Buy a hotel: sector profile

The hotel trade is subject to the caprice of various external factors

Like most industries the hotel trade is enduring a torrid time, with revenues across the sector falling 9% during the first quarter of 2009.

But look a little closer and the picture isn’t uniformly bad, as Alistair Murchie, who heads the Cirencester office of Colliers Robert Barry, which specialises in selling properties in the hospitality industry, explains: “It depends so much on where you are.

“Places with a lot of tourist visitors seem to be holding up pretty well, because of the weak pound, whereas if you’re dependent on conference trade you’re probably finding life much more difficult. Different styles of hotels would say different things.”

The Guild of Travel Management Companies, the voice of the business travel industry, reported an 8% drop in reservations in January and February, figures described as “catastrophic” by Hyatt International vice-president of sales and marketing Andrew Ashmore.

However, London hotels seem to be largely unscathed by the recession as tourists flock to the capital to take advantage of the weak pound. InterContinental Hotels, the world’s biggest hotel group, said that its 49 London hotels are a rare ‘bright spot’ in a market where its profits have tumbled 44% in the first quarter of this year.

Budget chains such as Ibis, Travelodge and Holiday Inn are also proving resilient as businesses and tourists cut back.

Budget chains such as Ibis, Travelodge and Holiday Inn are also proving resilient as businesses and tourists cut back

Fortunes can change quickly in this sector.

As hotels in the capital escape the worst of the recession following the precipitous collapse in the pound, it seems a long time ago that sterling reached a 26-year high against the dollar, slowing the flow of American visitors and money into the UK. But it was only two years ago that the exchange rate reached the other extreme.

Two years before that tourist numbers in the capital collapsed following the 7 July terrorist attacks.

Health scares, too, can decimate the trade. In recent years we’ve had the SARS outbreak costing the hospitality sector in East Asia millions, foot-and-mouth damaging tourism on these shores and, just recently, the swine flu outbreak devastating the hotel trade – and admittedly all other sectors – in Mexico.

Susceptible to the vagaries of geopolitics, terrorism, health scares and the money markets, big news events can send share prices tumbling for companies with portfolios concentrated in the affected region. The more countries and regions hotel groups operate in, the more they spread their risk, and the more insulated they’ll be.

Emerging markets

Expanding presence in particular regions serves another strategic purpose, namely capitalising on the gradual shift in global economic power. The shrewdest operators have been proactive in responding to the inexorable ascent to the economic top table of India and China, which together account for one in three people on the planet.

Now that the global slowdown is taking its toll on traditional locations, however, this process is accelerating.

Marriott, the US-based chain, is to open about 65 hotels in the world’s two most populous nations, as well as in the UAE. French-based Accor, meanwhile, Europe’s largest hotelier, is tripling the number of hotels it has in the Middle East.

Emerging markets still represent a relatively minor part of the business of large North American and European chains, but they’ll be highly significant in the long term. Robert O'Hanlon, tourism, hospitality and leisure partner at consultant Deloitte Middle East, says: “There is genuine belief that markets like China and India are underserved and in terms of business tourism and hospitality tourism there are opportunities for growth.”

Low interest rates are, unsurprisingly, exerting a significant effect on the market, as Alistair Murchie, who has played a major part in the sale of numerous hospitality businesses around the Bath and Cotswolds area in recent years, explains: “There’s been strong interest in certain sections of the market, particularly those where investors rather than hands-on operators are active.

“This is largely driven by low interest rates, so that these sorts of buyers are getting very little return on their money on deposit, and they’re keen to get into something with a better yield. They’re looking for quality properties, and those are getting a very good response indeed.”

As with so many sectors right now, values are failing but well-run businesses are holding up better and still attracting significant attention. If anything, the appeal of successful, accomplished businesses is all the greater for being a reliable sanctuary from the current pervasive uncertainty.

Hotels in general are “down from where they were two years ago, without a doubt,” says Murchie. “The market isn’t big enough to put a meaningful percentage on it, but it’s probably about as far down as the housing market.

“However, the most desirable ones have fallen in value perhaps a bit less.”

“Lower down the price range it’s more difficult,” he admits, “because the banks are reluctant to lend to the sector.”

There are signs, however, that credit restrictions are easing. “The tightening up of loans has made the market pretty slow for about a year, but it’s been much easier for the last six to eight weeks.” 

