Jersey: Renewed Interest in Hotel Investment - White Paper

Last Updated: 9 August 2006
Article by Brian Lee

Most Read Contributor in Jersey, September 2018

INTRODUCTION

Tourism is the world’s largest industry and as a consequence has a massive impact upon the global economy.

As tourism extends to all the corners of the globe, the impact of tourism on the hotel trade is wide spread. Recent statistics published by the World Tourism Organisation confirm over 800 million international tourist arrivals in 2005. This is a substantial increase over the previous 5 years, of over 30%.

If the statistics are broken down on a geographical basis over this 5 year period, both the Middle East and Asia Pacific have experienced increased levels of tourist traffic in excess of 40% whilst Europe with over half the market share of tourist traffic experienced a growth in passenger numbers of 12%.

The WTO statistics have forecast this continuing trend for the next 15 years with passenger numbers due to double over the course of that time period.

As a consequence, the impact on the hotel trade of these numbers is to say the least, dramatic. Budget airlines have expanded rapidly specifically in Europe. Long middle class travel has also broadened horizons to farther parts of the globe. There have also been substantial lifting of travel restrictions to the world’s largest market, China. All of these factors have culminated in an increasing desire to travel.

Not surprisingly as a consequence of this tourist traffic, tourists require accommodation.

CURRENT TRENDS

What we have also seen particularly in the course of the last 12 months has been a dramatic turnover in hotels changing hands. This turnover has also seen a paradigm shift in the traditional way that hotels have been owned and operated.

Hotel transactions in 2005 were valued at over $45 billion, a 60% increase on 2004. Interestingly nearly 40% of hotel transactions were acquired by private equity investors. At the same time that private equity has become increasingly significant in its involvement in the hotel sector, so we have also witnessed the separation of ownership and management. In addition we have seen further consolidation with regards to the establishment of brands and franchises throughout the globe.

With few exceptions, the hotel industry is doing extremely well. We are seeing greater brand consolidation but perhaps as a reaction and response to brand consolidation, we are also witnessing the development of niche or lifestyle hotels such as Armani, who are due to open branded hotels in 2008.

As the hotel property market becomes more sophisticated, inevitably we see greater attempts to differentiate. This will include attempts to generate greater consumer loyalty through the development of specific brands. We also see not only the development of so called lifestyle of niche hotels but also hotels offering a greater spread of facilities. Traditionally hotels provided accommodation together with dining facilities. This developed into sophisticated gourmet restaurants. We are now seeing this develop even further to include spas and other "treatment" facilities.

We are also seeing "amenity creep" as well, as hotel operators continue to attempt to differentiate from the competition. We are also seeing the development of niche and luxury hotels in more exotic locations for example the Middle East which is not historically been a hotel destination. The market is also fragmenting with regards to the economy end of the market - witness the latest attempt by the "Easy" brand to establish itself in the hotel sector.

RISKS

As the pressure on hotel operators continues, so they have sought to diversify and differentiate themselves. It is not only the competition that generates risks for hotel owners and operators. We also have the ever present threat of economic risks such as fluctuating exchange rates but also increasingly the impact of higher energy prices which not only threaten the overhead costs of running hotels but also the possibility of making travel more expensive.

We also have the increasing impact of the social responsibility of hotel operators to ensure that from an environmental perspective hotels are being ergonomically and environmentally soundly run.

Other risks that have impacted upon the hotel trade in the last few years have been cataclysmic events such as terrorism, the impact of the SARS virus and avian flu. These are all unpredictable factors which have to some extent impacted on peoples’ desires or abilities to travel, but what has been remarkable has been the resilience of the hotel industry to withstand these pressures and although in the short term, hotel traffic may have fallen temporarily, what we have seen is a ratchet effect so that falls of occupancy rates occur but then pick up again shortly thereafters.

FUTURE TRENDS

As for future trends with regards to the hotel sector, as we have seen already, tourist traffic is forecast to grow. This will generate short term pressures in the hotel sector some of which will have beneficial effects for hotel owners as values are forced up due to a relative lack of supply in the market place. We will also continue to see the development of hotel operators seeking to differentiate their product offering. I believe we will also see the increasing participation of private equity investment in this sector. Private equity by its nature is more driven by short term objectives so rather than having investment periods of perhaps 5 to 10 years, time horizons will be shortened to 2 to 4 years. Private equity tends to be more demanding on the returns on its assets than perhaps has been the case with historic hotel ownership structures. As a consequence, hotel operators will be expected to have better asset management skills and to become more sophisticated in generating better returns from assets employed.

However, despite all these risks, the hotel sector which is highly sensitive to economic and competitive market conditions, continues to be resilient and to seek ways of re-inventing itself for the future.

Summary

There is no doubt that demand will continue. The task and the challenge for hotel operators and owners is how to differentiate themselves from the crowd and to satisfy changing consumer demands. For those that cannot achieve this, these demands will produce appropriate rewards.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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