of low growth. The days of waiting for the economy to drive revpar are gone and hotel operators are helping themselves by growing their pipelines to deliver higher sales volumes. In a normal recovery – as in
old normal – Starwood would be in a very happy place given its leveraged position in regard to the recovery thanks to its still substantial portfolio of owned hotels. A slow recovery may actually
help Starwood in that it will not be distracted from focusing on its fee business but a giant leap in returns from owned hotels.
Europe’s consolidation
opportunity Despite all the moves the hotel industry has made in the last few decades to make itself less exposed to the business cycle, particularly by the brand owners and operators, GDP continues to have a huge impact on how well the industry does. And right now, the outlook is bleak.
In Europe the big fear is a break-up of the Eurozone. Some believe this is inevitable but the reality of it occurring is terrifying. It would surely make the collapse of Lehman Brothers appear like a little local difficulty. There are three things that
need to happen to prevent break-up. Firstly, there needs to be moves towards fiscal union. This is not going to be quick. Expert commentators believe it may take up to 10 years for the countries within the Eurozone to
agree the changes to the treaties and protocols necessary. Once the Eurozone has embarked on the path to fiscal union - and it arguably has already started with, at the time of writing, significant moves being made following a series of summits - then the second necessary condition to solving the crisis can start. This is for the European Central Bank to begin buying the bonds of troubled European countries on a large scale. Given the political resistance
to this in Germany, the only realistic source of help for the Eurozone, there has to be signs of progress towards fiscal union before the ECB is able to set its presses rolling in a money printing exercise similar to that already conducted by the Bank of England and the Federal Reserve. Thus Germany is demanding a debt for sovereignty swap. Finally, once fiscal union looks assured, the ECB can begin issuing its own bonds. These will pool the credit ratings and collateral of all Eurozone countries and thus end the current crisis. There are a myriad of variations to get to these same ends, involving the likes of the International Monetary Fund or emerging market giants like China, but ultimately it boils down to whether the Eurozone can be held together. Just like the end of the recession the process is going to be long, drawn out and bumpy. But better this than failure. A collapse of the Eurozone would be an unprecedented economic calamity and nobody knows just how bad things would be were it to happen. My favourite observation
was by analysts at UBS who, when asked what would be an appropriate asset allocation in the event of a meltdown in the
Eurozone, suggested investing in metals, mainly tinned food and small calibre arms. There are at least a couple of
ways in which the crisis is going to impact hotels. Firstly, the macroeconomic impact will be severe to catastrophic, depending how it plays out. Looking at the less gloomy side of things (which is still pretty gloomy), hotel demand is going to shrink with revpar numbers turning negative for most of next year at least. Revpars began sliding this autumn and the trend has largely accelerated as the crisis deepened. Although the second recession is likely to be short, the recovery from it will continue to be slow. The second big impact for the
hotel business is the lack of bank lending. Eurozone banks are being asked to do the splits by lending more while improving their core capital. Something is going to give and it is already clear that it is lending. The worst hit is lending outside
of the Eurozone. For Eastern Europe this looks like being particularly acute. But it will not be pretty inside the Eurozone either. A consolation of sorts will be that the lack of lending will constrain supply. For the global majors, who are
now as dependent on pipeline as revpar figures, the focus in Europe will have to be on conversion rather than development. There ought to be some significant opportunities for consolidation as well. In fact, if consolidation is ever to happen, it is surely the right time now given the crisis facing a significant number of mid-sized operators. Just as this issue went to press,
the China’s HNA pulled out of its deal to buy a 20% stake in NH Hoteles. This is a significant set- back for Spain’s biggest business hotel group and presents a prime
target for anyone seeking to swoop on a mid-sized chain with a pan- European presence The current crisis will throw-up many similar opportunities.
Hotel Analyst
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