The past decade has seen major hotel companies fervently embrace an asset-light strategy, pivoting from owning their bricks and mortar to instead focusing on the higher-margin business of managing and franchising hotels. However, the challenges in pushing this model further have been laid bare, exposing a more nuanced picture where factors like financing and interest rates are proving formidable obstacles.
As interest rates continue to rise in major financial markets, with debt pricing surging, debt availability becoming limited for borrowers and a gap between seller-buyer pricing expectations, the disposal of assets is proving challenging. And it seems Melia and Hyatt are experiencing this first-hand.
“It's a more challenging environment right now primarily because of financing and [the situation] is more acute in the United States,” says Hyatt CEO Mark Hoplamazian.
Over the first half of 2023, hotel sales in the US slowed, with the number of transactions valued at $10 million or more declining by 36 per cent, according to LW Hospitality Advisors’ Major US Hotel Sales Surveys.
Although Hoplamazian notes that compared to the US, debt availability and pricing of debt in Europe is still “quite reasonable and relative to historic levels”, it’s clear that sales across the Atlantic — especially in the UK — have been significantly affected.
According to CoStar, total hotel sales in the UK during the first six months of 2023 fell 49 per cent year-on-year, with deals during the period largely being led by buyers at the lower end of the price spectrum - sub £20 million - and often needing little to no debt.
So how are companies managing this difficult trading environment?
Hyatt's approach exemplifies a wait-and-see tactic, opting to bide time until market conditions become more favourable, with Hoplamazian noting that Hyatt hasn’t been aggressively pursuing marketing efforts and highlighting that the company’s financial performance allows it this luxury.
“We're getting paid a lot to wait. Our own and lease results continue to be very strong. We feel really good about the progression of earnings and margin expansion,” he says.
Jan Freitag, national director of hospitality market analytics at CoStar, says many are pursuing this strategy, adding that this approach is contributing the slowdown in sales.
“There’s still this bid-ask spread — chasm — and that is going to take a while to unfold. That’s why if you’re not motivated, if you’re just sort of sitting on the sidelines, there’s really no catalyst for you to really be aggressive in marketing your property.”
Melia, on the other hand, is actively reshaping its asset strategy, focusing on rotations, joint ventures, and partnerships to navigate the challenging waters. The firm recently agreed a deal with the Abu Dhabi Investment Authority (ADIA) to form a joint venture encompassing 17 properties.
“There have been some delays in asset sales, and we have reinforced our commitment to reduce debt as one of the main priorities of the company through cash flow generation and asset rotation,” says Gabriel Escarrer, CEO of Melia.
Melia’s chief real estate officer Juan Ignacio Pardo explains further.
“During the first half of the year, the real estate team has been mainly focused on transactions regarding some specific asset rotations and joint ventures, replacing and assisting our existing partners to the exit, while introducing our new ones to the existing joint venture structure. Changes are mainly focused on easing certain commercial restrictions on commitments that we have and extending the terms of the operation of the different units,” Pardo says.
He adds that there is a clear roadmap for the end of the year on the asset rotation phase and this is mainly focuses on partial disposals either directly or through joint ventures or introducing partners to assets.
The emphasis on asset rotation by Melia signals a trend where hotel companies are looking to optimize their portfolios rather than outright sales, this possibly being a reflection of these uncertain market conditions where outright sales might not fetch the expected valuations.
For Hyatt, it's about waiting for the opportune moment, banking on continued profitability. For Melia, it's a recommitment to strategic objectives, even as the brand confronts delays in asset sales. But the question remains – how long will these hospitality giants hold onto their assets in the hope of more favourable market conditions? And how will their approach – and the approach of other companies – affect a slow transaction market?
The hotel industry is at a crossroads. While companies must remain vigilant, adapt to changing circumstances and — like Hyatt and Melia — be willing to modify their asset strategies in the face of unpredictable market realities, these decisions are far-reaching, and the future of the industry will be defined by these decisions.
Looking forward, positively, Savills says it believes momentum will increase in the second half of 2023 as the bid-ask spread continues to tighten, which will drive annual transaction volumes closer to long-term averages.