1. WHY SHOULD INSTITUTIONS INVEST IN HOTELS WITH MANAGEMENT CONTRACTS RATHER THAN LET ON LEASES?

Govinda: These are two different models and will ultimately depend on the risk profile of the investor. 

If the investor prefers to be an active asset manager and is prepared to accept dynamic cash flows, then the management agreement model will suit. This model also invariably allows the investor some flexibility in shaping the operation of the hotel. The key here is to ensure you have the right brand partner from the beginning and heads of terms negotiated aligns both parties interests especially during a sale and termination. 

For more passive investors, and those looking for more stable income streams, then the lease structure is preferred. In addition, lenders tend to prefer leases as they are more predictable and gives some form of comfort. It can also, in their minds, be compared to rents for other traditional asset classes such as offices and retail. However, due diligence must be undertaken on the structure of the lease, with a reasonable fixed and a variable rate recommended. This hybrid formula effectively de-risks the lease, with the landlord guaranteed a certain level of income, while allowing themselves to participate in the upside with the tenant. Similarly, in a downside, this gives the tenant some breathing space. Indeed, it is this lack of a hybrid formula on leases agreed especially during market peaks that has led to the downfall of many. Further, whilst the structure of the lease is important in ensuring it does not place too much strain on cash flows, invariably it is the strength of the covenant that also matters. 


2. GIVEN THE LEVEL OF INVESTMENT IN HOTELS, IS THIS ASSET CLASS IN DANGER OF BECOMING MORE TRADITIONAL?

Govinda: Hotels have come a long way from being seen as fringe and alternative investments. As analysts and institutions have developed their knowledge of the sector, and backed by strong demand fundamentals, hotels are becoming more mainstream investments. This is underpinned by more sophisticated investors entering the market notwithstanding sovereign wealth funds and private equity. In addition, so called trophy assets aside, in a significant majority of global markets, for those chasing yield, hotels provide some spread to traditional assets. Further, as the old mantra for hotels go: location, location, location – hotels are invariably found in good locations, which can also underpin the capital appreciation on exit. However, this asset class remains specialised and we expect it to remain so for the while. 


3. HOW DOES THE SHARING ECONOMY E.G. AIRBNB, WEWORK AFFECTING THE TRADITIONAL BUSINESS MODEL AND AFFECTING VALUATION?

Govinda: The hotel industry has always been at the forefront of change, with serviced apartments arguably the fore runner to co-living, business centres and club floors to flexible work space, and of course lifestyle and localised brands in answer to Airbnb. 

The impact of any of these concepts and largely technology platforms will be market and sector specific. In more mature markets i.e. those which enjoy significant fill nights year-round, one can argue there is a space for everyone and can even attract latent demand. For those less mature markets, of course we can expect some cannibalisation, and indeed evidence suggests sharing platforms seem to have less success in these markets, especially outside peak periods. These so-called disruptors can also fill gaps in imperfect markets e.g. where regulation and unions in effect stifle competition, leading to a poor service offering.