Department of Real Estate and Construction Management Division of Building and Real Estate Economics Master Thesis Number: 340 THE HOTEL MARKET IN STOCKHOLM MUNICIPALITY An Analysis of Trends and Demand and Supply Factors Influencing the Market Author: Josefin Bergqvist Stockholm 2006 Supervisor: Hans Lind
MUNICIPALITY Master of Science Thesis Title: Author: Department: The Hotel Market in Stockholm An Analysis of Trends and Demand and Supply Factors Influencing the Market Josefin Bergqvist Real Estate and Construction Management, Division of Building and Real Estate Economics Master Thesis Number: 340 Supervisor: Hans Lind Keywords: Hotel properties, hotel market Abstract The hotel market in Stockholm has had a positive development during the last years and is forecast to continue the same way. This in conjunction with low interest rates and yield compression has given rise to a new interest of the hotel market as an interesting investment opportunity. There are currently plans to add approximately 2,750 new hotel rooms to the supply in Stockholm, most in the 4- and 5-star category. The development and construction of new hotels take several years and the developer has to be able to look into the future in order make correct projections of demand. It is therefore important to be able to predict market trends and anticipate what the future demand for hotel rooms will be in a city. This master thesis aims to study the current relationship between the demand of hotel rooms in Stockholm and the planned increase in supply by analyzing trends and demand and supply factors influencing the market. The study has been conducted through literature research and open face-to-face interviews. In total fifteen interviews were carried out with a mix of hotel operators, owner and other persons familiar with hotels and the local hotel market. The study confirms the Stockholm hotel market is closely related to the general- and regional economy and the hotel market follows the regional GDP development. It was also evident the demand for hotel rooms in Stockholm is very cyclical during the year due to a high percentage corporate guests, although leisure guests are increasing partly due to the introduction of budget airlines. The conclusion of the thesis is that although there are plans to increase the number of hotel rooms in Stockholm the stakeholders do not fear this will have any major implications in the long-term but most likely will only cause a short-term disruption before the incremental supply will be absorbed. However, this assumes continuing development of Stockholm as a destination and the right timing of the developments.
Preface This thesis, which is the last module in the Master of Real Estate Management program, has been conducted at the Department of Infrastructure Building and Real Estate Economics at the Royal Institute of Technology in Stockholm, Sweden. I would like to thank Professor Hans Lind at the Department of Infrastructure Building and Real Estate Economics for his support and guidance during the process. Stockholm, 2 June 2006 Josefin Bergqvist - 2 -
Contents Page Section 1 Introduction 4 1.1 Purpose 4 1.2 Methodology 5 1.3 Disposition 5 Section 2 Theory 6 2.1 Definition of Hotel Property 6 2.2 Essential Concepts 7 2.3 Description of the Stakeholders 7 Section 3 The Hotel Market 12 3.1 The Nature of the Hotel Market 12 3.2 History of the Hotel Market in Sweden 13 3.3 European Hotel Investment Market 15 Section 4 Selection of Companies in the Study 19 Section 5 Macro Trends 25 5.1 General Economics Sweden 25 5.2 Financial Outlook 26 5.3 Property Trends 27 5.4 Stockholm 28 5.5 Result from the Interviews 31 Section 6 Demand Factors 33 6.1 Hotel Demand in Stockholm 33 6.2 Visitor Statistics 35 6.3 Future Trends 36 6.4 Result from the Interviews 37 Section 7 Supply Factors 40 7.1 Hotel Supply in Stockholm 40 7.2 Hotel Developments in Stockholm Municipality 41 7.3 Result from the Interviews 44 Section 8 Final Discussion 45 References Appendix Appendix 1 The Swedish Hotel Classification System Appendix 2 Hotels in the City Centre of Stockholm Appendix 3 Hotels in the Municipality of Stockholm Outside the City Centre Appendix 4 Interview Questions - 3 -
1. Introduction In Stockholm municipality there are approximately 120 hotels and 13,500 hotel rooms. In addition there are 18 hostels of which five are affiliated to the Swedish Tourist Association (STF). The average occupancy in Stockholm in 2005 was 67%, up three percentage points compared to the previous year 1. This is still fairly low compared to some other Nordic- and European capitals (e.g. Oslo 68.5%, London 68.9%) and to the record high occupancy figure of 74% in 2000. It could therefore be assumed there is no need for more hotels in Stockholm. However, the occupancy statistics from SCB is an average of all hotels in the Stockholm municipality. The statistics may therefore give the wrong picture of the hotel market as one category of hotels might have a high occupancy at the same time as another category has a low occupancy. In order to understand the hotel market it is therefore important to have an extensive knowledge of the concepts, brand affiliations, star categories etc. in addition to occupancy levels and room rates for the