In an environment where interest rates continue to impact priorities, shifting focus away from capex improvement and towards deploying capital in order to cover debt costs, many assets aren’t getting the face-lifts they desperately need. However, these face-lifts may be exactly what’s needed to improve the value of these assets and jumpstart the transactions market. But the question remains: how to deploy capex, measure it and manage it effectively in order to get the most bang for your buck.
The end goal
Experts say it’s of the utmost importance that the end result not just improve the effectiveness of the hotel operations but also give the feeling of experiencing something special, thereby driving average daily rates.
“With guests preferences moving more and more towards experiences, especially in the luxury segment, we are seeing a greater allocation of capital expenditure towards experiential investments,” says Christian Bunte, managing director at Avingstone.
He adds that strategic capex allocation should be guided so that there’s an improvement in the market perception so that customers have a perceived value for the higher rates for example improving the experiential elements of a property as well as give protection to the asset in the event of any unforeseen shock to the sector.
ADR growth
However, Rastko Djordjevic, head of asset management at JLL Hotels & Hospitality Group stresses the importance of being mindful as to exactly how much room there is for ADR growth, especially after the pandemic’s shock to the sector.
“Over the last two to three years, we had a fantastic ADR growth, and if you had a renovated asset coming out of a pandemic, you did great. But now ADR growth is slowing down. So if your market share is indicating that there is more room for you to grow within the competitive set, then it makes sense to invest in your hotel. But if you're already at the top 10 percentile with your ADR, the room for ADR improvement is much smaller. So you have to really consider how much room you really have to grow?”
How to stand out
So how can investors use capex to create competitive differentiation in their hospitality assets, especially in a time where simply adding a spa or leisure facilities just doesn’t cut it anymore. The answer is to really home in one specific offering rather than purporting to be a jack-of-all-trades.
“We need to get away from the traditional thinking of ‘we're best at everything, we do everything’ because nobody does that anymore. Look at the value chain and ensure that within your value chain, you as a brand align yourself with partner brands and aim to be the best in class,” Djordjevic advises.
“For example ‘I’m going to have the best F&B operator, I'm going to have the best spa operator, I'm going to have the best the best fitness operator or co working’. So it's more about working towards a value proposition where you align yourself with your partners in order to provide the best experience to the customer. And that's key - ensuring that you have a clear differentiation strategy and ensuring that your capex is being deployed towards meeting that objective.”
Harriet Durbin, managing director at Panorama Hospitality agrees. “It comes down to where can you best fit in so you're meeting unmet needs and where can you best find a niche.”
Bunte adds: “Hotel owners and operators are seeing that it is no longer enough to be the most luxurious property in the market. You have to have a unique selling proposition, whether it is exceptional F&B, specialty spas or other experiences such as those related to the arts.”
ESG, technology and AI
Separately, with ESG improvements becoming a necessity especially in Europe, it is becoming increasingly important to pay attention.
“You need to be aware of all the ESG regulations coming into effect, Djordjevic says, adding “if gas boilers are being phased out in certain countries by a certain year, you will need to deploy more capex into the mechanical and electrical plan.”
However, he says that spending money in this way need not only be an effort to be compliant, but could also help with reducing costs, therefore positively impacting the bottom line.
“If you invest into your building management system - to control the temperature of your room, to control the lighting in your room - and invest into a clever system which changes the cooling and the heating of your building in line with the with the outdoor conditions, you will have an immediate saving on electricity. And this will tick two boxes in one where you will tackle the ESG component of it but also tackle your costs.”
However, he warns that with green initiatives, it’s important to have a clear strategy to achieve whichever standards are being pursued as well as to be mindful of the real-life operation of any ESG-focused technology.
He explains: “We have seen buildings where new systems which are very environmentally friendly have been implemented, yet they only allow you to cool down the room a certain number of degrees compared to the outside temperature. And then in summer when it gets extremely hot, the system doesn't have enough power to cool down the room. What happens then is that you need invest into a new system which has enough capacity and that's going to be very costly.”
Theodor Kubak, managing partner at Arbireo Hospitality Invest agrees, noting that getting investments in technology right can be a tricky endeavour and it’s an area which many don’t get right.
