'The pandemic has acted as a Darwinian catalyst' - deep dive into the state of UK hospitality

AHC 2021 UK Hospitality Overview

UK hospitality’s finest gathered in May for The Annual Hotel Conference (AHC) 2021 Virtual Advisory Board meeting chaired by Alexi Khajavi, president of Questex Travel and Hospitality, and Jonathan Langston, chairman and founder of HotStats to discuss the state of the hospitality industry. The board’s insights will shape the programme of The AHC 2021 which will take place on the 22-23 November at the Manchester Convention Centre.  

As the world gradually re-opens, so have the hotels. The participants noted that the period of enforced pause allowed hotels to strip back to basics, review current operations and re-evaluate strategy, and a lot of discovery will carry on well into 2022.  

Hoteliers are reviewing all areas: staffing, operating model, technology, utilization of space, revenue generation, costs, customer needs to name a few. What did transpire very clearly is that adaptability and flexibility are crucial.  

The impact of the pandemic dominated the discussion, but the focus was on the learnings, positive outcomes, and opportunities, both immediate and longer-term.  

“I think the pandemic has acted as a catalyst and that is quite Darwinian”- Nick Smart, vice president of development at Hilton Hotels.

Investing Challenges 

The investment community is cautiously optimistic about the recovery and started to look beyond the short-term prospects. There is still a lot of ‘dry powder’ on the market and huge pressure to get the money out of the door and disperse, particularly for the private equity funds. However, there was not as much distress sale as anticipated. 

“The whole spectrum of deals isn’t coming through as expected which is quite interesting,” said Dan Williams, head of hotel and real estate finance, Clydesdale Bank. Lissa Engle, managing director, Berkeley Capital Group, noted that the most volume of transactions right now is at the lower end and over the asking price due to lack of supply. Patrick Grant, partner at Alpha Real Capital, agreed: “The pricing is held up even during the pandemic, so it almost sorts itself”. Yet the general sentiment on pricing is that it is still below build costs.” 

Andrew Robb, CFO, RBH Hospitality Management, was concerned that there was a lot of capital looking to spend on hotels, but very little product for them to invest in. “Pricing is a little bit artificial at the moment and it would be useful in the coming months, once things settle down a bit, to see what the normal pricing actually translates to,” he said. 

Another challenge noted by the participants was that the assets that did come on the market were “runts of the litter” with not much of an angle to do anything other than just recovery. “There have not been many opportunities for an obvious repositioning of the slices of portfolios that came to the market,” said Andrew Robb. For Lionel Benjamin, co-founder of AGO Hotels, repositioning angle was not an issue. He noted that there were great properties in great locations that would be nice to have in anyone’s portfolio and investors who look at the long-term value of hotels were willing to pay for them over the odds because they did have this amount of capital to deploy. But properties of this value seemed to be few and far between.  

The Rise of the Remote Working  

The pandemic had a massive impact on corporate real estate portfolios with the reduction of office footprint and an increase in flex office. It also reinforced the work from anywhere movement which opens new possibilities for hoteliers to serve the mobile workforce.  

Williams was interested to see how hoteliers explore and exploit the corporate spend in different ways. Robb noted that opportunities for hoteliers would come from downgraded office spaces and that hoteliers needed to work closely with local corporations to meet their needs for social and meeting spaces.  

“This direct shift away from big offices, more hybrid, hot-desking in corporate offices, we're going to need office space and we're going to need meeting space on a turn on/turn off basis and we think that's going to be a big opportunity,” said Nick Northam, executive vice president - international, Interstate. 

The co-working models are changing too as the customers' needs shifted. For Ennismore, once they relaxed their existing rules and adjusted to allow clients the flexibility they asked for, their occupancy went up to capacity. The question is, how will it change in the next 12 months. 

“While hotels should respond to newly changed working patterns now, the workplace is likely to look really different in the next 2 or 3 years and then probably will change again as we normalize again because there's so much change going on around all of the sectors that actually we're still trying to ride a wave at the moment and make the best of the opportunity that we're faced with,” said Paul Gorry, principal sales & marketing manager, Willmott Dixon. 

Accelerating the ESG Agenda 

The participants noted that when the financial crisis happened, it seemed to put the ESG agenda on the backburner. This does not seem to be the case with the Covid crisis. If anything, it seems to accelerate the deployment of ESG initiatives. A big part of it is a different customers’ sentiment with the millennials and the Gen Z driving the change. “I don't know if more people have spent more time watching documentaries on Netflix about the environment or it can even just be down to basic awareness but yeah, it's going to be huge,” said Kevin Edwards, global business development director, Alliants. 

