Selling hotel property will mean bigger hotel groups

04 May 2005
Selling hotel property will mean bigger hotel groups

Andrew Sangster, editor of Hotel Analyst, considers the likely knock-on effects of the great hotel assets sell-off

It seems no hotel operator wants to own property at the moment.

InterContinental has hoisted a for sale sign on virtually its entire portfolio; Hilton is selling-off £400m worth; Whitbread has sold-out of its Marriott-branded business entirely; and French giant Accor is disposing of the property interests of 10 of its upmarket Sofitels and restructuring the leases on its mid-market brands.

In North America too the trend is away from owning hotels if you also own and run brands.

Marriott has long ago taken the decision to just focus on managing and franchising, but its main rivals in the USA, Hilton Hotels Corporation and Starwood, are now both intent on selling at least some of their property interests.

At first sight, this is a strange situation. Now is a great time to be an owner of hotels. The business cycle in the industry has turned for the better and, by retaining ownership, hotel companies will enjoy much bigger profits in the next few years.

But, for a change, the vision is much more long-term than this.

A hotel company that bases its business on making money from fees earned by either managing or franchising hotels is likely to be making more money relative to the amount of cash investors have put into it than a hotel group that also owns its own property.

This higher level of "return on capital employed" has been a particular focus for investors in the City. They want stock market-listed hotel companies to generate a return on capital of at least 10%. If you own hotel property, particularly in the mid market and above, it's hard to achieve this in the long run.

In addition, property suffers from wilder fluctuations in the short-term, as anybody that owned a house during the early 1990s property crash will tell you.

Owning hotel property is still a great business, but it is very different to managing or franchising.

The City wants companies to be clearer on where the bulk of their business is going to be focused and companies are being forced to choose between owning and operating.

There is going to be a clear side-effect of this pressure: hotel companies are going to get much bigger and operate or franchise many more hotels.

If you own a hotel as well as running it, you get to keep all the cash it makes. But if you just manage it, you will typically receive less than 10% of the gross operating profits and less than 3% of the turnover as a fee. A typical franchiser will receive less than 5% on rooms revenue.

For every one hotel you own, you may need to manage 10 or franchise 100 to make the same amount of money.

No company wants to make less money, and, if companies are selling their hotel property, they need to manage or franchise several times more than they owned just to stay still.

The hotel industry has talked for years about consolidation. It may soon be about to happen.

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