“Sometimes, new technology appears that you feel has to be implemented immediately. However, an area that is less risky is the hardcore FF&E; if you create something where the guest can physically benefit from and where they feel the comfort of the upgrade, then it’s generally more straightforward.”
“So you need to be aware of what the regulations are, how systems work in real life, how do they save energy. You have to be clear about what you want to achieve, what the associated costs, and what's the ceiling is,” Djordjevic adds.
Another common pitfall, Bunte warns is owners attempting to cut corners in order to save on costs.
“Often, those perceived savings from cutting corners are really just amortised over a longer period of time and sometimes cost more as the property will need more capex sooner if, for example finishes are lower quality or F&B concepts aren’t fully maximized. If a capex budget needs to be reduced, try to do it in an area that guests will not see, smell, feel or hear, and always spend the funds where the guests will experience the impact.”
Asset management and teamwork
Bunte adds that effective asset management is a critical part of optimizing capex investments, with Durbin stressing the importance of having a thorough asset management which has the buy-in of all stakeholders who all work together to stay on top of that plan.
Djordjevic adds: “It’s very important to keep a balance between the owner’s and the operator’s priorities. Many times, whilst some elements may be important for the brand to rollout, not necessarily are they going to have an immediate impact on the owner’s return. So it’s keeping the balance on which are the must-haves from the brand and which are the ones that are going to create that differentiation factor and that immediate return to the owner. It's about ensuring that the brand and the product manager and the owner are all working in synchronization and they're aligned.”
Additionally, Djordjevic advises not to underestimate the benefits of good collaboration between the members of the team. “If you have the opportunity to work with a project manager or general contractor and designer that previously worked well together and delivered on projects and they have a good understanding and teamwork, that's really going to help you,” he says.
He also stresses that owners need to stay abreast of brand standards and how these standards are changing. He notes: “If there's a new brand standard coming into effect where the brand will ask all its owners to make certain capex investments into specific items, you want to be aware of it while you're planning today rather than tomorrow.”
Kubak adds it’s also important to seriously consider how the various capex considerations interplay with each other, rely on each other and may affect one another.
“One should not just look at one single aspect but also look at how would it affect any other aspects in the hotel and trigger potentially other considerations. There is interactivity between every single capex consideration, which may have an effect on further costs further down the line,” he warns.
Looking to the future
Looking ahead, Kubak says technological advancements and AI will have significant impact on capex in future.
“It will impact AI will impact us in all aspects; how we conceptualise property, which kind of services we provide, how we communicate with the guest – it will impact every single aspect of the guest journey. And so therefore, we need to see how we can adapt to this new reality as quickly as possible and make it serve the hospitality sector. If we can get it right, it can result in bigger returns. AI is something we need to come to terms with.”
He adds: “In terms of technology and sustainability, right now, we’re at an important junction where if you don’t recognise the window of change and take the right steps, there’s a risk of not staying relevant over the next five to 10 years.
Djordjevic notes a shift towards a more residential product where improvements utilise the use of working with warmer colours, getting rid of the typical working desk and making a lower desk which can also be used for working but also for dining as well as a merger of different spaces coming together.
“We've seen co-working spaces and F&B spaces merging together and creating more of a meeting space rather than just a lobby,” he says.
However, he warns. “Where the industry is going towards is that everything needs to be Instagrammable and glamorous. So when you're investing, your cycles are getting a lot smaller and so your concept could be obsolete in five years. So how can you have a product in place which is going to address the current trends but also be able to be upgraded and facelifted in four or five years times as the trends change?”
Durbin concurs. “At the very beginning while you’re working out what you want to do and how much things would cost, you should at the same time be seriously considering exactly what impact will be had on the profitability and the overall performance of the asset in for example, the next five years.”
Positively, Durbin notes that the prevalence of unbranded, tired hotel properties in southern Europe means there’s a lot of opportunity in that region. “There are tons of people working on turnaround projects from 2-star through to luxury and there’s big opportunity there,” she says.
In a nutshell, experts agree that capex need to be specific and targeted. It has to be able to refresh the space and to infuse a new spirit in the property which is instantly and very clearly recognized by the customer, and there needs to be a strategy in place to ensure that any improvements are future-proof.