different market segments. Although the demand for one type of hotels is satisfied this does not mean there is no demand for another type of hotels or demand in another location. The market also changes with new trends and influences from macro factors. One example of this is the introduction of budget airlines like Ryanair and Easy Jet which have increased the accessibility and awareness of Stockholm as a destination and as a result introduced new guests to the market. The development and construction of new hotels takes several years and the developers have to look a few years into the future in order to make the correct projection of the demand. This stresses the importance of being able to predict market trends and anticipate what the future demand for hotel rooms will be in a specific city. Due to the above reasons it is of main importance that the stakeholders in the hotel market have an extensive knowledge of the market interaction between demand and supply as well as direct and indirect factors and trends affecting the hotel market. 1.1 Purpose The purpose of this study is to analyze trends and demand- and supply factors influencing the hotel market in Stockholm. This in order to establish whether the hotel development plans for Stockholm are feasible or if there is a risk for over supply in the near future. The scope of the study may be summarized as follow; Overview and analysis of the hotel market in Stockholm. Identification of trends and macro factors influencing the hotel market in Stockholm. Analyze of current and future demand for hotels rooms in the competitive market. Analyze of current hotel supply and review of proposed hotel development in Stockholm municipality. 1 Figures from SCB Statistics Sweden - 4 -
1.2 Methodology As an initial step Chris Rouse, Senior Director of Hotel Development at CB Richard Ellis Hotels in London and Lennart Gustafsson at the Stockholm planning office were contacted in order to discuss whether the subject of the thesis would be of interest to the market. After these initial meetings general information about the market and companies included in the thesis were gathered and analyzed. At this stage the history of the hotel market in Sweden as well as general trends in the European hotel market were also analyzed. In the next stage a number of open-ended face-to-face interviews were carried out with hotel operators, hotel owners and other persons familiar with hotel development and the local hotel market. The hotel operators and hotel owners where chosen on account of market share and involvement in current hotel projects in the city but also on account of their ability to provide a better understanding of the hotel market and actors involved. A short overview of the companies involved in the study can be found in section 4. All people interviewed were met in person and all interviewees were asked the same questions (see Appendix 4). Although the pre-set questions were the base for the interviews the interviews were more a two-way conversation about the topic of the study. 1.3 Disposition The second chapter of the thesis consists of a definition of hotel properties and main concepts and a theoretical description of the stakeholders involved in the hotel market in Stockholm; operators, owners and distributors. The third chapter describes the hotel market in Stockholm starting with the nature of the market and a historical background in order to give an explanation to the structure of the hotel market today, followed by a description of the European hotel investment market and trends. Chapter four is an overview of the companies included in the study. Chapter five describes some of the macro factors in Sweden and Stockholm influencing the hotel market as well as financial and property trends. The chapter concludes with results from the interviews. Chapter six deals with demand factors, visitors statistics and future demand trends likely to affect the market followed by chapter seven which describes supply factors and new hotel developments in the Stockholm municipality. Both chapters end with results from the interviews. Finally chapter eight is a conclusion of the study with a discussion of the results and its potential implications. - 5 -
2. Theory Hotel properties differ in many ways from other properties, mainly in terms of tenancy agreement and the complicated structure between the tenant, property owner and sometimes also distribution firm. 2.1 Definition of Hotel Property Properties are divided into subcategories depending on the activity and purpose the property is used for. For example if a property is named residential property or office property this means the property is mainly used for residential respective office purposes, each field of application has a specific code. Hotel properties have code 322 rental property, hotel or restaurant building. In this thesis a hotel property is a property mainly used for hotel purposes, meaning rooms in the property are let for shorter overnight stays. 