Europe's Gateways To Stability: Hotels In Major Cities Better Off Than Others

Business is down across the continent, but primary destinations are holding their own.
By Adam Kirby, Associate Editor -- Hotels, 8/1/2009


As elsewhere in the world, hotel performance across Europe is down, but some analysts say the industry has actually held up better than expected, and some European markets are even showing signs of rebounding.

Radisson Blu Le Dokhan's Hotel, Paris Trocadero, opened this year.Major gateways like London, Paris, Barcelona and Amsterdam are among the cities showing relative resilience. Established markets with strong corporate and leisure markets, unsurprisingly, are holding up better than others.

On the whole, Jones Lang LaSalle Hotels expects Europe RevPar to fall by 15% to 20% overall this year. And while even Europe's primary destinations are having a tough time, it is the secondary cities that are being truly pummeled, with major cities benefiting from intraregional short holidays, says Christiane Fiack, a Frankfurt-based partner with Ernst & Young.
"Some markets appear a bit more robust—the traditional business, government and tourist destinations such as London, Frankfurt, Brussels, Paris and Venice have not declined as badly as the secondary markets," Fiack says. "All European markets are likely to be scarred. Nonetheless, markets in secondary cities with a high share of domestic demand might be impacted less, but they usually trade at a comparably low, though stable, level."
The upper-upscale and luxury segments, especially in markets with a high share of international demand and which showed strong growth in supply and demand in recent years, may be the ones that really suffer worst, Fiack says.

France's hotels, in general, have shown more resilience than most of those throughout the rest of Europe due to the country's diversified and mature tourism industry, says Vanguélis Panayotis, the London-based director of development for consultancy MKG Hospitality. The country's biggest player, Paris-based Accor, is buoyed by its limited reliance on franchise deals, giving it more control through subsidiaries and via management contract properties, he says.
But resilience, of course, is relative. IHG has taken to tracking RevPAR relative to the rest of the market, rather than year-over-year, as a more telling measure of success. "We're not immune, but like in the [rest of the] world, IHG continues to outperform generally in Europe," says Kirk Kinsell, IHG's vice president of Europe, Middle East and Africa. "All of us will see our numbers fall off considerably, but on a relative basis, we think we'll stay out ahead."
Maintaining rate integrity is the ideal scenario, but while few hoteliers admit to a strategy of cutting rates, most have given in, to varying degrees. In London, for instance, occupancy actually grew 1.5% year over year in May, but ADR dropped by 5.4%, according to TRI Hospitality Consulting.

Although rate slashing does not pay over the long haul, it can serve to make things a little easier in the short run, says Stewart Coggans, the Czech-based head of Central and Eastern Europe for Cushman & Wakefield Hospitality. "With no ADR adjustments, guests will not magically appear—today's consumer is spending more time looking for bargains—and as a result, the performance of hotels who do not address the ADR issue can fall of a cliff, and it's more difficult to bring the guest back," he says.

Complicating revenue management is a dwindling advance-booking window. In June, The Dorchester, London, booked about a quarter of its inventory within a week of arrival, says Dorchester Collection CEO Chris Cowdray. Some operators also report that the duration of travel is getting much shorter, particularly among European travelers.
"The Europeans previously booked an average 10 days stay, and Americans five days," says Luis Riu, CEO of Riu Hotels & Resorts. "Now, the Europeans get closer to the Americans, if they travel to mid-haul and short-haul destinations."Openings Still Happening
A lack of available credit across Europe, as in most of the rest of the world, is severely hampering new development opportunities. Instead, major international brands are seeing a rush to conversions and flaggings by owners of unbranded hotels.
But while new project starts may be limited, projects well into development are continuing to open, giving hotel companies plenty to talk about. Some 38,879 guestrooms in 277 hotels are projected to open across Europe this year, according to a June forecast from Lodging Econometrics, while a further 278 hotels and 47,464 guestrooms are expected to open in 2010.
The Europe pipeline for Hilton Hotels Corp. will deliver more slowly in the coming year, acknowledges Patrick Fitzgibbon, senior vice president of development for Europe and Africa. Still, the company expects a typical attrition rate. Most developers are waiting out the storm, and even projects that would otherwise be abandoned are being kept alive by other developers looking to enter several of Europe's notoriously high-barrier-to-entry markets, he says.
Panayotis backs up Fitzgibbon's analysis generally, saying many investors remain confident and are continuing to pursue development plans made prior to the downturn—particularly in Western Europe. "Of course, many are playing the waiting game now," he says, "but as soon as things become clearer, we will see investors out of the block. It is the same situation with many of the refurbishment programs that have been postponed for next year."

