Since COVID-19 struck, the importance of the asset manager has arguably never been more important within the hotel owner-operator stack.
Back in the early days of the pandemic it was all about dealing with lockdowns of varying lengths across different countries, now the challenge is all about dealing with a very different world, with different labour and demand patters.
At this year’s IHIF the Hospitality Asset Managers Association (HAMA) Europe, will once again recognise the key role played by the industry in sustainably growing asset value and driving underlying investment returns with the presentation of the Asset Management Achievement Award.
Ahead of the deadline for first round submissions is (8 February) Hospitality Investor caught up with two of HAMA Europe’s board members Anne-Marie Auriault, managing director of Pimilco Asset Management and Sophie Richard, asset manager - Europe and UK, M&L Hospitality to discuss the industry at the start of 2023.
Hospitality Investor: Post pandemic, how has the role of the asset manager changed?
Sophie Richard: Asset managers have always played an important role for hotel owners. During the pandemic, they were extremely involved in ensuring operational efficiencies and this is still true post-pandemic. Asset managers can have a much broader view as we often oversee a portfolio with different management companies, in different European markets. It allows us to assess best practices across them and help improve each asset locally where it is needed.
While a good working relationship was always key between the asset manager and the operator and the local team, it has been emphasized during the pandemic.
Like operators, asset managers are faced with new challenges and a paradigm shift in the hospitality industry.
Anne-Marie Auriault: Budgeting has been more fastidious since the pandemic. The role of the asset manager also requires a more detailed operational knowledge, especially with some shift from hotel management agreements (HMAs) to franchise agreements (FAs).
We are facing to shortened lead time, which requires more agility from the operator in managing the asset. In 2022, we have made sure to consciously scale back some operating costs i.e. not to the pre-pandemic level. As Sophie mentioned, we have also seen the importance of having a more balanced relationship with the operator than before.
Hospitality Investor: What are the most pressing challenges today?
Sophie Richard: Managing resources well, whether it is staff or utilities. The high inflation seen across all markets and still staff shortages have pushed hoteliers to look at a higher rate and lower occupancy than we had in the past. This will be for 2023 the balance to achieve profitability.
Anne-Marie Auriault: For me its Inflation and (re)financing. Labour issues remain a pressing challenge but are an even bigger concern on seasonal properties.
Hospitality Investor: We’ve entered a new phase of the economy with the price of debt going up, what does this mean for asset managers?
Anne-Marie Auriault: Underwriting is challenging at the moment for the asset manager, especially with rising inflation. Of course, it would also depend on the cycle of the asset.
The difficulty of financing is affecting all types: from debt maturity/refinancing exercise, or capex financing, especially if some hotel owners have used the furniture, fixtures, and Equipment (FF&E) reserve for liquidity purposes during COVID-19.
With capital being very expensive at the moment, we may see some sales in 2023 but probably not before the second part of the year.
Hospitality Investor: Conversions have been a big part of the investor strategy over the past couple of years, is this still the case?
Sophie Richard: It depends on each market of course but I have seen quite a number of hotels being repurposed. For example, some were taken over by government for asylum seekers, or investors decided to invest in short term accommodation, student and senior residences.
It is almost a textbook case where the asset manager has to look at the strength of the market and the demand for hotel rooms. If there is a decline and no foreseen uplift it is necessary to perform a highest and best use analysis and make recommendations to investor to convert.
Anne-Marie Auriault: When prices have dropped on some assets, such as where business demand has changed, it can make sense to look at conversions. Accordingly, it can work very well for some global funds that can shift the asset allocation.
Hospitality Investor: With interest rates rising are you expecting more forced sales over the coming months?
Sophie Richard: Investors have been waiting for forced sales since the beginning of the COVID-19 pandemic. This has not really happened the way people expected it. Banks learned from past crisis that the hotel industry is resilient and will come through. I do not expect banks to want to keys back of the hotels at this stage.
If another crisis were to hit I would expect investors to look closely at the obsolescence of their hotel portfolio and make the right decision to sell.
Post pandemic the industry started to recover, unfortunately many hotels had to put a cap on their occupancy due to staff shortages, and now the industry is faced with the consequences of the Russian invasion of Ukraine (utilities cost, inflation).
If the markets do not stabilise and recover strongly it is likely we will see forced sale in the second half of 2023 but likely not to the same level as 2008.
Anne-Marie Auriault: Although, there is no liquidity issue in the market now, several transactions have been put on hold in 2022, and we are going to see more closings during Q1/Q2. The difficulty of financing can result in some sales in 2023, but not immediately, most likely in the second part of the year.
Hospitality Investor: Where are asset managers looking to spend money in 2023? What levers are the most attractive right now?
Sophie Richard: There will be a strong focus in 2023 on projects with positive P&L impact, especially those that help reduce utility bills. Some countries are still offering subsidies for solar panels and there is a strong interest in finding alternative and sustainable source of heating.
There is an emphasis as well on technology whether it is guest facing or through a smart building management system. While the first one will help increase guest satisfaction and efficiency of the staff, the latter will help asset managers and owners to better manage the building and ultimately make the right investment decision and help the disposal process.
Hospitality Investor: Where are the best performing hotels or markets?
Sophie Richard: I can only comment on the ones I follow and while London and Paris are still high performing markets, the DACH area and Netherlands have not felt the same rate of recovery.
The CEE area is recovering well, in particular Prague.
We have to see how 2023 develops with corporate and business groups. This will be key for the larger hotels.
Anne-Marie Auriault: Luxury hotels are performing extremely well with premium ADR. With record ADR levels, the leisure markets will continue to be strong.
I cannot agree more with Sophie, that London remains the financial hub of Europe, and Paris with the Olympics and Rugby World Cup coming up will remain the best performer. Also, with China reopening, more Asian demand will come back to Europe, in addition to the US market. We can see some more activities in Rome in the luxury sector, with many new players entering this market.
You can submt entires to this year's award here.