Deloitte 21st European Hotel Investment Conference - The Road Ahead

It’s been a long twelve months since last year’s European Hotel Investment Conference when the economy was accelerating on a downward trajectory towards the unknown. Since then, the world has hit rock bottom. But, in the run up to Deloitte’s 21st European Hotel Investment Conference, signs of recovery were starting to emerge.

Reading The Signs
The full-to-capacity ballroom at The Dorchester on Park Lane, London, just goes to show how vital this conference has become, particularly in the challenging times we are currently experiencing. Attracting over 350 senior level decision makers of the hospitality industry, the event remains unique, in that attendance is by invitation-only.

The theme this year was The Road Ahead: “a theme that was chosen some six to nine months ago when we didn’t know which direction we were going to head in,” explained Marvin Rust, Global Managing Partner of Hospitality, Deloitte.

In his opening remarks, Rust set the scene by telling delegates that the UNWTO estimated a 7% decline in tourist arrivals for the first eight months of 2009, premium travel declined more dramatically than expected, capital markets remained volatile, and debt packages were still below general levels. As if they needed reminding.

Rust presented an analysis of hotel performance over the past year and predictions for the future. Year-to-September revenue per available room (revPAR) was shown to be down 19.2% for European hotels while occupancy levels fell to 61.6%. Focusing on country-by-country, the majority, including UK, Germany, France and Italy showed revPAR changes of between -10% and -19%. Eastern Europe reported the largest drop with Moscow falling over 30%.

“What is encouraging,” said Rust on a change of course, “is that there have been some signs of recovery in the last few months.”
Looking forward to revPAR growth forecast for 2010, regional UK and key European cities are expected to grow by between 0-10% when compared to a weak 2009. When compared to a stronger 2008 however it is a different story, with only Edinburgh coming out in positive territory.

To summarise, Rust pointed to the upturn in economic performance and consumer confidence, both of which are linked to hospitality performance to confirm that “the worst seems to be over.”

He looked to London as an indicator as to when Europe as a whole will recover: “In Europe, performance shows some signs of improvement and we should look to London to lead us out of recession... The road ahead is far from straightforward however.”

These thoughts reflected a delegate survey conducted by TNS Research International prior to the conference, that showed around two thirds of respondents expected London to be the first to show signs of recovery.

Hazard Ahead
To the strains of “Danger! Danger! High Voltage!” and a backdrop of hazardous highway signs, Roger Bootle, Managing Director of Capital Economics took to the stage to present his view on the economic outlook without the doom and gloom heard last year, in his opinion anyway.

Starting on an optimistic note: “This is the worst I’ve ever seen,” warned Bootle. Based on GDP growth year-on-year, he renamed the so-called emerging European destinations of Russia, Estonia, and Ukraine as “disappearing Europe” and predicted further declines for 2010.

Bootle did predict some weak, yet positive, economic growth in the UK and Europe overall and a benign outlook for interest rates illustrated by, in his own words, “his most boring chart ever”, which was basically a straight line showing rates in UK, Europe, and in the US at or below 1% for as far as the eye could see.

In perhaps his most bullish statement Bootle said that: “A repeat of the Great Depression has probably been averted but the world faces a long period of very low growth.”

This was echoed in part by Nick van Marken, Global Sector Leader, Corporate Finance, Tourism, Hospitality & Leisure, Deloitte, who took delegates on a trip down “Recessionary Road” past the mixed fortunes of 2009 and the complete dearth of deals as we know it. There was little to suggest that things will improve into 2010 according to the delegate survey. When asked whether 2010 will see more hotel portfolio transactions than in 2009, only 35% of respondents agreed. Van Marken suggested that although there will be an appetite for deals, there will be little supply.

In The Driving Seat
“Who wants to be a CEO in these challenging times?” questioned Alex Kyriakidis, Global Managing Partner, Tourism, Hospitality & Leisure, Deloitte inviting his panellists, Chief Executives from two of the five largest global hotel brands, to the stage. It’s fair to say that Andrew Cosslett of InterContinental Hotels Group (IHG), and Christopher Nassetta of Hilton Worldwide haven’t had an easy ride navigating their brands through the twists and turns of the past year.

