While there are still plenty of mid-market bargains to be had for buyers, the general health of the sector is a little harder to diagnose. David Churchill reports
WHEN MALMAISON and Hotel du Vin were voted the top two smaller chains last September by readers of Buying Business Travel’s sister magazine, Business Traveller, it seemed that both iconic collections were on the top of their game, riding out the tough market conditions facing all hoteliers outside the buoyant London hospitality market.
But within three months the parent company of both chains – MWB Group Holdings – had collapsed, with debts of more than £200 million, into administration, although the Malmaison and Hotel du Vin hotels are continuing to trade.
The MWB slide into administration was partly due to an internal financial dispute with another subsidiary, MWB Business Exchange, which provides serviced offices. But the two hotel chains had reportedly been up for sale for some time to help reduce the corporate debt, and a change of ownership is still on the cards.
Yet the MWB collapse was not a one-off financial failure. Other, mainly regional, hotel groups have also fallen foul of over-optimistic financial engineering, which has left them saddled with hefty debts – estimated at up to £16 billion in total by professional services firm Deloitte – and forcing them into considering fire sales of key assets (see below). A quarter of all UK hotel sales last year involved “distressed transactions”, according to hospitality property consultants Colliers International.
PROVINCIAL PROBLEMS
But the UK hotel sector has other problems. While London hotels – especially at the top-end – have remained relatively buoyant ever since the 2008 financial crash and recession, many of those in the provinces have struggled.
At the same time as the debt cloud is hanging over regional hoteliers, the traditional independent mid-market sector outside London has been squeezed by the enforced trading-down of four-star hotels, as well as the bottom-up pressure from the fast-growing budget hotel operators, especially Premier Inn and Travelodge (although the latter, too, has recently been forced into a debt refinancing). “The mid-market is a difficult sector to operate in,” points out Russell Kett, chairman of hotel consultants HVS London. “Cash-pressed travellers tend to trade down and squeeze the mid-market, particularly those hotels which are not clearly branded.”
MID-MARKET MOVES
Just under 30 per cent of the UK mid-market sector is branded, compared with 43 per cent of the hotel industry as a whole, according to research carried out by Accor. Not surprisingly, Europe’s biggest hotelier therefore sees scope for expansion in the UK mid-market, taking advantage of the administration of Ramada Jarvis in 2011 to franchise 26 former Ramada Jarvis-branded properties under its mid-market Mercure label.
Other international chains have also moved into the UK mid-market sector. Hilton, for example, has been quietly pushing ahead with expansion of its midscale Hilton Garden Inn and Doubletree brands into key regional cities.
Marriott is bringing its international midscale Courtyard brand to the UK, with the opening this spring of the 194-room Courtyard by Marriott at Aberdeen airport, adding to the Courtyard at Gatwick which opened in 2009. With over 900 Courtyard properties worldwide, Marriott has delayed bringing the brand to the UK until it considered market conditions were right, according to hotel analysts, although it is hedging its bets by opening initially at airports.
But many independent regional hotel groups that rely on the conference market have also fallen foul of the post-2008 structural shifts in the meetings sector, including shorter length of booking periods, fewer delegates and pressures to reduce costs. Unfortunately, the pre-recession buoyancy of the regional conference business encouraged many mid-market hotels to invest heavily in new facilities, which are not now paying off in the current market conditions.
Yet, in some respects, the debt-fuelled hotel boom over the past decade is a symptom for much of what is collectively ailing UK businesses at present. Companies in all sectors are struggling to meet debt repayments and are having difficulties refinancing from a ‘once bitten, twice-shy’ banking sector which prefers to hold on to its money in uncertain times as a triple-dip recession looms.
But the financial squeeze facing regional hoteliers is not likely to easily go away. New data from TRI Hospitality Consulting reveals that provincial hotels in 2012 suffered a fifth consecutive year of decline in their profitability, with increasing costs outpacing any rise in revenues.
And the higher costs were not just the usual suspects of wages, taxes and energy: travel agency commissions rose 6.8 per cent on a per-room-let basis to an average value of £5.50, which was the equivalent of 7.3 per cent of total room revenue.
“After five years of decline, the ‘keep calm and carry on’ mentality is wearing a bit thin,” says TRI managing director Jonathan Langston. “It is clear the fundamental shift in the operating structure of provincial hotels will continue to be played out as the market anticipates further casualties in 2013.”
TRI believes that profit-per-room data is a more significant metric than a focus on the usual measure of revenue per room, since ultimately it is profit that counts. Thus, hotels in Liverpool saw a 3.7 per cent increase in profit per room last year, even though the revenue per room increase was only 0.9 per cent. This, says Langston, “suggests that the recent tough trading conditions in the city have engendered a parsimonious mentality”.
