVA will put forward questions that owners have usually forgotten to ask themselves about their project.

At NOVA we like it when owners ask us bluntly “why would I need you?” or “what will be my ROI on my investment with your services?”. We like those questions because we have so many examples of situations illustrating the real value of having an asset manager by your side.

E: The first thing to be clear on is what type of hotel they are trying to be and have a basic needs requirement for their property. That will equip the owner to better know what types of questions to ask. More objectively, when they are looking for an Asset Management company, they should ask what kind of experience the Asset Management company has. Understand their track record to see if they are a good match for your asset type and class.

The second aspect is to ask and try to gain a good understanding of the network the Asset Management company has in the industry related to service providers and connections that will improve the physical asset in the industry. This can be in terms of brand image, asset improvement, marketing and sales, talent connections, etc.

The age of the management company is also worth considering because the longer the company has been around, combined with a successful track record, the greater the chance the company will be able to drive your property forward. More time in the industry usually will result in more resources, assets, connections, and experience / expertise which will enable them to guide the property owner in strategy and management that result in positive results.

M: We always advise owners to firstly look at their underlying reasons for searching an Asset Management company. There are many reasons that lead to the choice of third party management company, and each of those reasons may lead to completely different outcomes as far as the final selection. Owners should not look at simply ‘the best deal’ or the ‘most known brands’ or the relationship with some single individual within the management company. The choice should always be a consideration of all of the above combined.

In some cases, owners simply prefer not be involved in operations and they are looking for a third party management to use as a trusted partner for their property. In such cases, the establishment of the right degree of trust that goes beyond the simple contract is important. In other cases, owners are looking for more financially driven purposes - perhaps a repositioning of the property to seek increased rates and occupancy, or maybe looking for more control over operational costs. In cases like this we would suggest looking more attentively into the ability of company to generate extra returns, the structure of the operational team as well as the sale and marketing, and, of course the commercial terms of the contract including well-structured performance tests.

P: Perhaps the most important question might be: what is the asset manager’s value-add proposition? It can be difficult to size up the challenges a hotel owner encounters as the operational component of the asset becomes more prominent closer to the opening date and beyond. Establishing what capabilities an owner needs to cultivate in-house versus contract with a third party asset manager varies with the size of their portfolio. Being familiar with the type of asset, whether a resort, city hotel or serviced apartment and the particular geography should all be explored.

What's your advice to first-time owners on how to select the right brand? (Or should it need a brand at all?)

A: There are no good or bad answers here. Brand or no brand, operator or owner-managed, it all depends on the size of the hotel, its location, the owner’s profile and the owner’s goal for their property.

When it comes to selecting a brand, Owners may think it’s easy to get in touch with potential operators by themselves and select one. The reason they shouldn’t is that selection involves more than mere introductions. Most of the time, owners will go back to the operators standard terms. At NOVA, our goal is to protect the owner’s interest by implementing a very structured process in order to invert the leverage and therefore get the best brand on the best commercial terms.

E: CBRE advises client’s in many operator selections. The first consideration before deciding to manage in-house or use a brand name is to understand where the company stands with the asset. This involves conducting a feasibility study, or at the very least getting advice on strategy in comparing in-house or third-party management; which, will set the direction for Asset Management strategy.

In helping the owner select the right brand, we consult the owner on some key points that will guide them to a brand that will meet their needs. Some of the key questions that the developer needs to be able to answer in selecting a brand why they want to select a brand, how that specific brand works in their specific location, positioning of the hotel, and consider brand management fit with their own company. We heavily recommend an advisor who has experience in the industry and can identify all the key considerations on behalf of the owner to successfully manage and negotiate contracts with operators and service providers.

M: The right answer is ‘it depends’. In several cases a brand is absolutely necessary for the owner to create additional value in a competitive environment. In other cases, the important part is not the brand itself but the support that management companies will have in planning and operations, especially for first-time owners. That said, for certain types of properties or for experienced owners with multiple operating projects, a qualified and dedicated GM could be enough and it’s not necessary for a management company to get involved.

One of the positions that we always see as underrated is the ‘Owner Representative’, which is key for owners to be able to properly supervise management companies and add additional levels of control into the quality of management and strategy.

P: When we conduct this kind of assignment, our first task is to understand the owner’s vision and aspiration for the project, their priorities, whether these are flexibility in terms, flexibility in design, international distribution systems, localised support teams, etc. This is a crucial step to better understand what kind of brand would suit the project best; sometimes it is down to the highest returns, sometimes it is all about aspirations. And no, it doesn’t always have to be a brand and we can assist owners who are willing to do so, to build their management team and corporate functions. Although very challenging, developing their own brand also appeals to many owners.

What's the most challenging thing in your job as an Asset Management company?

A: The most challenging thing in our job is that most of the hotel owners / developers don’t even know that there are Asset Management companies out there to help them achieve their objectives. Most of time they know already that something is missing but they just cannot put their finger on it. Many of our clients come to us when they are facing major difficulties but actually if they knew from the outset what kind of value we can bring to the table, they would have contacted us much earlier.

M: There are several situations where an Asset Management project can become more challenging. Sometimes it’s related to the owner and the ownership / management structure, with owners intent on being deeply involved in operations, but lacking a long-term vision, simply focusing on short term cash flow and over-controlling things. The approval processes become very complex and commonly slow down operations and discourage staff. There may be no long term vision to be shared with personnel and the property becomes merely a ‘revenue vs cost’ business instead of aiming to be a product to deliver superior service and experiences for the guests.

The other issues we face are sometimes not related to owners but to markets. It seems that it is becoming harder and harder to source trained staff at every level. In places like Vietnam or Cambodia, where a large amount of new openings has required mass hiring, finding reliable candidates seems the single most challenging task that several properties are currently facing

P: To bring together and balance the expectation of the owner and the operator / management team. Communication is key to the relationship between the two parties and that is where the asset manager comes in. At the end of the day it is all about balancing priorities to ensure the highest possible return for the owner and maintain a win-win environment.

Bashing up the operator to cut costs for the sake of it is effective, but very short-sighted. The asset manager needs to maintain the strategic thinking, establish the vision and drive the implementation of the related action steps. Finally, remaining abreast of the ever-changing market place and practices, new technologies, etc, is also a vital component of our role as asset managers where exposure to many different types of properties and geographies across Asia can add significant value.

About Author

Wimintra Jangnin

Wimintra Jangnin

Wimintra Jangnin is the founder and Editor in Chief of Hotelintel.co, A Political Science graduate, who falls in love with hotels. When she isn't writing, she is speaking at industry events.
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