Investors should use the pandemic to consider repositioning hotels to be more profitable, according to a study produced by Christie & Co.
The company said that, with market KPIs remaining relatively low, the pandemic represented a good time to be reposition hotels.
The study noted that previously there had not been compelling pressure from the competition to refurbish hotels, and the operation has been producing sufficient profit to keep the owners at least smiling. Now suddenly facing a serious challenge and demand shock, and having the carpet been swept underneath the operator, the question remained about what to do to prevent serious impact?
Kimmo Virtanen, director - Scandinavia, Russia and the Baltic States, Christie & Co, told us: “Covid-19 is a catalyst to start thinking. There is so much demand to come. Maybe you need to convert to something else, or maybe a repositioning. But don’t stand still, do something about it. When the music starts again you need to be ready to play.
“Most of the products in the Nordics are mid-market products, but the world has since evolved. In the mid-90s we saw the growth of the budget sector, then boutique hotels. Markets change. Something that was fashionable 10 years ago is not necessarily now. You check your wardrobe and your car on a regularly basis, why not your hotel concept?
“There are many hotels which, location wise, are in the sweet spot, but need to be refurbished. They’re not making the most of the location. If the purpose is to maximise return on investment that is - some investors want safe, easy investments.
"But there is also a lot of money that needs to be invested somewhere. Before the pandemic yields were going down and there were not enough good targets. Money or the desire to travel hasn’t disappeared, it’s just been hampered.
“Many markets are facing oversupply of offices, there is several million m2 of vacant office space in the Nordic region, and there are also some who are converting hotels to residential use - so it is going in both directions. There will be a rethink: whatever is available, whatever is required, what do you need for the long term.
“The hotel sector is very capital intensive. You need a large amount of money and if your management does not focus on measuring the outcomes of their efforts, they are doing nothing more than guessing.”
Joonatan Akkanen, head of hospitality, dSign Vertti Kivi & Co, added: “Our clients who were able to invest started to act in March and April and soon they will be able to see the benefits of their refurbishments.
"During these times maximal value for money is the key also in design. Differing from general approach that focuses on evaluating designer´s work only based on look and feel created, also the financial improvements that have been achieved as a result of co-operation should be closely evaluated and considered. For example, what has been improvement in room rates, increase in income on F&B or increase in the number of returning guests as a result of Capex investments and redesign. Nailing these both targets; unique look & feel and improved financial performance is the real value the owners are looking after.”
The study cautioned that plans should be evaluated carefully taking into account the new positioning, potential branding and freshly refurbished product, but said that that even this did not guarantee the required end result. There were number of reasons why the above may not necessarily save the situation, such as, but not limited to: no access to required refurbishment capital, fundamentally changed dynamics of the market, obsolescence of the product and prohibitive refurbishment costs.
Finally, there may be also an opportunity to sell the property to new owners. Potential purchasers may have access to alternative solutions for the property that the current owners may not and could implement the required changes to maximise the value of future business.
Whoever the owner, there was still potential for the brands - or a new brand. Virtanen added: “You need to take your car for inspection every year and it should be the same with hotels - the brands would like to keep standards up. The brands cannot allow the product to deteriorate too much. A clever investor would ask the operator whether they are maximising the product or whether the concept needs to updated or changed. Sometimes the right answer is from mid-market to international economy, or something else. But are investors undertaking this analysis or just saying ‘whatever’?
“The danger is that if you listen to some operating companies, they will ask for the moon from the sky immediately rather than investing over time. Savvy investors must instead prioritise.”
Insight: Prior to the pandemic, hotels were the investment of choice for those looking for a little hedge in their portfolios. Enthused by the rise of brands, third-party operators and everyone else who ensured that you could own a hotel without having to have anything to do with running a hotel, hotels were creeping into the mainstream.
Then the pandemic came along and it transpired that hotels could be closed down by forces beyond anyone’s control and investors started to get a closer look at what happens to a hotel when all the guests have gone.
Some - starting with family-owned properties in the Mediterranean - are starting to think that this is too much hassle to be putting up with and are getting out, leaving the hotels to be acquired and possibly repositioned. For those who can hold and have well-grounded faith in the long term, deeper questions remain about whether their hotel is the correct hotel. If there’s one thing investors have time to do while the doors are closed, it’s think.