MANCHESTER, England — Investors will be forced into difficult conversations if energy prices continue to be impacted past summer 2023.
“We were lucky that large portions of our portfolio were hedged through wintertime,” said Tina Yu, principal, KSL Capital Partners, speaking on a panel discussing hospitality investment at the Annual Hotel Conference (AHC).
Yu said the assumption was that prices will settle down in the second half of 2023 but that if they don’t, “people are going to have a much different conversation than they are currently”.
Taking place at the Manchester Central Convention Complex on 3 October, the panel was moderated by Kenneth Hatton, executive director, head of hotels, EMEA at real estate services and investment firm CBRE.
Yu told the audience of hospitality owners, operators and investors that KSL’s existing portfolio had seen energy costs double this year but this had been projected to be four to six times higher before government intervention was announced. She acknowledged that it was “harder” to pass cost increases onto customers “when you’re not on the upscale and higher end spectrum, especially when you’re staring down inflationary pressures that are double-digits”.
James Dunne, head of operational real estate at investment company Abrdn predicted as other speakers at the event had previously that “it will be that mid-market which is under pressure from a lot of areas that is going to suffer”.
During the discussion, however, Yu also expressed her confidence in hospitality investing despite the challenges the market is facing. “I’ve staked my career that travel is part of the human experience. For us it’s about investing in good teams,” she said. “You can still find good businesses you just have to invest in differentiated products and the right management team.”
KSL bought the eight-strong portfolio of Pig hotels in the UK earlier this year for an undisclosed sum.
James MacNamara, head of operational real estate at asset manager Schroders Capital, expressed confidence in the growing lifestyle and particularly luxury lifestyle segment which is attracting Middle Eastern and US customers. “It’s not difficult for everybody out there,” he said.
The panellists agreed that brands will need to differentiate themselves with good service at the right price point to stand out and attract custom. Yu offered the example of Village Hotels, acquired by KSL in 2014, which she said during the day is “packed” with gym members and Starbucks customers; while MacNamara highlighted the importance of finding “a piece of real estate that allows you to adapt” and provide value.
Earlier this year, CBRE published a paper which looked at the impact of inflation on hotels, according to which, during periods of low or medium inflation, most hotels see neither benefit nor harm from inflation – the returns follow the real economy.
The paper found weak evidence that economy hotels may be less able to price to inflation, but much stronger evidence that luxury hotels were able to benefit from higher rates of inflation, with luxury hotels emerging as the most likely candidate as a hedge for inflation.