The 473-key W Barcelona, Europe's second W, will open in October.Mandarin Oriental Hotel Group is making its entry into Southern Europe at the end of this year—the 98-key Mandarin Oriental, Barcelona, will be housed in a redeveloped building. Also notable in that city is the opening of W Barcelona, which is Europe's second W, following last year's Istanbul debut. The opening of the stunning 473-key new-build is set for October; other W projects remain under development in Paris and London.

Fairmont Raffles Hotels International continues to seek Raffles-branded properties in several major Europe gateways—London, Milan and Berlin at the forefront—but those plans are on the back burner for now. The Fairmont brand's expansion in Europe likewise remains a dream deferred, says Chris Cahill, chief operating officer for Fairmont Raffles.
"Because of the lack of liquidity, lack of equity, lack of debt and lack of demand, there's really not much impetus for new supply at this point," he says. Raffles Paris is slated to open early next year, while the London Savoy is in the midst of a £100 million renovation. Kiev Fairmont should open late in 2010.

London and Paris are medium-term targets for Mövenpick Hotels & Resorts, but land and development prices in those cities have not come down to a point where new construction makes financial sense, says Ola Ivarsson, Mövenpick's senior vice president for Europe. Mövenpick plans to explore expansion in markets where it already has a presence, like Germany and Switzerland.Conversions Appeal
Setting aside projects already in the ground or with committed financing, Coggans estimates that only about a quarter of Europe's announced pipeline actually will commence in the next 18 months. However, conversions—either in the form of extensive renovations or, more likely, brand re-flaggings—are increasingly common across Europe. Owners of unbranded hotels, which make up about 75% of Europe's inventory, are feeling more pressure than ever to affiliate from lenders wary of default. As a result, Hilton has more growth opportunities today than at any time since the 2006 merger with Hilton International, Fitzgibbon says. "In any downturn or crisis, there is always opportunity, and for us that has been one of the real highlights. Whilst there have been some developments that have slowed down, there are others that have really accelerated," he says. The Doubletree by Hilton brand is generating especially strong conversion interest, having flagged six hotels in the past year in the UK, with at least four more expected in the next 12 months. And while the luxury and upper-upscale segments have been hardest hit by the downturn, branded product is holding up better than independent; Hilton thus sees opportunity to continue growing its Waldorf Astoria Collection portfolio across the continent.
Starwood Hotels & Resorts holds similar optimism for its Luxury Collection in Europe, says Bart Carnahan, senior vice president of acquisitions and development for Starwood's Europe, Africa and Middle East division. "It is a major luxury hotel brand that is ideal as a conversion proposition for owners that treasure individuality and flexibility, but that seek to enhance their positioning by linking to the well-established Starwood engine," he says. Starwood remains on track to grow its EMEA portfolio by more than 25% in the next five years, and conversion will be a major component to that, Carnahan says. Meanwhile, Starwood reports a general slowdown in new-build requests in Western Europe. "We think this is to be expected, that it is temporary and that it opens up conversion opportunities, which are a perfect match for Starwood and which previously may not have been on our radar," Carnahan says. Marriott International continues to seek opportunities for its upscale brands in major European cities, complemented by its limited-service brands. What has changed with the downturn is a new emphasis on conversion opportunities, says Carlton Ervin, Marriott's senior vice president for development.

New management contracts are off this year for IHG, Kinsell says, but activity on the conversion side is way up. He reports heightened interest among owners of independent hotels and properties with "weaker brands" across Europe looking to convert to Holiday Inn and, to a lesser extent, the upstart Hotel Indigo brand. Indigo made its Europe debut in January with a 64-key property in London, with three more in the pipeline for that city. IHG is keeping an eye on unfinished residential and office projects in Europe that have been stalled by the credit crunch as prospects to be repurposed as hotels. "It's certainly in the considered set," Kinsell says. "We're paying attention to deals gone bad for other uses. To a lot of real estate developers, hotels are starting to look attractive because they've got the notion that inflation is coming back, especially if they are able to buy the asset below replacement cost."Emerging Markets Struggle
Most new development is being mothballed or deferred in Europe's emerging markets, with the exception of some budget and mid-scale projects. Lack of equity and debt funding, higher loan-to-value ratios, hesitant investors and difficulties defining market values are conspiring to keep emerging markets in their proverbial cocoons. Markets reliant on inbound visitors, like many in Eastern Europe, are struggling mightily.