2 There are several types of hotel properties as well as different level of standards targeting different customer groups. Since 2003, Sweden has an official hotel rating system handled by the Swedish Hotel- and Restaurant Association, SHR. This is a voluntary classification system and not all hotels in Sweden take part in this. The hotels that take part are awarded 1 to 5 stars according to approximately 130 different criteria both to public areas and to the actual hotel rooms. The classification of hotels is conducted through yearly inspections. Examples of the requirements for the various star ratings are attached in Appendix 1. It should be noted, there is no universally accepted system for classification of the market level of hotels. Instead the different systems are more designed as a guest information service rather than an analytical tool. 3 Hotels properties differ from office properties in several ways. The value of the property is closely tied to the tenants (the operator) profitability as the cash flow is generated in the property itself and the rental costs is a large part of the operating costs. It is therefore important that the owner of the property has knowledge of not only the property market but also the hotel market. Further there are usually no vacancies in hotel properties but the sitting tenant (usually only one tenant) has long leases, often over 15 years and in general the rent is not fixed but based on the revenue the hotel generates. The structure of a hotel lease is of major importance as the value of the hotel property is to a large part determined by the lease structure. 4 As a last point, hotels differ from other properties as they often retain high residual value, especially up-scale hotels. In order to preserve the value of a hotel there is often extensive maintenance, repairs and renewal programs for re-investment and capital expenditure. The usual method for making sure there is enough money to do so is to set aside a percentage of the hotel s revenue to a replacement reserve. The amount of this proportion varies with type of hotel and characteristics of the location but a common figure is 4% of total revenue. 5 2 www.skatteverket.se 3 SHR 4 Rouse, C. 2004. 5 Rouse, C. 2004. - 6 -
2.2 Essential Concepts Revpar stands for revenue per available room and is a performance assessment in the hotel industry. Revpar is calculated by multiplying a hotel s average daily room rate (ARR) by its occupancy rate. The occupancy rate is number of sold room in relation to total number of rooms. The graph below shows how Revpar is calculated. Figure 2.1: Revpar Calculation Occupancy ARR = Revpar Number of Sold Rooms Total Room Revenue Total Room Revenue Total Number of Rooms Number of Sold Room Total Number of Rooms Source: SHR It should be noted that Revpar does not include revenue from other hotel services such as food and beverage, conference rooms, spas etc. 2.3 Description of the Stakeholders The structure of the hotel market is complex with several stakeholders involved in a complicated relationship. There are three main types of stakeholders in the hotel market which sometimes overlap each other. The picture below illustrates this relationship. Figure 2.2: Actors in the Hotel Market Owner Operator Distributor Source: www.homeproperties.se The relationship between the stakeholders can take several different forms. A hotel can for example be owned and operated by the same company or there might be a separate operator from the owner of the property. An operator can also be linked with the hotel in various ways, for example the operating company may also own the hotel property but operate the hotel through a management contract. Individual operators who are not tied to a larger operating company like Radisson SAS often work together in alliances in order to achieve effective marketing and sales programs. - 7 -
Below follows a brief description of the three types of stakeholders. 2.3.1 Hotel Property Owners The figure below shows the property companies in the Nordic countries who primarily invest in hotel properties. In Sweden there have historically been two companies who only invest in hotel properties, Home Properties AB (former Capona AB) and Pandox. However, a new player Norgani Hotels ASA entered the market in May 2005 and bought hotel portfolios from Home Properties AB as well as Pandox. Norgani is now the largest hotel property company in the Nordic countries with 64 hotels in their portfolio (March 2006). Figure 2.3: Hotel Owners in the Nordic Market 2005 70 70 60 60 64 64 50 50 # Hotels # Hotels 40 40 30 30 20 20 10 10 0 0 Norgani Norgani Hotels 37 37 Norlandia Norlandia Hotels 37 37 Olav Thon Gruppen Olav Thon Gruppen 32 32 Dividum Dividum 25 25 Pandox Pandox 20 20 Home Properties Home Properties 17 17 Host Hotelleiendom Host Hotelleiendom 17 17 Kapiteeli Kapiteeli 16 16 Rica Eiendom Rica Eiendom 15 15 Vital Eiendom Vital Eiendom 12 12 Wenaas Hotels Wenaas Hotels 12 12 Tapiola Tapiola 9 9 Ramuk AB Ramuk AB 6 6 Nordisk Nordisk Renting Renting Source: www.homeproperties.se In addition to the companies in the figure above, there are several other property companies, institutions and private owners who also own one or several hotels as well as hotel operators who own the hotels they are operating. 2.3.2 Hotel Operators The hotel operator is the tenant in the hotel property but the lease is usually different from a commercial property lease e.g. office contract. Instead it is common that the tenant (if the owner and the operator is not the same company) pays a percentage of the revenue to the owner or receives different fees for operating the hotel (management contract). The value of a hotel property is to a large extent dependent on the structure of the lease. It is therefore important that both the operator and the owner have knowledge of the specific characteristics of the hotel market and that the structure of the hotel lease reflects the underlying market conditions. Below is a short description of the most common lease structures; management contract, revenue-based contract and fixed-fee contract. - 8 -
