2018 Hospitality Industry Outlook - Let the Good Times Roll... for Now

27 Apr. 2018

The International Hotel Investment Forum held in March (IHIF2018) presents an opportunity to sit back and take stock of where the industry is heading. As Hospitality Insights reported a year ago, the economic outlook at the time was cautious, but the pace of structural change in the industry was accelerating. This year, there was plenty of optimism despite some ‘clouds on the horizon’ in terms of the economy.

 

There is an absolute wall of money looking at the hotel sector at the moment, said Keith Lindsay, Managing Director EMEA with CBRE Hotels, at the start of a panel discussion on investor’s intentions in 2018 and beyond.

“2017 was a bit of a frenzy and with all the capital formation that’s happening at the moment, it’s quite likely there’ll be a repeat of that (in 2018).” CBRE’s Hotels Investor Sentiment survey sees 37 percent of investors looking for capital growth this year, compared to 24 percent a year ago.

According to Alexi Khajavi, Managing Director EMEA and Chair of Hospitality and Travel at Questex, which stages the IHIF, there’s plenty of positivity right now in the marketplace. “We’ve been in the longest cycle in the history of the industry,” he told Hospitality Insights. So since roughly 2009 it’s been quite a good cycle. I think everyone was looking over their shoulder, wondering when the party would end but the fundamentals are good.”

Russell Kett, Chairman of HVS London, said in an interview with Hospitality Insights on the sidelines of the Young Hoteliers Summit at EHL a week later that there is a ‘greater understanding’ of the asset class now and hotel investors are seeking ‘good deals’ in the sector.

“What they’re looking for in the hotel industry is the opportunity to make good money and use that investment to get a stronger foothold in the sector. No longer is it the poor relation of real estate but an asset class in its own right.”

“I think there are a few more years left in (the industry cycle) and I look for signs and can’t see any. Yes, there will always be shocks … but for the most part, the industry is on a firm footing. I don’t feel any declines coming our way.”

 

Kett moderated a panel discussion at the Young Hoteliers Summit on ‘The Changing Dynamics of Hotel Ownership.’ At the start of the session, he stated that in Berlin last year, everyone was thinking the industry wasn’t doing ‘too well’ but the year finished strongly after ‘a bit of a sluggish start’, helped by the return of North American investors.

During the YHS panel session, Marc Socker, Managing Director of investment management firm Invesco, said he’d never seen so much interest in the sector. “Importantly, hotels have a yield premium.”

 

So why are institutional investors interested now?

“First and foremost, hotels is a growth sector,” Socker said. “You can look at supply-demand fundamentals in Europe; demand is growing quicker than supply in most markets. Some of the biggest challenges European economies have are how do we cope with the influx of tourists coming into the market?”

Socker pointed out only four percent of Chinese nationals currently have passports and five percent of Indians. “Every increase of one percent (in those populations with passports) leads to tens of millions of new travelers coming into the European market.”

Kett also regards this as a major opportunity. He told Hospitality Insights: “You only have to move the needle a little bit and anybody who’s worried about demand growth need have no worries at all. And that’s only two countries in the world. One of the staggering facts is that 90 percent of Americans also don’t have passports. They have a lot on their own doorstep they can enjoy, but it’s still a fraction of the total population that has traveled outside their shores.”

“There is a myth out there that hotels are this volatile asset class with very fluctuating income,” Socker said, adding that, according to benchmark data, hotels outperform the all property index. In addition, the sector shows ‘very little volatility’ and was the only commercial asset class that “didn’t go negative in terms of total return during the crisis.”

“So there are lots of reasons why hotels are interesting out there. They just have to be understood. It’s a specialist class after all.”

 

Private equity, asset management and financial services firm Blackstone is also investing in the hotel sector, particularly resorts.

Abhishek Agarwal, Managing Director of Real Estate, told the Berlin forum that Blackstone’s investments were “underpinned by our belief in the fundamentals in the sector, especially if you look at the demand-supply side. There seems to be an imbalance.”

Spain is a major focus. Last year it saw a nine percent increase year on year in international visitors to 82 million, making it the second most visited country after France. “That’s huge and good for the leisure business,” Agarwal said.

 

Given this backdrop of positivity, what’s then the view of hoteliers?

Michael Levie, Chief Operations Officer of citizenM Hotels, told the YHS in a keynote speech that the industry is at an all-time high.

People are really looking to us. There’s a lot of money available. For the first time, we’re getting a seat at the table. So we’re awfully excited. There’s always been money, it was just never interested in our industry.

“What can we do with it? It will, for a short period, shows us quite a (number) of transactions. In the long run it will filter out a lot, because the minute the industry starts to shift a little in an economic downturn – and let’s say the best of breed survives and others have a more difficult time – you will see a big shake-down again. So I think it will be a short-lived cycle.”

The boom days may be here – for now. However, further consolidation may be on the cards. “It’s not about optimism, it’s about realism,” Levie said. “As an industry, we don’t offer great differentiated products. As an industry, we’re not consistent in our products. As an industry, we don’t produce brands.“ You can see ‘incredible returns,’ in other investment classes, he said.

We’ve just never done that as an industry. So we’re a cork afloat on the ocean and just because we’re on top of the wave … we shouldn’t get too excited because it’s a (long) way down again.

 

 

Need more resources on Hospitality Industry trends for 2018? Check these articles out:

 

 

Topics: Trends

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Mr. Stuart Pallister
About the author

Stuart Pallister, Head of Academic Editorial Content.

After working as a television journalist in Asia and Europe for nearly 20 years, mainly at CNBC, Stuart switched to digital content development at INSEAD business school and the National University of Singapore.

He is currently the Head of Academic Editorial Content at Ecole hôtelière de Lausanne and Editor-in-Chief of Hospitality Insights by EHL.

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