Test bed UK provides a springboard for Europe

The UK’s mature hospitality sector means that it remains a key European market and the ideal location to trial new initiatives and to showcase new brands, according to Karin Sheppard, managing director Europe, IHG.

With London continuing to attract high wealth travellers from regions such as the Middle East and India, returning to mid and long haul travel after the pandemic, she says that IHG was, for example, able to introduce the Kimpton Fitzroy brand to a global audience in the city, saying it remains a “great place to showcase a new brand”.

Sheppard adds: “We have 350 hotels in the UK, making it the largest market for us in Europe. It’s a market that broadly works, is well governed, well controlled, and is easy to grow within. We have a great footprint today and you can map out where the growth comes from next. So the UK would be on top of the list for opportunities, trials and tests. You have all the ingredients for growth.”

She says that although the sector was rocked during the pandemic, its ability to bounce back has given investors and developers renewed confidence in its future performance, especially in uncertain times.

“Resilience is fundamentally driving belief in the hotel market,” she says. “Leisure continues to hold up really strongly, while with the corporates we had expected tempered demand [post Covid] but the reality is people still want to connect and conferences and events have come back. So literally all the demand drivers have pointed in the right direction.”

Patrick Mendes, CEO Europe and North Africa, Accor, agrees and especially notes the RevPAR achieved despite the fact that pre-pandemic capacity has not quite returned to normal.

“We are not back to the volumes of 2019, we are perhaps 3-4% behind, but the rates are really high. First, even if the consumer is reducing a lot of things, they don’t give away their travel. They still want to travel. It’s a big surprise to us. Second, they tend to stay in the regions they are from, so if you look at Europe, 85% of our business is coming from European travellers. This is new for us, mid-haul and staycations,” he says. “Third, we are seeing that brands are becoming very strong and a differentiator, people are looking for a brand they know and they feel comfortable and safe with.”

Mendes says that this needs to be played out at both an individual brand and group level, to suit the needs of the customer.

“The consumer is lost about brands, we have 54 brands at Accor,” he concedes. “But sometimes you need to have a big umbrella like for our Accor loyalty programme. People want to have the individual brands they love but the security of a big umbrella behind it.”

The UK is the number three market for Accor after France and Germany and Mendes agrees that the country acts as a gateway for in-bound travel for locations such as China and India.

“The UK is often where we test our products and initiatives as it is a good testing market,” he says.

Matt Luscombe, CEO of Cycas Hospitality, said just over 20 hotels or around a third of the firm's hotels are in the UK and that the overall picture was "very good" some areas were doing "fantastic" some that were just "ok".

He added: "Some people are scared of spiders, some people are scared of snakes, I'm scared of empty hotels. The world's in a lot better place than it was a coupe of years ago."

Funding models

In terms of future expansion, Mendes admits that higher inflation rates and the consequent cost of capital and debt means that Accor is noting a slowdown in the development of greenfield sites, so the company is moving towards brownfield sites and conversions.

“But the profitability of the hotel business is surprisingly high, compared with offices, residential and other real estate asset classes,” he stresses. “As a result, hotels are becoming top of the pyramid [for investors].”The current situation may also require more companies to look at alternative financing models, according to David Anderson, divisional president, Aimbridge Hospitality.

He cites a recent deal his company struck with fund manager Aberdeen for a property in Leeds, where the fund required that it had no exposure to operations.

“We derived an agreement where we employed the staff and the franchise under our entity, and then under a management agreement could take a base and bonus fee and whatever was left could go back to the owner. The risk was limited because if there was an economic downturn and we couldn’t fulfil, then we could walk away,” he explains. “We believe that for other REITs this could be a good way forward.”

Ten years ago when Aimbridge wanted to expand, it went forward with that through M&As and as an American-backed business he says the company was “very comfortable about putting their money in, and the management contracts”.

“For us, it’s the perfect market for growth. The relationships with the brands, especially in the UK, has never been as strong,” he adds.

However, despite the strong demand from customers, the economic cycle has made investors cautious about all real estate classes and hotels have not been immune from the challenge of attracting capital.

“We have to be a bit patient about transactions so we are currently focusing on adding value with customer service and optimising performance,” says IHG’s Sheppard. “In the meantime we can do what we do best, which is focus on the fundamentals of hospitality.”