Management contract Management contracts are not very common in Scandinavia but much more frequent in Europe especially among the international hotel chains like Marriott Internationals and Hilton Hotels. The main characteristics are that the property owner also owns the operational business. However, an operator is assigns to operate and manage the hotel through a management lease. The property owner pays a management fee to the operator. Revenue-based contract Revenue-based lease are linked to the revenue generated by the hotel operation. In order to limit the risk revenue based leases often specify a minimum guaranteed amount of rental revenue. Fixed-fee contract A fixed-fee contract is via an index linked to the Consumer Price Index (CPI). This type of leases limits the risk as they are not linked to the revenue or profit of the hotel but they also limit the potential. In the Nordic countries the most common structure of hotel leases is revenue-based leases linked to sales generated by the hotel business with a minimum rental guarantee. This limits the risk for the owner and at the same time provides the owner with a share of the potential growth. The graph below shows the main hotel operators in the Nordic market. Figure 2.4: Hotel Operators in the Nordic Market 2005 # Hotels # Hotels 120 120 100 100 80 80 60 60 40 40 20 20 0 0 124 124 Hilton Hilton International International 93 93 Choice Choice Hotels Hotels 51 51 Rica Hotels Rica Hotels 43 43 Restel Hotels Restel Hotels 42 42 Norlandia Norlandia Hotels Hotels 39 39 Sokos Hotels Sokos Hotels 37 37 Thon Hotels Thon Hotels 33 33 Tribe Hotel Tribe Hotel Management Management 26 26 Accor Hotels Accor Hotels 26 26 Rezidor SAS Rezidor SAS Hospitality Hospitality 17 17 Elite Hotels Elite Hotels 12 12 Winn Hotels Winn Hotels Source: www.homeproperties.se The importance of being affiliated to a brand has become more and more essential in order to distinguish from others and to communicate and market the product to a selected target group. In addition to achieving marketing benefits and access to global booking systems, affiliation to a brand also gives benefits of attracting funding and drawing potential - 9 -
employees, as well as creating barriers to competition 6. How important being affiliated to a brand is depends on the specific market and target group. As mentioned the structure of the Swedish hotel market is constantly changing and at the end of 2005 Rica Hotels decided to not renew contracts to 16 hotels affiliated to them by franchise agreements. This will decrease their nation-wide coverage, opposite to what most chain operators are trying to achieve. 7 2.3.3 Hotel Distributors The hotel distributing company provide the marketing tool as well as the booking system for the hotel. The distributing company can be either an integrated chain or a marketing organisation. An integrated chain means the chain is operating and managing several hotels and marketing is done together with all hotels in the chain and bookings are done in a global reservation system. Radisson SAS is an example of an integrated chain distributor. A marketing organisation is a voluntary economic organisation for privately run hotels. The organisation gives benefits of joint marketing and reservation system which can be of a major importance in order to be competitive in the market. An example of a marketing organisation is Sweden Hotels. There are also independent hotels that are not part of any hotel distributing company or marketing organisation but all marketing and bookings are made by the operator. Joining a distribution chain is especially important in cities where the marketing potential is a large competitive tool in order to reach the guests. At the same time internet is gaining importance as distribution channel and more and more bookings are done through this source which may in time limit the importance of chain affiliation. The graph overleaf shows the percentage of sold rooms each distributing group achieved in 2005. 6 Amristead (2000). 7 Restauratören Nr 8, 2006. - 10 -
Figure 2.5: Percentage of Sold Room in Sweden in 2005 per Distributor First Hotels, Rezidor SAS, First Hotels, Rezidor SAS, Elite Hotels, Grand Hotel Elite Hotels, Grand Hotel Holdings, Nordic Hotels Holdings, Nordic Hotels 16% 16% Other 2% Other 2% Ramada Sweden 1% Ramada Sweden 1% Ditt Hotel 3% Ditt Hotel 3% Svenska Möten 6% Svenska Möten 6% Best Western 5% Best Western 5% 0-25 rooms 6% 0-25 rooms 6% 26-50 rooms 8% 26-50 rooms 8% 51-100 rooms 8% 51-100 rooms 8% >100 rooms 9% >100 rooms 9% Integrated Chain (Swedish) Integrated Chain (int. owner) Marketing Organization Independent Hotel Norlandia, Choice, Accor, Norlandia, Choice, Accor, Amica Konferens, Sodexho Amica Konferens, Sodexho 14% 14% Scandic/Hilton, Sheraton, Scandic/Hilton, Sheraton, Rica Hotels 22% Rica Hotels Source: 22% SHR - 11 -