Under its new corporate umbrella of Hilton Worldwide, Nassetta explained measures he has taken to cut costs by 15-20%. “We’ve gone through restructuring, relocated our world headquarters, and reorganised how we operate at property level.”

Rather than concentrating on cutting costs, Cosslett’s strategy was to invest more money into IHG’s brands accelerating into development plans that were already in place.

The relaunch of Holiday Inn for example, has seen the removal of 900 hotels from its system between 2002 and 2004 in a bid to change its entire hotel stock. Cosslett believes the changes will be completed on schedule by December 2010.

According to Nassetta, Hilton has also embarked on a significant investment programme. “It’s all about the medium to long term,” he said, adding: “we’re investing a lot in our ten brands, and also in the luxury sector.” Nassetta has doubled Hilton’s luxury portfolio since joining the group in December 2007. The one sector of course missing from its portfolio is a lifestyle offering following the controversy surrounding the Denizen launch. “Fundamentally I like this space and it does have a higher growth rate,” said Nassetta, confirming that: “We will at some point have a product in that segment.”

According to the delegate survey however, it was the budget and economy market expected to see the most investment with just over a third saying that this is where they see market growth.

Pay At The Toll
There was plenty of sparring on the financiers panel with speakers, including Peter Anscomb, Corporate Director, Leisure & Head of Hotel Finance, racking up 100 years of property finance expertise between them.

Distressed assets and the importance of a transparent relationship with the bank were the topics of discussion but the question of the day came from a member of the audience who put the bankers on the spot when they asked: “How much money have you lent on new hotel transactions over the last 12 months?” Refreshingly, the panellists answered honestly and although the amount of money that the banks had lent was not a significant amount, what was crucial was that most of that money had been lent in the last three months indicating a change in fortune for the industry.

Changed Priorities
Bad news for hotel staff came from the panel of operators moderated by Robert Bryant, Global Leader, Consulting, Tourism, Hospitality & Leisure, Deloitte, who believed that cutting staff was the key to cutting costs. This was mirrored in the delegate survey. When asked: “What is the most significant cost saving plan hoteliers have been undertaking?” staff reduction came out on top with 38% of the vote.

Concerns were aired throughout the sessions about what effect this would have on customer service but Jeremy Richardson, Founding Director of Kew Green Hotels explained that he was making the most of his resources, investing in training to give staff the opportunity to take on more responsibility.

Shane Harris, Hotels/Leisure and Operations, Moorfield Group, professed to looking at services and amenities across the portfolio driving out costs through supply chains.

Road Work Ahead
The closing session of the day provided an optimistic view on 2010 pipelines with some cautionary notes. Christian Karaoglanian, Chief Development Officer, Accor, boasted a pipeline of 75,000 rooms over the next four years whilst Paul Harvey, Managing Director, International & Development, Travelodge Hotels disclosed a figure of 9,000 rooms under active discussion. An interesting debate ensued as to what counts as a property in the pipeline, with each panellist holding a slightly different view. From Puneet Chhatwal and Rezidor’s perspective, it was a signed deal. Patrick Fitzgibbon, Senior Vice President Development Europe & Africa, Hilton Worldwide, believed that what is of more importance is the number of hotels that are actually being opened, adding: “We have more hotels open than ever before driven by our conversion pipeline.”

Hotspots for development, as told by the panel include regional UK, Africa, and Turkey, a country that has worked well for Hilton. Chhatwal said that at Rezidor, key locations were addressed brand by brand, revealing that for its mainstream brands, Radisson Blu and Park Inn, ambitions lie in having a presence in every capital city. It was agreed that, despite Bootle’s earlier remarks of ‘disappearing Europe’, Russia was still offered exciting long-term prospects due to its undersupply. However, the fundamentals of development remain with having the right product, in the right location, with the right brand.