Traditional mid-market hotel assets need to evolve quickly in order to keep pace with changing consumer preferences and effectively tackle operational cost inflation as well as increasing demands from investment stakeholders in relation to ESG compliance, according to Hospitality Investor’s Investor Council.
The Council noted that the trading performance of the luxury segment was relatively positive in the in the last 12 to 18 months because it has pricing power and added that those with lean operating models - such as serviced apartments or in the budget space - were also protected to a certain extent from inflationary drivers. However, they stressed the mid-market faces the greatest challenges and many assets and platforms will need to refocus and change in order to survive.
“It is important for the mid-market to really differentiate their product in order to reach for higher ADR. There, how you differentiate and have relative pricing power is where lifestyle plays a role and adds value. If you don’t have pricing power, you die. These middle of the market, traditional commodity assets are slowly going to die or will need to be transformed in one way or the other,” the Council said.
They stated however that just doing something that already exists will not cut it as guest demands are going up and the expectation of guests paying hundreds of pounds a night remains very high, particularly because of the reliance on North American visitors in some markets who have very high expectations of what they want in terms of service delivery.
The Council noted that the key here is getting good operators who are informed, using the best systems, having a top-notch commercial strategy and stitching that together with brand strategy.
“If you do it from a position of real operational skill, brand integrity and brand reputation, that's a differentiator that's very visible to all the economically rational people who are spending money in your hotels. It’s crucial to have really good operators, that’s a really key area,” they said.
They added that some of these hotels will also need to re-think how to attract a changing customer base which has shifted from corporate transient travellers - who now rely more on Zoom - to less frequent, block bookings on the back of increased corporate incentive travel as companies trying to re-engage with their people, but for which only certain assets and locations are appropriate.
The mid-market also came under fire for being the segment in which there’s the most risk of non-compliance with ESG policies going forward, and therefore the highest risk of stranded assets. Part of the reason behind that the stock tends to be the oldest and therefore the most expensive to retrofit.
They noted that because segment is most at risk from inflationary pressures and faces the most strain from an income generation point of view, there’s less opportunity for the deployment of capital expenditure towards ESG improvement.
However, the Council stressed the importance of mid-market keeping ESG considerations at the top of the agenda, noting the pool of potential buyers is reduced dramatically if there’s an absence of recognised ESG certifications, with most lenders also placing increasing importance on the presence of ESG stamps and ESG-related strategies.
“People, lenders are now taking ESG much more seriously. It’s not just three letters. Energy is not just fixed costs. Ultimately, it’s also something you can manage. It’s getting into the details of what’s the actual efficiency is. What’s your kilowatt consumption, what’s it by night?,” the Council noted.
In the past it was previously purely the domain and the responsibility of the operator to examine and manage the nitty-gritty of kilowatt consumption. However, very interestingly, institutional investors now materially concern themselves with the details on elements of the P&L such as kilowatt consumption.
Unfortunately, the Council noted that some of the engagement with the operating community has been challenging in recent times because many of the proformas lack this level of detail now expected and required by the investment community.
Looking ahead, the Council said that while lenders continue to be impressed with ADR growth, many remain cautious about the future and that there is still some conservatism and nervousness about what the trade environment is ultimately going to be.
They also noted there are preconceived notions that need to be challenged in relation to what hotel operations or what a good hotel needs to be.
“If you're a urban and corporate hotel, do you really need to turn down service? Is a good restaurant a serviced restaurant or is it counter service as opposed to servers? There are still items like that which people can go through and rationalise, which will help the middle of the P&L where, from an asset management perspective, it's currently hand to hand combat to battle a wall of costs.”