3. The Hotel Market During the last 15 years the hotel market in Sweden, and especially Stockholm, has gone through structural changes and experienced record high as well as low performance. Although, the Swedish hotel market differs in many ways from other hotel markets it is likely global trends, especially European will to some extent also influence the hotel market in Sweden. Below follows a short description of the nature of the hotel market followed by the background of the hotel market in Sweden and the international market. 3.1 The Nature of the Hotel Market The hotel industry can be divided into two main guest segments, corporate (business- and conference guests) who primary use hotels from Monday until Thursday and leisure guests who mainly stay in hotels on weekends and holiday periods. Leisure guests normally pay a discounted rate and do not use hotels in the same extent as corporate travellers leading to a lower occupancy and average room rate during weekends and holiday periods. In the Scandinavian countries the difference between weekends and weekdays are much more prevalent compared to the rest of Europe. However, this has changed slightly during recent years and the occupancy on weekends has improved partly due to increased disposable income and new travel patterns. As mentioned, the hotel market is dependent on several macro factors in the economy, not just on a country specific level but also on an international level. The hotel market is therefore cyclical following the overall trade conditions, state of the market and the development of the gross domestic product (GDP). The graph below shows this relationship. Figure 3.1: The Hotel Market and GDP in Sweden 1996-2005 Translation Rumskapacitet Sålda rum Beläggning BNP Room Capacity Sold Rooms Occupancy GDP Source: Capona AB Annual Report 2005-12 -
3.2 History of the Hotel Market in Sweden The Gulf War at the start of the 1990s resulted in a dramatic decline of worldwide travel and combined with an economic recession the hotel industry suffered dramatically with low financial performance. The recession in the hotel market which was at its lowest in the beginning of 1990s, had its roots in an over optimism of the sector in the second half of 1980s and a general view that hotel properties were secure investments. At the same time investments were done in order to increase tourism in Sweden and the hotel supply was increased. But instead of increased demand, the demand for hotel rooms decreased to record low levels. As a result of the over optimistic view of the real estate and hotel market several property companies went bankrupt in the beginning of the 1990s forcing banks and other financial institutions to take over. One of the companies that went bankrupt during this time was the Swedish hotel company SARA hotels and this rapidly made hotel owners and operators aware of the importance of risk sharing in the leasing structure for hotels. 8 In the middle of the 1990s the recession in the hotel industry had reached the nadir and investments started again. This time the stakeholders had learnt from their previous mistakes and investments in hotel property was done after careful feasibility studies of the market and the potential. Emerging from this period, the industry moved to consolidation and the value of being affiliated to a brand became a recognized benefit and sometimes demanded by banks as a security. The recession in the real estate market led to banks and property companies starting to structurally rationalize their portfolios that previously had been fairly unstructured in terms of location and type of properties. In order to achieve more stream lined and easier to manage portfolios, companies niched their portfolios and focused on certain types of properties or areas and assets that did not fit into the new concept were disposed of. Pandox as well as Home Properties were fruits of this process. Pandox started in 1995 after Skanska and Securum had consolidated seven respective eleven hotel properties in a joint company 9. The aim was to increase the value by actively managing the properties and focus on hotels. Home Properties started two years later at the end of 1997. Again hotel properties from two companies, Diligentia and Prifast were consolidated and Home Properties started with 37 hotel properties 10. Since the mid 1990s the hotel industry has seen several other trends due to structural changes in the Swedish market but also due to general trends in the international market. One trend is that hotel property companies have become even larger and niched. It was clear there was a need for expertise in the hotel property market in order to be able to achieve the cash flow that was needed. At the same time lenders and investors demanded greater transparency and involvement in the supervision of the operation of the business and this could only be achieved through specialization. 8 Restauratören Nr 2,1994. 9 www.pandox.se 10 www.homeproperties.se - 13 -