A Maltese hotel group has just managed to secure a huge loan for the acquisition of the Metropole Hotel near Trafalgar Square. International Hotel Investments paid £135m for the iconic landmark, and will plough in another £135m to develop a “flagship London luxury hotel”.

The hotel is expected to be up and running by the end of next year, and will be operated by fellow Maltese Group Corinthia Hotels.

“Entering the UK market has been a target for us for many years,” says International Hotel Investments chairman Alfred Pisani.

“We believe this redevelopment project, at this time and in what will be one of London’s iconic hotels, will reap tangible immediate and long-term rewards not only by virtue of the investment itself, but also in widening the appeal of our Corinthia Hotels brand into this world capital.”

On the whole, this is still a market geared towards acquirers with plenty of capital targeting robust businesses with pedigree. “There are some signs that some banks are pushing their loan products again,” says Murchie, “but they do want to see solid profits; they’re not going to lend money on fanciful projections.”

Sidelined

This is a lamentable state of affairs, as it prevents so many inspirational success stories from being written. The hands-on operator, with his antennae for potential, passion for the sector, and knowhow of what makes a hotel function well, has frequently been sidelined from the market since the credit crunch.

“They are in the market but they often have a problem raising the finance. They can do it for places with a very good bottom line, but it’s difficult,” says Murchie.

Few things are as inspiring in business as a canny, independent operator taking over an ailing business and rejuvenating the staff, refurbishing its outdated decor, overhauling its modus operandi and restoring it to pride and profit.

But banks are still unmoved by such romantic notions and resolutely circumspect, no matter how well the operator sells his vision. Fawlty Towers-type businesses are less likely to be rescued and more likely to go under in the current climate.

“Traditionally there’s a kind of buyer who buys a business that isn’t doing very well in order to turn it around, sell it and make a profit,” says Murchie. “But it’s difficult to finance it if you’re going in when it’s struggling.”

Murchie, however, was keen to echo the sentiments of many other brokers Mid Market Exchange has spoken to about a range of sectors since the magazine was launched last year: “If you’ve got the cash then it’s a fantastic time to buy, because we believe there will be more administration sales coming on.

“We’ve got a couple of very smart places in administration at the moment, the Forbury Hotel in Reading and Barnsley House near Cirencester. They’ve got guide prices of £4m and £5.5m respectively, and those are getting huge interest.

“Some sellers have found trading difficult in the last few months and I think there are some good deals to be done with experienced operators who have a considerable amount of cash.”

Fortified by a €600m bond Accor is intent on capitalising, having earmarked €100m a year to acquire hotels for sale that are put on the market as a result of the global slowdown. The group, which counts among its brands the budget Ibis chain and the luxury-end Sofitel hotels, has otherwise been reining in spending as the downturn hits profits, but is willing to make significant outlays when the downturn throws up opportunities.

Again, Murchie, who sold a hotel through Robert Colliers Barry before joining the company in 1988, offers similar advice for sellers in this sector as brokers have offered for those in other industries. Just as it’s a time of opportunity for buyers, sellers have to face some sobering truths.

“They need to know that they can sell. There are buyers out there, but you have to be realistic about the asking price.”

And if they’re to correctly gauge the value of their asset in such a turbulent climate, “then good advice is very important indeed.”

Murchie, who operated the award-winning Highland hotel in the 1980s, says that “if you have the skills to run a business well you can make a very good living. A lot of people live within the business.

“And people who know what they’re doing very often manage to buy well, turn a business round and manage to sell well.” As for the risks to the acquirer in this industry, that’s essentially “the flip side of the good thing – because the value is so closely tied to the success of the business, it does depend on you being a good operator to benefit as an investment.”

So what should an acquisitive operator look for to minimise any risk?

“A solid business, with the property in good condition and a good location. It’s a cliché, but location is so important.” 

Asked what trends he has observed in the market in recent years, Murchie says: “There has been a growing number of lodge-style hotels in recent years, and although we haven’t got the same number as they have in, say, France, there are still plans to build many more.” 

This is not a sector where smaller players will inevitably get subsumed within large groups. Economies of scale do not render them uncompetitive and independent hotels can compete with major groups on customer service and facilities.

“We still find there is huge customer demand for privately owned, owner-operator businesses,” insists Murchie. “There is still scope in this country for the private operator to thrive.”

Read about the impact of TripAdvisor on the hotel sector and online reputation management.