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LONDON—Hoteliers already are underlining the strategic need to look long term as volatility and negative revenue per available room performance is more likely in the next couple of years, according to sources.

Panelists on the “European leaders’ outlook” session at the Hotel Investment in Europe Conference, better known as Hot.E, said nimbleness is required as fundamentals remain strong and look as though they will continue to be.

“Why are people buying all these hotel portfolios? There is volatility in other real-estate classes, but the (hotel industry) weakness we’re seeing is probably still beginning. There will be negative RevPAR for the next few years,” said Cody Bradshaw, managing director and head of international hotels at Starwood Capital.

Gaël Le Lay, deputy CEO of Covivio, is one of those buyers. His real-estate investment trust recently bought a 14-hotel United Kingdom portfolio from Starwood Capital Group, which InterContinental Hotels Group agreed to manage. At least two of the properties have been rebranded as Kimpton Hotels & Restaurants assets, debuting the brand in the U.K.

Cautiousness is a buzzword numerous hotel conferences have heard for several years now.

“Yes, we’re cautious, but fundamentals are good in the long term. When we invested in the U.K. last year, we knew Brexit would be rocky,” Le Lay said.

Strong brands, robust plans
Karin Sheppard, managing director for Europe at InterContinental Hotels Group, said the present belongs to those who have the willingness to do something different.

IHG’s acquisition of the Six Senses Hotels & Resorts brand allowed it to extend its luxury portfolio as well as guests’ travel experiences and loyalty options, a strategy that has continued with its partnership with marketing platform and travel club Mr & Mrs Smith, announced on 23 September.

“Some say Six Senses is today’s Aman (Resorts International), and it might be going into urban locations,” said panel moderator Laurence Geller, chairman of ownership group Geller Capital Partners.

Bradshaw said funds such as the ones he controls have in-built flexibility due to the shifts in geography they are able to undertake.

“That is a good challenge. … It is always on a risk-adjustment return basis, so I have to know the numbers, and that challenges us to believe in the fundamentals,” he said.

Bradshaw added that for him 2019 has been a quiet year, but that should change in the next 12 to 36 months.

“Structured deals take a while to do, and for the first time in the eight years I have been here, (the industry has) started to see deals break down in Europe,” he said.

Le Lay said for Covivio, progress is stalled if a deal cannot satisfy the company’s loan-to-value ratios.

“There is no inflation at the moment, so from a real-estate position that is a concern. (Covivio) is going out of the Eurozone for the first time. … Yes, the political environment might affect short-term decisions, but what might be too scary for us might be perfect for private equity,” he said.

Sheppard said that while IHG has hotels in various business models, growth in the next few years likely will be limited in markets where scaled franchise opportunities are not possible.

Bradshaw said the mathematics on return on cost are very compelling to him at the moment.

He cited Starwood Capital’s recent moves into Yotel, which just debuted in Scotland with an asset in capital Edinburgh, and a potential project in the U.S. that features cabin accommodations, with each unit having its own acre of space.

“You cannot accuse me of exiting the U.K. in that we are preparing to invest in more there, and we are keeping De Vere and Principal, for which we did have bidders,” he said.

“We exited (the Covivio deal) in the usual (private equity) model, but we were not rushing to the exit.”

Bradshaw added he is worried about the U.K. outside its top five or six cities, but said there remains a wall of capital that still sees Europe as a safe haven.

“We have to wait until investors such as Gael are too nervous. We can go further up the risk curve, waiting for that volatility where Gael cannot easily structure a lease, but when you see the predictions for inflation, there should be more space,” he said.

He added hotel yields are more attractive than other real estate asset classes like offices. “We’re hungry and ready, so we are frustrated sitting at the sides watching others structuring deals, currently not being able to see the necessary profit to take part in the bid process,” he said.

Sheppard said the European hotel industry must “manage through this volatility.” “There still is the need for people to go to beautiful places,” he said.

“Yes, but perhaps just further back from the beach,” Le Lay added.

Sustainability, geopolitics
Geopolitics are ramping up tensions in Europe even more than in the past 18 months.

“We’re acutely aware of this, and sustainability is top of mind. For staff, sustainability is how you attract them. They are acutely aware of (it), and for guests, too. We thought, well, would that play out into luxury, and we saw that it does,” Sheppard said.

The industry has a lot to do, though.

“The industry has disconnected shareholder bases. (In sustainability), we’re always playing catch up as it is a behemoth industry. Everyone needs to have alignment, the what and the when, but it does mean more opportunity,” Bradshaw said.

He added that a dinosaur mentality of big-box hotels on prime real estate requires a huge change in design and operations.

“As contracts and (hotel management agreements) come up, (sustainability) is where hotels will differentiate themselves, because up to now they did so only with their brands. It will be hugely exciting over the next 10 years, and this will be a challenge to the big hotel brands. … Budget luxury is leading the charge,” he said.

Sheppard said the hotel industry is very resilient once it knows what is happening

“Talent keeps me awake at night … and it will be tougher for (the U.K.). You have to be on top of that, and know what that means. The minimum salary required for a work visa into the U.K. is £30,000 ($37,382), and there are pilots who earn less than that,” she added.

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