While Panayotis believes the mature markets of Western Europe are already beginning to offer limited opportunities for investment, he is less optimistic about the rest of the continent. Central and Eastern Europe markets are less active both in terms of development and performance, he says. In Bulgaria, for example, a national tourism organization projects some 300 hotels there will be in foreclosure by the end of the year. According to STR Global, no Europe market has been hit harder than Moscow, which posted a 40% RevPAR drop in May year-over-year. Nevertheless, Olga Arkhangelskaya, a partner with Ernst & Young's Moscow office, believes the recent rate of industry expansion may, in fact, be sustainable in the CIS.
Telling indicators like occupancy and ADR are decreasing, but not substantially. "Even during the period of rapid development the market experienced an undersupply of hotels, so currently the hotel sector shows the least downturn in comparison to other real estate sectors," Arkhangelskaya says. During the boom times, emerging markets benefited from improving yields, rising performance and the availability of debt for new projects, Coggans says. Those conditions are history. "Until banking confidence in the sector returns, new projects will be few and far between," Coggans says. "More likely activity is the redevelopment and upgrading of existing product, and arguably that is what is needed in any case."

That said, The Rezidor Hotel Group remains downright bullish on Europe's emerging markets. Rezidor, which already has signed 20 contracts and opened another 20 properties this year, expects more than half of its growth over the next few years to come from Russia, the CIS and the Middle East, says Puneet Chhatwal, Rezidor's senior vice president and chief development officer. At the same time, Rezidor also is looking to expand in Europe's traditional gateways, taking advantage of reduced development costs resulting from the downturn.
Starwood continues to see activity in Central and Eastern Europe, in markets like Russia and Ukraine, Carnahan says. The same goes for IHG's Kinsell, who still views Russia as a strong play, particularly in the upscale segments due to undersupply; Moscow and St. Petersburg remain targets for the InterContinental and Crowne Plaza brands. The world's largest Holiday Inn, with 1,000 guestrooms, is under construction in Moscow.

Hilton sees potential in Russia for its upscale brands, especially its Doubletree conversion brand, which is opening in Novosibirsk later this year. And Shangri-La Hotels and Resorts has signed a deal to manage a 400-key hotel in Moscow beginning in 2012. Orient-Express Hotels, which is in the midst of a major renovation of trophy asset Hotel Cipriani, Venice, is refocusing on the traditional core markets of Western Europe after several years exploring emerging markets. "Opportunities in Eastern Europe, including Russia, have dried up in the short term," says Filip Boyen, vice president of operations for Orient-Express. "But, as real estate prices have not yet hit bottom, we might see great opportunities going forward."Opportunities Abound
For the rest of this year and into 2010, there are deals to be had as hoteliers struggle to stay afloat.

Kempinski Hotels, for instance, is focusing on adding inventory in high-barrier-to-entry gateway cities in Western Europe during the downturn, says Chief Development Officer Leonard Cohen. "The current environment has really not affected those plans," he says. "If anything, we are even more active than we would otherwise be because we hope that some assets that might be in trouble will eventually trade, and there could be some management opportunities that arise from that."

Many investors continue to expect a flood of distressed assets to hit the market later this year. Until then, hotel transactions are few, especially above €50 million. "Where we have seen deals done, these tend either to be at the trophy end of the market by majority equity buyers or for the limited number of distress sales we have seen to date," says Derek Gammage, EMEA managing director for CBRE Hotels. "It seems increasingly likely that banks will look to accelerate their impaired loans over the next 12 months, and this, combined with the inability to refinance loans, should drive an increase in disposal activity. We do not believe, generally, we will see hotels coming to market unless the seller is, to some degree, acting with compunction."
A good example: In one of the biggest hotel deals this year, Starwood Capital Group agreed in July to purchase approximately 240 of the 260 hotels owned by Netherlands-based Golden Tulip Hospitality, which went into receivership earlier this year. The transaction, the value of which was undisclosed, is on top of Starwood Capital's previous acquisition of Golden Tulip's franchise business, its development and representation businesses, its joint venture interests, and its brands, trademarks and intellectual property. Starwood Capital plans to create a strategic alliance between the Golden Tulip brand and its other major Europe hotel holding, Groupe du Louvre.