Hotel owners and investors are taking a slow and phased approach to capital expenditure (capex) and property improvement plans (PIPs).
This is due to the higher cost of borrowing and some cautiousness about where we are in the cycle and what’s to come.
“We're three years into a really good cycle. How long is it going to continue?” asked Chip McIntyre, vice president of strategy and development, Avendra International. “Because at some point, as money is more expensive, and then if revpar or occupancy softens, that has a dramatic effect on where you're spending the money.”
A phased approach to capex is slowing down projects and not necessarily the most efficient way to refurbish hotels. Philip Halanen, head of sourcing and sustainability, EMEA, Wyndham Hotels & Resorts, said: “If you've replaced your HVAC, but you're not going to re-do your windows, you're not going to see the best benefit because your building might still be leaky.”
Different Owners
Independent family owners who are holding their hotel assets over generations are more likely to invest in capex, while there is more reluctance and caution from institutional investors.
Halanen said: “Our bread and butter is economy and midscale, and with the mom and pop hotels, especially in India and Turkey, we see a dynastic element to it and a lot more love that goes into the property, and they're more willing to invest in capital when it's needed.”
In constrast, institutional investors are more cautious about making capex decisions, typically because decision-making takes longer in large organisations or because the ROI is not clear.
Owners have more leverage now, said Halanen, and brands are not in such a strong position to dictate brand standards and PIPs anymore.
“It’s much more of a two-way street,” he said. “We want to be flexible. If we say: ‘Well, here's your PIP and you're deficient in all of these areas, now spend loads of money,’ you're only going to get one answer: no. There’s also quite a lot of questioning that comes from the asset owners: ‘Why are you forcing these particular suppliers on me?’ The scepticism is there and it can gum things up.”
With competition for net unit growth and the prevalence of conversions, key money (developer incentives, forgivable loans) from the major brands is playing a significant role in getting deals done.
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