The importance of ESG requirements has grown exponentially as part of the investment criteria too, particularly for institutional investors. “We are actually getting pretty close to the point where there will be increased liquidity premiums for assets that don't hit ESG criteria. The material difference in pricing for assets that aren't able to show how efficient they are and share a route to improvement if they need to improve will potentially start hitting liquidity and therefore, pricing in the future”, said Grant.  

But it is not all rosy. Robert Alley, chief operating officer, Roomzzz Aparthotels, noted:  

“The worst thing is, we've made a lot of progress on single-use plastic. And then of course Covid came, and we wrapped everything in bloody plastic because you couldn't give it to anybody without it being sanitized and covered in plastic, it was completely counterintuitive.” He added that this setback only relates to the physical aspects of the ESG, not to more ethical decisions on diversity and inclusion. 

The question that remains to be answered is who is going to pay for it. “I guess the overarching theme is going to be, is the guest likely to pay more for something that has got an underlying level of diligence around ESG or is this just at the expense of the hotelier?” pondered Edwards. 

Sweating the Value Chain 

“This has been an extraordinary opportunity to reset an entire cost base. I don't think that there is any doubt that the cost base of the hotels has irrevocably changed, and I don't think that we will ever go back to the same level of headcount as we were at before. And then the really big thing is about how can you use the different areas of your hotel to actually make more money,” said Northam. 

Interstate turned several hotels into care homes during the pandemic but sees it as a short-term opportunity. Nick shared another business opportunity - leasing hotel space for extra courtrooms: “It's a fantastic business worth hundreds and hundreds of thousands of pounds, very easy to manage, because essentially it's just room hire.”  

Edwardian Hotels London also tried everything from the different uses of the meeting rooms to workspace for remote workers to projects with hospitals, universities and government. But a lot of these initiatives were really looking at short term answers. Sweating the asset comes after the ability to be able to operate the asset, according to Peter Anscomb, senior corporate director. He noted that the challenge was in working out a plan to deleverage the assets in the future when the hotel gets back into a sensible level of overall trade. 

CEO of Resident Hotels David Orr noted that revenue will be linked more and more to reputation. “We're just going to be very, very focused on our reputation and making sure that it’s deployed in the best way because the recovery on revenues is going to be quite tough, that's not going to be an easy ride”. 

Food and Beverage Services 

F&B services have gone through some of the biggest transitions to become one of the main revenue streams for the hotels during the pandemic and will remain prominent in the long term. “We've seen a lot of success amongst members pivoting their food and beverage operations to offer mobile kitchens, whether renting their kitchen out or bringing their chefs onto delivery service to offer new revenue streams to the hotel effectively,” said Rob Paterson, CEO of Best Western Great Britain. 

For Ennismore, every F&B outlet that they have opened also has come back extremely strong. “We've never seen margins so high, partly because of the staffing reductions we've done, partly because of some of the rooftop spaces,” said Keith Evans, chief investment & development officer. Northam noted that while it had been easy to drive good revenue with dark kitchens, once the costs were taken out, the margins were very small, but it enabled them to keep the staff employed. 

Smart noted that the hoteliers will be partnering more with creative third-party F&B providers instead of offering it in-house. “Gone are the days when hoteliers actually think they have all the food and beverage solutions.” 

Blended Use and Conversions 

“You'd want to have an amalgamation of things and create a plethora of opportunities and a plethora of different brands within one ecosystem: a bit of upscale, a bit of luxury, a bit of eco, a bit of budget, a bit of a coffee shop, a bit of fine dining, a bit of coworking. By opening yourself up to as many opportunities as you can, you will surely not only de-risk yourself but drive more revenue streams,” said Philip Lassman, VP development North Europe, Accor. 

“There are definitely opportunities in those stronger markets for the repositioning of certain assets, but clearly, a lot of them in a lot of markets will not be able to pivot to an alternative use,” said Kerr Young, director, hotels & hospitality group, JLL. “Typically, the further through a cycle you get, the more likely you are to get property speculators rather than hoteliers at the helm of some hotel assets,” he added. 

Paul Thomas, senior director, international development, Marriott International, distinguishes between conversion and adaptive reuse. The quick wins are the creation of black brand compliant assets from other competitive estates “because they normally drop into your system within a 6–12-month period.” Then there are assets that need 12-24 months of intensive work to change the use, and these are the conversion brands. 

The participants noted that hospitality industry suffered less than retail and questioned the opportunities in retail assets. “The pipelines obviously changed significantly as a result of the pandemic and we've seen a lot of downgrades, a lot of deferrals, a lot of abandonments so it's logical that retail assets will be converted into leisure areas, but we have got a long road back,” said Thomas Emanuel, director, STR.  

