To own or not to own? That is the question

Optimism about hotel development, financing and property values is growing.  During a recent seminar I hosted at World Travel Market, a panel of experts said that new investment from insurance companies, hedge funds and private equity, plus the fact that banks are lending again, means the hotel investment market is enjoying a buoyant period. This is true not just for London but for many UK provincial cities.

Does this mean we will see more hotel management companies moving into property ownership again? The arguments for and against hotel operators owning bricks and mortar are often equally compelling.

It is often argued that owning property provides stability. Is there a correlation between Accor which owns a significant number of its hotels having 15% staff turnover, and IHG, which owns virtually no hotels, having 33% staff turnover?

Ownership means a hotel operator has full control of the building and means rent increases and troublesome and potentially costly legal wrangles can be avoided. You can receive a double ROI from owning and operating a hotel: the income from its operation and, hopefully, its appreciation in value.

Transaction activity in the UK hotel sector has increased significantly, with £1.4 billion worth of transactions completed in the third quarter this year. With one quarter still remaining, transaction values have already exceeded 2013 levels. The highest valued acquisition this quarter was for 144 Travelodge hotels purchased by a consortium of investors for an estimated £520m.

Graeme Smith, Partner at Zolfo Cooper, says this year we may even see total values comparable to those before the downturn. So there is plenty of healthy appetite to invest in UK hotel property. But surely we need to remember that property values are cyclical and property crashes have precipitated many of the gravest economic downturns in history.

Some of the largest global hotel groups learned hard lessons in the past that made them very keen to exit ownership. Once upon a time, Marriott, for example, owned nearly 4,000 hotels. When the 1991 recession hit, the hotels were empty and Marriott could not sell them. Today it owns just five.  

Similarly, it is argued that IHG’s rapid growth would not have been possible if the group owned a greater proportion of its assets. In 2009 it owned just 17 out of 4,400 hotels. The value of the stock has more than tripled in the five years since 2009 and the group now owns even fewer hotels – just nine out of 4,700 worldwide.

By 2023 the global number of tourists is expected to double to two billion. For global hotel groups that need to put ever more flags in the map, if their money is tied up in ownership, how can they move fast enough to keep up with demand?

Although the hotel investment market typically follows a seven-to-10 year cycle from peak to trough, there are no firm indicators of an imminent crash.