31 January 2013 | InterContinental Hotel, Park Lane, London

EY Real Estate and Hotels Workshops

‘Setting a course for the future’

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A new confidence

As 2014 opens, confidence is surging back into the hotel market.

New investors are coming into the market, and established operators are firmly back on the growth path. However, things are not going to be easy for anyone.

There is still stiff competition for the best assets, and prices are rising significantly, lenders still need reassurance, the rise of online travel agents (OTAs) represents an increasing threat to traditional booking channels, and there are tough negotiations to be made over the terms of management contracts. Crucially, the challenge of keeping pace with technology and maintaining investment to meet the customer's ever-changing needs will only increase.

Despite these concerns, at EY’s January 2014 Annual Hotels Workshop — Capitalizing on recovery: Building a leading business — 90% of the delegates were either “very confident” or “confident/optimistic” about the coming year.

“We’ve seen some reasonable growth in key locations both across Europe and most certainly here in the UK, where London and Regional RevPAR (revenue per available room) growth surpassed general expectations at the start of 2013,” says EY Head of Hospitality and Leisure UK & EMEIA, Cameron Cartmell.

“From an operating perspective in the second half of the year, we started to see some confidence come back into the markets and finally at the end of the year, the successful IPO of Hilton Worldwide. Business confidence is improving and there is the likelihood of an increase in consumer spending — which is good for our business.”

Naureen Ahmed, Manager, Marketing and Analysis at STR Global, said that RevPAR had increased in each of the three global regions in 2013 except AsiaPac (4.1% decline), which was driven by a slowdown in China.

“MENA RevPAR grew 4.7% overall, but it was a mixed performance with the Middle East showing 6.8% growth, Northern Africa a 10.3% decline and Southern Africa broadly flat,” she says.

North America RevPAR grew 5.3% and Europe 1.7%. “Since the banking crisis, Europe has been outperformed by America in terms of demand growth. However, the latest results suggest Europe’s growth is now catching up with underlying demand, up 3.3% in 2013, so it will be interesting to see how it will play out in the next few years,” says Ahmed.

In 2013, RevPAR growth in Europe was experienced across all hotel segments — with economy and mid-scale performing best — with southern Europe (Iberia, Italy, Greece and Turkey) showing positive growth, albeit weak compared to 2012.

London still achieved the highest occupancy rates across the region and, surprisingly, RevPAR increased in 2013. “It’s unexpected to see positive RevPar in a post-Olympic year,” says Ahmed. “It’s fairly minimal growth but is still completely uncharacteristic compared to other Olympic host cities, and underlies the inherent strength of demand for London.”

She added that she expected further growth across Europe in 2014, with Dusseldorf, Cologne and Glasgow (Commonwealth Games in 2014) being particularly strong, and Madrid and Warsaw lagging behind.

Q: How do you feel about the short-to-medium term future of the hotel industry?

EY - Where do you see finance markets in 2014?

Source: Delegate poll results from the EY Annual Hotels Workshop 2014.

90% of delegates were either “very confident“ or “confident/optimistic“ about the coming year.


The return of growth

2013 saw a marked increase in the level of hotel transactional activity, both for portfolio sales and individual assets. Transactions levels should increase further in 2014: over two-thirds of delegates polled said that they were planning to transact in 2014.

Examining the number of hotel rooms transacted, along with the number of new rooms in the development pipeline, provides a good indication of overall supply and demand infl uences for individual locations.

“London continues to show a strong pipeline. According to STR data, there are 18,000 rooms in the pipeline, with 7,000 having traded in 2013,” says Andreas Ewald, a Director in EY’s German real estate practice.

In contrast, in Spain, where the recovery has been slower, the development pipeline remains muted. Africa, an emerging market, has 31,000 rooms in the pipeline, while only 950 were traded last year.

The biggest buyers in 2013 were sovereign wealth funds, with 26% of transactions, which included high-profi le acquisitions, such as the InterContinental London and the Marriott UK “Blackheath” portfolio of 42 properties. This was followed by real estate private equity, with 23% (examples included Starwood Capital’s acquisition of Principal Hayley Group and Blackstone’s £250m (US$416m) acquisition of the Concorde Opera Paris), and hotel operators with 21%.

Q: How likely are you to undertake transactions in the next 12 months?

EY - How likely are you to undertake transactions in the next 12 months?

Source: Delegate poll results from the EY Annual Hotels Workshop 2014.

“There was a lot of activity in 2013 and the outlook is very strong. Germany saw an 81% increase over the prior year in the number of rooms traded, followed by London and Paris — the most sought after cities in EMEIA — which increased by 62% and 42%, respectively.”

Andreas Ewald
Director, EY

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