But Liverpool was one of the few regional cities whose hotels showed an increased profit per room: declines were reported in Newcastle (down 10.4 per cent), Nottingham (12.7 per cent), Bath (4.7 per cent), Manchester (1.9 per cent) and Leeds (3.8 per cent).
Nick van Marken, global head of hospitality at Deloitte, also points out that “regional hotel performance is closely linked to the health of the domestic economy, and the real concern is that unless volumes return, hotels are unlikely to be able to drive their pricing – with a significant erosion of the bottom line and little sign that an improvement in profitability will be seen for some time.”
FINANCIAL PRESSURE
While those inhibitions on pricing power is bad news for regional hoteliers, it is good news for travel buyers who will be able to continue to exert pressure on rates. But there are other implications for corporate travel buyers and business travellers alike. The financial pressures on the regional mid-market means less money is available to be spent on room refurbishment and investment, leaving facilities sometimes not up to the level expected or paid for.
This is especially in contrast to the emergence of branded mid-market chain operators who can afford to invest in higher standards, have the access to corporate buyers from their extensive databases and are better able to offer corporate, added-value deals.
But in spite of all the gloom, the UK regional hotel market is set to grow this year, with a 1.4 per cent increase in the number of available rooms coming on stream, according to hotel market data provider STR Global. But the bad news from STR for regional hoteliers is that demand is only likely to grow by just 0.6 per cent, meaning that occupancy levels will continue to decline – an opportunity, perhaps, for some shrewd bargaining on rates?
A MARRIAGE OF CONVENIENCE
The current trend for refinancing means the relationship between banks and hotel groups is becoming ever closer...
NEARLY 20 YEARS AFTER Hugh Grant spent a (fictional) romantic weekend with Andie MacDowell at Amersham’s 16th-century Crown Inn in smash-hit film Four Weddings and a Funeral (see right), the cold wind of 21st-centuryreality has finally caught up with the 41-room, Grade II-listed hotel, which went into administration last autumn.
The Crown was one of four hotels operated by the privately-owned Dhillon Group that were put into administration at the same time, although all are continuing to trade normally while buyers are sought.
Although the administrators, BDO, are confident about prospects for the four hotels, it is a tough time for sellers. “Difficulties in accessing debt funding and the continued disparity between buyer and seller in terms of price expectations means the disposal process is likely to continue to be longer and more difficult to complete,” says Deloitte’s Nick van Marken.
The professional services firm’s data shows that the number of UK hotel transactions fell in the second half of 2012, from about £1 billion of sales in the first six months to just £300 million in the last half. Moreover, a recent Deloitte survey of hotel industry professionals found that some seven out of ten felt it would be another three-to-five years before transaction prices reached their previous pre-crisis peak.
The problem is not usually the quality of the assets, but often the complexities surrounding a sale. A portfolio of 42 Marriott-branded hotels around the UK (Marriott is the operator and not the owner) has been on the market for the past 18 months after being put into administration when the investor consortium that bought it from Royal Bank of Scotland for £1.1 billion in 2007 did not keep up with interest payments due on the debt finance.
But while many investors are adopting a ‘wait and see’ strategy for prices to fall before buying assets at knock-down prices, this delay is also putting undue financial pressures on hoteliers.
Q Hotels, for example, which operates 21 provincial hotels – many with a strong focus on conferences and meetings – spent much of last year seeking to sell a clutch of properties to help refinance the business and pay down debts. Eventually, in January this year, it was forced into a more radical solution of putting its original holding company, Q Hotels Group, into administration, and arranging a three-year refinancing. The scheme has the advantage that the hotels are still trading as usual while the debts are paid off under the refinancing plan.
Refinancing, in fact, is the preferred name of the game for hotel groups which either cannot – or do not want to – sell assets. Late last year, for example, the 32-strong Jurys Inn chain carried out a refinancing of its £600 million debt with the help of Middle Eastern and private equity backers. The move encouraged the chain to invest in a £25 million renovation programme.
Lloyds has become one of the key players in restructuring the UK’s regional hotel sector, a legacy of its rescue of HBOS at the height of the financial crisis.
Other regional hotel groups that remain indebted to Lloyds include Macdonald Hotels, Scotland’s largest hotel chain with 45 properties, in which the bank has a 50 per cent stake. The group is currently in negotiations with Lloyds about refinancing some £300 million of debt facility due to expire this autumn.
But Macdonald is also looking further ahead than just sorting out its debt: last month (February) it took over the management contract for Swansea’s four-star Dragon Hotel, owned by an investment company, after a £3.5 million refurbishment.