Hotel operators also became more specialized and operators that owned their assets started to sell out their assets but keeping the hotel operation, so called sale and leaseback. More and more hotels also started to join a hotel chain affiliation or marketing organization in order to achieve the competitive advantages this gives. This led to a new structure of the hotel market with new hotel chains, marketing organizations and brand names in the market. 11 In 2001 Hilton International Hotels bought Scandic Hotels. This was a major change in the structure of the Swedish hotel market. Before the recession in the 1990s Sheraton Stockholm Hotels & Towers was the only hotel in Sweden which was operated by an international hotel chain compared to today when approximately 40% of rooms sold belong to a hotel affiliated to an international hotel brand (see graph on page 10). 12 As a last step towards the new structure, the leasing contracts of hotels changed. Previously most of the hotels had a fixed rent adjusted yearly according to the consumer price index which resulted in a high exposure in recession. The new trend involved revenue based leases with a minimum guarantee rent which put some of the risk on the property owner at the same time as the owner of the assets also received part of the higher profit in a boom. Today these types of leases are the most common contracts in Sweden among chain affiliated hotels although they generally specify a minimum guaranteed amount of rental revenue. The interest for hotel properties as an investment has increased during the last years due to low interest rates and profitability in the market. In 2005 the Nordic market saw some major changes in the ownership structure of hotels as a new investor entered the market, Norgani Hotels ASA. During that year Norgani among other deals bought portfolios of hotels from Home Properties and Pandox. Today Norgani is listed on the stock exchange in Oslo and the company owns 64 hotels in the Nordic countries which make the company the largest hotel property owner in the Nordic countries. The list below shows some of the largest hotel transactions in the Nordic countries in 2005. Table 3.1: Hotel Transactions in the Nordic Countries in 2005 Date Hotels / Portfolio Seller Buyer Price (MI) Aug-05 16 hotels Holiday Club Finland Dividum 120 Jun-05 14 hotels Home Properties AB ESO Invest 1 115 Jun-05 16 Scandic Hotels Home Properties AB Hotelleiendom 148 Jun-05 12 hotels Pandox AB Norgani Hotels 254 Sep-05 3 hotels Wenaasgruppen Norgani Hotels 102 Nov-05 5 hotels Home Properties AB Norgani Hotels 72 Dec-05 16 hotels Hotelleiendom Norgani Hotels 187 Source: CB Richard Ellis Hotels Research 11 Restauratören Nr 11, 1999. 12 Restauratören Nr 8, 2002. - 14 -
3.3 European Hotel Investment Market The European hotel investment market has evolved significantly over the past five to six years. Increasing demand for hotel investments opportunities have become increasingly comfortable with operating income streams and associated risk. This in conjunction with the pressure on the commercial real estate investment market as a whole has driven significant yield compression in hotel investments across Europe. 3.3.1 European Transactions In the past 12 months the European hotel market has seen record performance with a transaction volume of over 20 billion. The European hotel investment market is relatively young with significant investment transactions only really taking place over the last five or six years. As such, evidence of investment yields is limited and transactions are not highly market transparent. Despite this, there has been a trend of yield compression since the start of the decade pushing values up. 13 Table 3.2: Sample of Hotel Investment Transactions Date Hotel / Portfolio Location Buyer Price Yield 2000 Holiday Inn Heathrow UK Standard Life 31m 7.4% 2001 11 Hilton hotels UK RBS 312m 7.1% 2002 9 Jarvis hotels UK Lioncourt Capital 150m 7.8% 2002 10 Hilton hotels UK Rotch Group 338m 7.0% 2003 8 Accor hotels UK / France Heron / AXA 89m 6.9% 2004 3 QMH hotels UK The Sellar Group 40m 8.0% 2004 Partouche Group France CIT Group 66.5m 6.7% 2004 Travelodge portfolio UK Prestbury 380m 6.5% 2004 Savoy Group UK Quinlan Private 750m 5.7% 2005 Accor portfolio (135 hotels) France Fonciere des Regions 1.0bn 6.7% 2005 InterContinental portfolio UK LRG Acquisition Ltd 1.1bn est. 7.4% Source: CB Richard Ellis Hotels research The transactions illustrated above include investment acquisitions, sale and leaseback and sale and manage-back deals where the operator retains an operating interest through either a performance based lease or management contract. Yield compression has been most evident at each end of the market spectrum; trophy 5-star hotel assets, such as the Savoy Group, have attracted significant interest from high net worth individuals seeking the benefits of the strong residual values (albeit with lower income returns). Conversely, at the budget end of the market there have been significant yield shifts which reflect the similarities of these hotel assets to retail investments due to the stable and growing incomes in this sector. Individual asset investment transactions in this sector have been reported with yields in the region of 5.75% for fixed rent leases to Travelodge. 13 Smith, J. 2006. - 15 -
