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ESG, tech, focus for squeezed capex

Updated: Jan 31, 2022

Following the immediate needs arising from delayed capex, spending on ESG and technology were being prioritised in the hotel sector, according to the latest webinar from Watson Farley & Williams.

With government support ebbing away, the sector remained under pressure, with mixed responses from the brands and owners on where to prioritise capex.

At Frasers Hospitality, Guus Bakker, CEO EMEA, was, as an owner/operator - in addition to having a number of management contracts - able to approach the issue of capex with some flexibility. He said: “Cashflow was very important as nobody knew how long it was going to last, but despite the cash flow issues, we have taken on a number of new projects which have been successful.

“As a group we have a balanced approached to capex including refurbishment, technology and change of use in certain areas in the hotel.”

An appreciation that technology can improve operations (not least given staffing issues) and drive ancillary revenue was now near-mandatory in hotels and has been driving evolution and adoption of innovative approaches to assist both guest and owner.

Kevin Edwards, Business Development Director, Alliants, said: “Because we focus on improving the guest and employee experience within hotels, we have never been busier. We are seeing a real drive from forward-thinking hotel owners, particularly private equity firms.

“Traditionally, private equity had very little interest in investing in technology because it was simply seen as a cost. This has now changed. PE firms now realise they can invest in technology to drive additional revenue and asset values on exit.

“We are working with a very large PE firm with a portfolio of 15 UK hotels and the business case is startling. With a £2m investment in technology, they are going to generate £14m EBITDAá. Suddenly you’ve got a very compelling business case. Add that to your enterprise value on exit and investment in hotel technology makes a huge amount of sense.”

While owners were increasingly happy to invest in technology, there remain some issues over the brands implementing it, given their global spread and, often their favouring their own systems. At Cycas Hotels, where the group works with a number of flags, Asli Kutlucan, Chief Development Officer, said: “Brands are still a bit slow at adopting technology that would make life easier and we are pushing boundaries to get them to be more flexible.

“Most of the issues of inflexibility come from safety and security. Plus most of the interfaces have not been tested to their brand standards.

“Some are also concerned that the levels of customer service will decrease with the implementation of technology, but reception desks have always been rejection desks in my mind. It’s never been a welcoming point – just an admin place. Kiosks that allow more interaction are more welcoming and add more value to the service level.”

The staffing issue, which is now dominating cost and operational concerns around the world, meant that “IT investment is going to be a priority," according to Felicity Jones, Global Real Estate Sector Head and Partner in the Corporate and M&A group, Watson Farley & Williams.

Another essential was investment in ESG, with Jones adding: “You’re seeing it everywhere in the stack – investment funds have green and sustainability criteria. Some of the banks are being very specific in their requirements as well. We’ve seen some slightly unrealistic requirements from some of the larger estates/authorities – they have more rigid requirements than pension funds and private equity.

“The brands are ahead of the game on ESG and rightly so, but at the end of the day, there is still a long way to go. There will be a lot of costs in some of the older buildings (which may make some more suitable for repurposing). There has to be a balance. Balancing the costs against the requirements has to be a process.

“It’s also about educating the consumer as much as educating the owner – if a guest staying in a five star hotel wants their linen changed daily, the expectation is that it will be done.”

Bakker added: “Unless organisations are being forced to build to certain ESG standards it won’t happen due to the significantly higher costs involved. At the end of the day, the consumer needs to be prepared to pay for it.”

With staffing and energy costs rising, the hunt for more revenue was pressing. Kathrin Cockhill, Director of Hotel Intelligence EMEA, HotStats, said: “What are we going to do with all these empty conference rooms? How long are we going to wait to decide what to do with them?

“Hotels need to take advantage of the space that doesn’t require a lot of extra labour – indoor gardens, cinema rooms, indoor activity space - things that appeal to families and leisure space. Leasing space to local retail? You need creativity and bravery to think about conference space as an opportunity.”

Kutlucan wasn’t convinced that the answer lay in the work from hotel trend. She said: “As soon as any restrictions have been lifted, we see people returning to the office enjoying more productivity and a better working environment. We experienced hotel lobbies being the next office with start-ups and Millennials – this was around before the pandemic. Hotel owners and operators have always been mindful of this group.”

Bakker agreed, adding: “Hotels have always offered space for flexible periods of time. What we see today, particularly in the UK provinces, is people using hotel space when they need an uninterrupted meeting free from distractions of home working.”

With the recovery set to be choppy, flexibility will remain everybody’s friend.

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