International Hotel Investment Forum 2009

First the doom. Introduced as “Doctor Death” by moderator Andrew Sangster, Editor of Hotel Analyst, the economist Roger Bootle, Managing Director, Capital Economics was never going to be upbeat. Opening the International Hotel Investment Forum at the Intercontinental Hotel, Berlin where hotel investors and operators come to meet with advisors in the real estate sector, Bootle was his usual lucid and direct self. “This is the worst outcome for the global economy since World War II,” he began before apologising that his prediction of last year had not been gloomy enough. His fellow panellist, Dr Holger Schmieding, Chief Economist Europe, Bank of America, lamented “life is unfair as the ‘saints’ suffer more than the ‘sinners’”. In his view, the ‘sinners’, the property-based economies of the Anglo-sphere (note the dropping of the usual ‘saxon’ suffix) caused the whole crisis and yet would suffer less than his ‘saints’, the “saving” and “trading” nations of Germany and Japan. Whilst agreeing that the US economy would probably “get away with it” Bootle was swift to react. “We need to see the Anglo-sphere as the ‘saints’ because they have spent. If we all behaved as the Germans (and saved) then we would all be ‘sinners’”, he forcibly suggested in an entertaining session that certainly got the audiences’ attention.

Irrespective of the causes of the current economic crisis, for many at the 12th annual conference the game was putting on a brave face and predicting just when it will be over. Take your pick from the doom merchants such as lawyer, Simon Neilson-Clark, Partner, DLA Piper UK LLP who stated that the hotel sector had yet to really feel the pain. A February 2009 DLA Piper survey of European hospitality executives saw 52% not expecting an upturn until 2011. Philip Davidson, Senior Partner Restructuring, KPMG similarly saw that the market had not yet experienced the “big shock” and his prediction that the wider economy will not begin to recover until 2012 was the gloomiest. Bootle was unusually reticent and accepted that much more care was needed with forecasting in such volatile times. Arne Sorenson, Executive Vice President, CFO and President, Marriott International Lodging suggested that as the extent of downturn had been poorly predicted, so more care was required forecasting the upswing.

Those with a vested interest in seeing transaction activity increase expressed unsurprisingly more optimism. Such was the candid assessment of Robert Koger, President of real estate advisors and brokers, Molinaro Koger, whose optimism was based on the fact “that we are transaction guys, so we predict an upswing by the end of 2009”. Operators, also in need of activity to keep their hotels busy, generally erred on the optimistic side. Such was the view of Frits van Paasschen, President and CEO, Starwood Hotels and Resorts Worldwide, Inc., who expected to see “some recovery in the second half of 2009 but on a comparative basis only”.

Schmeiding also saw a rebound in the second half of the year based on a number of preconditions one of which was a recurring theme across the plenary sessions – namely, the need for the US administration to take the lead in getting the global economy moving. Even Bootle agreed with this plus others from ‘Old Europe’ such as Gilles Pélisson, Director & CEO, Accor.

Looking at ways to minimise the pain, rate maintenance, a topic also close to the hearts and top lines of the operators, was discussed. Jamie Chappell, Managing Director, STR Global saw that hotels were in danger of “falling into a vacuum of lack of information” and rather than the usual scenario of “following the (market) leader (in setting rates) it was now more a question of following the first in the market to panic”. To avoid this, new forecasting tools such as that from STR Global that predicts two years of data for 42 markets based on a variety of constantly reviewed indicators and local market drivers were available. Pragmatically Sorenson explained that whilst no one can avoid the pricing decisions of others, sending a directive to 3,000 hotels wasn’t practicable. Andy Cosslett, CEO, IHG agreed: “It’s crazy to discount without targeting incremental business. The market needs to avoid a mid-week pricing collapse as the business traveller won’t make another trip because the room costs $10 less”.

Leisure business was on the other hand seen as a possible area to exploit. Mathew Crummack, Senior Vice President Lodging, Expedia Partner Services, saw leisure travellers responding well to promotions whilst Richard Balfour-Lynn, CEO Marylebone Warwick Balfour Management Limited saw much less volatility in the leisure sector and growth in non-corporate business. Expanding on a theme of strong marketing being the way to gain market share in a recession, Balfour-Lynn recommended aggressive marketing to capture new income flows from spa, restaurants and other leisure facilities.

With no hint of schadenfreude, Arthur de Haast, Global CEO, Jones Lang LaSalle Hotels saw amongst the dramatic decline in investment activity that “deals will come due to distress. Pressure from breached covenants will lead to receiverships and some transactions”. Van Paasschen agreed “whilst in general the bid-offer spread was so large that activity will be reduced, once in a lifetime acquisitions might come along”. The lack of debt was the sticking point, de Haast reminding the audience “30% of activity in Europe in the first three quarters of 2008 was from Middle Eastern Sovereign Wealth Funds...who are keeping their powder dry”. Talk of merger and takeover was also tempered by the lack of debt. The DLA Piper survey shows 39% of respondents expecting that up to five hotel chains will file for bankruptcy within the next year. The vultures have started to circle.

With recessions allegedly generating creativity – Sorenson reminding us that the “Op Co / Prop Co” solution was born out of the last recession – there were a number of possible outcomes. Chappell saw the “slow down moving focus back on to the operating side of the business rather than the real estate play”. Operator Majid Mangalji, President, Westmount Management Limited concurred, “We are looking at the middle of our P&L to trim costs”.

An increasing segmentation of the market was expected with a general consensus amongst the CEO’s that they would have (even) more brands in the future. Cosslett was grateful for IHG’s current focus on their Holiday Inn brand predicting that “it will be a good time as business travel managers trade down”. Nassetta chipped in with a teaser for the launch of Hilton’s new lifestyle brand, Denizen, that took place immediately after the CEO panel. Cosslett also predicted that the brands would all gain market share. With IHG still expecting to open 400 hotels and Starwood opening their 1,000th hotel in 2009, no one blinked an eyelid when Sorenson predicted “one of us (the international hotel groups) will have a million rooms within a decade”. On a similarly optimistic note, Van Paasschen saw “that today’s cancelled meeting is tomorrow’s pent-up demand” and with an estimated 1 billion people entering the middle classes “the new rooms will be filled”.

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