The yield compression that is evident in the market is a result of several factors, including poor stock and share returns which have driven demand into real estate and this has been further encouraged by lower interest rates across the Eurozone. The hotel investment market is reflecting the wider trends being experienced across the property world. Lower returns in more traditional sectors have forced many buyers to look at other sectors where yields are higher. As mentioned hotels remain a relatively new asset class in the investment world and therefore many new investors have entered the market. In 2005 approximately 20% of funds came from first time buyers in the market. 14 Further the recovering hotel performance across Europe and investor confidence in the market as well as increasing understanding of the operational risk involved in hotel transactions has increased investments in hotels. Hotel companies have experienced restrictions on their ability to raise finance for development and pressure to improve return on capital employed. This has led to the development of more creative lease-type structures to allow hoteliers to leverage off their asset values. At the same time the importance of experienced asset managers who understand both property issues and hotel operations has increased. 15 Historically investors have been against performance-based rentals and preferred the fixed leases that are more common with other forms of property investment but this has changed as investors have started to realize the superior returns that are available with hotel investments. From an operator s point of view, performance based leases allow them to reduce the risk with a downturn and at the same time reduce the balance sheet implications of a guaranteed rental stream. 16 Most of the major hotel operating companies have moved towards the split of bricks and brains and are focusing on expanding their portfolios through operating contracts. This means that the focus of development, particularly for up-scale brands, is increasingly through management contracts. As management contracts become more acceptable to the investment market there is a knock on effect on the required yields for more traditional lease structures in the hotel market. As a result there has been an increase in values for leased hotels. The opportunity for hotel operating companies to realize value from their real estate and expand their portfolios has opened out considerably as investment demand increases. For the first time hotels encumbered with operating contracts are valued higher than those with vacant possession. The increase in investment in hotels with management contracts have led to the value of the brand becoming a crucial element in measuring investment risk. Hotel values are supported by a business with the long term growth potential of the traveling population, as well as ongoing investment to protect the residual value of the underlying asset. 14 Smith, J. 2006. 15 Sugg, A. 2004. 16 Gammage, D. 2003. - 16 -
In the competitive market the value of the brand is also being driven by: The power of the operators track record - its ability to perform The power of its distribution capability - its ability to reach its guests The power of its global diversification - reducing exposure to single markets 3.3.2 Funding of Hotel Properties The graphs below show the source of funds and destination of funds for European Crossborder hotel transactions in 2005. Figure 3.2: Figure 3.3: Source of Funds, European Cross-Border Destination of Funds, European Cross-Border Norway 3% Norway 3% Ireland 4% Middle East Ireland 4% Middle East 5% Other5% Other 8% 8% Other 5% Other 5% Global 21% Global 21% UK UK 27% 27% France France 10% 10% UK UK 14% 14% US US 56% 56% Pan-European 26% Pan-European 26% France France 18% 18% Scandinavia 3% Scandinavia 3% Source: CB Richard Ellis Hotels Research It is estimated that Europe needs to save between 150 and 300 billion Euros per annum to close the potential pension fund gap. Conservative estimates are that an additional 24 billion euros per annum should be invested by European pension funds in real estate through a combination of reallocation of current weightings towards property as well as additional funds. 17 US pension funds are reported to be re-weighting their allocations towards real estate from 6% to between 9% and 12% and a proportion of this will head towards Europe. In addition a large amount of cash is being generated by the Arab world from the strength of oil prices and there is a vast amount of money needing a home. Clearly, pension funds have not historically been major investors in hotels and Arab funds traditionally headed to the US. But even if these funds are not invested directly, the knock on effect from global real estate markets as a whole will impact hotel investment in Europe. 18 As the European market matures new investors test the waters with domestic acquisitions but more sophisticated buyers are increasingly looking to cross borders. The UK and France represent the traditional Western European markets where investors feel safe and will continue to be important markets for first time buyers of hotel assets. As the European market 17 Smith, J. 2006. 18 Smith, J. 2006. - 17 -