“I'm not sure we'll see a wave of high street or city centre real estate that is immediately going to convert into hospitality real estate. There are a lot of macro factors indicating that it's a good idea, but it might not be that big a thing,” concluded Smart.  

Customer Experience 

What do customers want and how should hotels meet the changing demand? Participants debated the balance between contactless service and human “hospitality” interaction. 

“People are so used to instant updates online, that they expect a real person to answer every query at a hotel level in person, no matter what time,” said Jacqueline Reid, associate vice President, RateGain. “They want personalisation and real time responses.” 

In Roomzzz Aparthotels, the arrival-departure interaction is the only non-digitised touchpoint.  Alley considered its automation somewhat counterproductive to the customer engagement and experience because “they don't write on TripAdvisor ‘I like the kiosk that I checked in and out’, it's always about people and those pure hospitality touchpoints are still important”. “And if you've digitised all of those, you've kind of lost the spirit of hospitality in the first place,” he added. 

Paterson agreed. He saw first-hand at Village Hotels that when customers used a kiosk for check-in and check-out, the TripAdvisor scores went down but when they had a host at the front welcoming people, the scores massively improved.  

Shona Whitehead, managing partner at Cogent Blue, countered that having an automated process is not taking away from the experience, on the contrary, it is freeing up the time of staff members to talk to the customer and enhance their experience because checking in with the head down is not part of the good customer experience.  

For Edwards, one of the biggest things that must evolve is engagement with the customers who should be given the ability to communicate with the company on any channel they want. “I think it's their choice and that's what people want, that’s part of their experience of staying in a hotel - it's all about them,” he added. 

Technology is going to need an investment to improve the provision of services to customers. from property management systems to CRMs to websites and apps. The lockdown has enabled many bigger companies to phase out legacy systems and become far more efficient yet the challenge of convincing the buyers to commit to tech investment remains. Overhauling the tech stack is particularly challenging for smaller hotels. “There are a lot of projects that were put on hold 12 months ago and haven't come back to the table. For independent properties and smaller groups, the investment isn't there,” said Whitehead.  

“There are some really different dynamics, depending on if you're a brand, if you're a franchise, if you're a group of hotels that can consolidate operations. It is a really tricky space. And I don't think there is a simple clear-cut way to do it, but there is certainly an appetite now for that change in the consumer world which is a big plus,”, said Patterson. 


Register now for The AHC 2021 to take advantage of an early bird rate. 

In the meantime, we invite you to join us at both The International Hospitality Investment Forum (IHIF) 1-3 September 2021 and Adjacent Spaces on Tuesday 2nd September 2021 in Berlin 

Our sincere thanks to the Advisory Board Members for their time, energy, support and insights during the meeting: 

  • Adrian Ruch, Director, Head of Strategy & Corporate Development, Choice Hotels International 
  • Nadeem Boghani, Vice Chairman, Splendid Hospitality 
  • Andrew Robb, CFO, RBH Hospitality Management 
  • Carl Ridgley, Partner, Cushman & Wakefield 
  • Dan Williams, Head of Hotel and Real Estate Finance, Clydesdale Bank 
  • David Curtis-Brignell MBE, Business Advisor, Tourism & Hospitality, Tourism Reimagined 
  • David Orr, CEO, Resident Hotels 
  • Jacqueline Reid, Associate Vice President -Sales -UK, Ireland, Iceland, Portugal and Brazil, RateGain 
  • Keith Evans, Chief Investment & Development Officer, Ennismore 
  • Kerr Young, Director, Hotels & Hospitality Group, JLL 
  • Kevin Edwards, Global Business Development Director, Alliants 
  • Lionel Benjamin, Co-founder, AGO Hotels 
  • Lissa Engle, Managing Director, Berkeley Capital Group 
  • Mike Grove, Chief Operating Officer, EMEA, HotStats 
  • Nick Northam, Executive Vice President-International, Interstate 
  • Nick Smart, Vice President Development-North and West Europe, Hilton Hotels 
  • Patrick Grant, Partner, Alpha Real Capital 
  • Paul Gorry, Principal Sales & Marketing Manager, Willmott Dixon 
  • Paul Thomas, Senior Director, International Development, Marriott International 
  • Peter Anscomb, Senior Corporate Director, Edwardian Hotels London 
  • Philip Lassman, VP Development North Europe, Accor 
  • Rob Paterson, CEO, Best Western 
  • Robert Alley, Chief Operating Officer, RoomzzzAparthotels 
  • Robert Holland, Managing Director UK & Ireland, Hotelpartner 
  • Shona Whitehead, Managing Partner, Cogent Blue 
  • Thomas Emanuel, Director, STR 

 

We look forward to welcoming you to Manchester Central on the 22-23 November. 

The AHC Team