31 January 2013 | InterContinental Hotel, Park Lane, London

EY Real Estate and Hotels Workshops

‘Setting a course for the future’

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Owners need to continue to invest at all levels

With investment funds scarce, operators face tough choices on how to deploy scarce capital. But not investing is no longer an option.

“Maximizing profits has very little to do with cost cutting and very much to do with investing, making sure you are focusing in on your core product and delivering that hospitality experience,” says EY’s Cameron Cartmell.

With new build capacity constantly coming in, later may be too late.

“It’s very difficult to invest when you are weak, but at the same time it’s the best time to invest” says Raúl González, CEO of Barceló Group. “There’s less demand and less of a problem to close part of the hotel down for refurbishment.”

Ideally refurbishment and growth should work in tandem, and according to Whitbread Hotel & Restaurants’ Managing Director, Patrick Dempsey, it is possible to do both. The Whitbread brand plans to open “a hotel a week” this year while maintaining a policy that no room is more than three years old. “You’ve got to keep your core estate in good condition” he says.

Five years of underinvestment have left operators playing catch-up with a tired core estate.

“There’s a lot of distressed stock and an overhang of underinvestment that needs to be corrected,” observes Hugh Taylor, CEO of Michels & Taylor.

For some hard-pressed hoteliers, exiting the market may therefore be a more realistic option than investing. Certainly, all operators are looking hard at their portfolios to identify exactly which hotels are most likely to be value-enhancing in a market that is expected to remain challenging.

“It often makes sense to work your Capex harder to reposition and extend the market appeal of your hotel. In this way, you can get a better upside than relying on economic recovery and current customers,” says Taylor. “Otherwise Capex is just maintenance and defense.”

Q.

What’s the most efficient deployment of capital in today’s economic climate?

What's the most efficient deployment of capital in today's economic climate?

Source: Delegate poll results from the EY Hotels Workshop 2013

Owners may be seduced by high-profile expansionary projects such as spas or new conference facilities, where they can set a target return on investment. However, less easily measurable defensive Capex, such as cyclical room and restaurant refurbishments, is essential to avoid the danger of an asset being perceived as tired and losing out to better-invested competitors.

Andreas Ewald
Director, Transaction Real Estate, EY, Germany

Maximizing profits has very little to do with cost cutting and very much to do with investing, making sure you are focusing in on your core product and delivering that hospitality experience.

Cameron Cartmell
Hospitality Leader — UK & EMEIA, EY