Joining Montfort’s Andrew Teacher in the latest episode of PropCast, three hospitality experts – Jackie Newstead, real estate partner at law firm Hogan Lovells, Derek Griffin, FTSE 100-listed Whitbread’s head of acquisitions, and Richard Servidei, co-founder of alternative property consultancy firm AREA – offer their perspectives on the challenges facing the sector, and where some of the best opportunities currently lie.
While the strong post-Covid rebound in the hotels sector has been something for the industry to celebrate, “the leisure industry generally is facing exactly the same challenges as the rest of the economy,” according to Jackie Newstead. “It’s equally exposed to rising interest rates and inflation.”
As such, a healthy increase in rates and inflation has often been matched by an increase in running costs. This, too, is Derek Griffin’s experience observing Whitbread’s biggest division, Premier Inn. But he argues that lower-cost hotels have been less exposed to operational pressures. “We’re able to control our margin in the budget sector,” he remarks. “In the five-star market, you are more exposed.”
A big question hanging over the industry is whether Covid-era patterns of living and working are here to stay. While business travel in large metropolitan was initially slow to get back up to speed, Griffin says, “London is strong and is probably leading the performance, whereas a year ago it was slower compared to other parts of the market that dealt with staycations, for example.”
Richard Servidei of AREA – which stands for Alternative Real Estate Advisors – argues that today’s hospitality investors are in it for the long term and can afford to ride out short term market fluctuations.
“Investors today focus on IRR and they accept they are buying an investment for a long period of time,” he explains. “With that, they accept the market in ten years will be different to today, so they accept a trended return over a period of time.”
As such, Griffin doesn’t put a deadline on Whitbread’s ambitions to expand to 125,000 rooms in the UK, from the current base of 83,500. “It’ll be as fast as we can do it, given market sentiment,” he notes. “Last year we opened 2,000. We’d like to open double that, but we can’t do that just with Whitbread money. So, we need to work with people like Richard to work out how we can unlock other people’s.”
Newstead thinks that refurbishing commercial buildings can play an important role in meeting such ambitious targets, particularly given the issues many owners of commercial property are facing in agreeing refinancing. “There’s a fairly drastic reduction in the amount the lender is prepared to refinance, and the increase in rates might be double,” she observes. “That is definitely going to spin out some assets that just are no longer sustainable financially.”
Griffin agrees, recalling anecdotally that “we’re taking phone calls from people who own office assets, when they haven’t done so for five or six years – because their market’s softening.”
Revaluations have also opened up opportunities for cash buyers, Servidei observes. “What we’ve seen this year is people with money, generally cash purchasers, taking advantage of accessing stock that they’ve not been able to access for the last ten years because they’ve been priced out,” he says.
It’s a trend that Newstead has also seen in her advisory work. “What we’re seeing now is more owner-operators coming into the market,” she explains. “Institutions are pretty much out of the game. And a lot of that’s to do with risk profile.”
Luxury hotels in particular present too much of a risk for institutions that need to pay out pensions or policyholders, she says, in part due to capex risk and the unpredictability of changing fashions.
Griffin offers a final word of caution over measuring new development. “People need to take care of not overstating new supply,” he says. “We are quite skeptical of the amount [of new hotels] that some hotel analysts are saying are going to open. Some will inevitably fall away or be used in different ways.”