continues to mature, new markets such as Eastern Europe will be more popular and the investment in hotel assets in Europe is forecast to continue increasing during 2006. - 18 -
4. Selection of Companies in the Study The operating companies selected for the study where selected due to their active involvement in the current hotel developments in Stockholm and/or because of their large market share. Below is a brief description of the companies involved in the study. The information regarding the different companies has been obtained from respective homepage listed in the reference list. 4.1 Rezidor SAS Hospitality Rezidor SAS Hospitality A/S is a fully owned subsidiary of SAS Investment A/S, Denmark which is ultimately owned by SAS AB, Sweden and listed on the Stock Exchange in Stockholm, Copenhagen and Oslo. Rezidor SAS Hospitality A/S has no hotel operation of its own as all operations are organized in subsidiaries, co-ordinated and managed by central administration function in Brussels, Belgium. In 1994 SAS International Hotels signed an agreement with US-based Carlson Hotels Worldwide for the rights to develop and operate the Radisson brand in Europe, the Middle East and Africa, under a 30-year exclusive master franchise. SAS International Hotels changed its name to Radisson SAS and later to Rezidor SAS. In 2002, Rezidor SAS signed a similar deal to become the master franchisee for three additional Carlson brands: Regent International Hotels, Country Inn & Suites and Park Inn. Moreover, the existing agreement for the Radisson SAS brand was renegotiated. In addition, Rezidor SAS has developed a new, life style hotel brand Hotel Cerruti with rights to operate hotels under the name of this prestigious Italian fashion brand. Rezidor SAS is currently operating and developing more than 200 properties, across five brands, in 43 countries, with over 17,250 employees and total turnover in excess of 1 billion. Table 4.1: Rezidor SAS hotels under operation and under development by brand Rezidor SAS Radisson SAS Park Inn Country Inn Regent Cerruti Total number of hotels 1 246 178 57 6 3 2 Hotels in operation 2 190 138 41 6 2 0 Number of rooms 2 39,858 31,414 6,574 517 703 (290) Countries of operation 43 42 14 4 2 0 Notes: Source: SAS Group Annual Report 2004 (1) Including hotels under development (2) Including franchise hotels - 19 -
Development Plans Rezidor SAS vision is to become one of Europe s leading hospitality management companies with a focused collection of high-performing, profitable brands in various market segments. Rezidor SAS has set its long-term growth target at 700 hotels with over 100,000 bedrooms by 2012. This represents an increase of around 60 hotels per year and the company has a significant development team of nine individuals covering eight defined geographic regions. Radisson SAS forms the bulk of the Rezidor SAS portfolio today, but the mid-market brands are increasing their market share and presence in the portfolio. Radisson SAS and Park Inn are the two volume brands and the key growth engines for Rezidor over the next few years. These brands aim for heavy penetration in the markets they serve. Conversely, Regent International Hotels and Cerruti strive for strong niche positions. Of the 200 hotels in operation and due to open, two are owned, 45 are leased, 88 are managed and 65 operate as franchisees (40% of total room inventory). The up-market brands Regent International Hotel, Cerruti and Radisson SAS Hotels & Resorts will be developed through management and lease agreements in order to secure brand control and maintain high quality levels in terms of product and service delivery. Country Inn will also primarily grow through management agreements while the principal approach for developing the Park Inn brand will be through franchises. This will enable fast growth through branding a wide range of properties, offering the same standard and product quality. 4.2 Accor Accor was created in 1983 after a merger of Novotel SIEH Group and Jacques Borel International. Novotel SIEH Group started in 1967 when the first Novotel Hotel opened in Lille and in the middle of the 1970s the first Ibis Hotel opened followed by the acquisition of Mercure hotels. In 1983 the economy brand Formule 1 was created and in 1990 the acquisition of the Motel 6 brand made Accor to the world s leading hotel group in terms of properties directly owned or managed (excluding franchise). Since then several acquisitions of companies in the travel industry have increased the company and also increased the awareness of Accor as a brand. Today Accor is the only international hotel group that is presented in all hotel market segments from up-scale hotels to the most economic segment. Accor currently operates 4,065 hotels across 83 countries. - 20 -
Table 4.2: Accor Hotels under Operation as of January 2006 Sofitel Novotel Mercure Ibis Etap Formule 1 Motel 6 Other Number of Hotels Number of Rooms Countries of Operation 192 398 738 720 331 377 905 32 41,345 69,255 87,233 78,780 26,999 29,187 93,946 5,967 53 56 48 35 11 12 2 -- Source: Accor Annual Report 2005 In addition to the hotels in the list above Accor also has 10 Corelia Club Hotels, 18 Suite Hotels and 32 hotels not including in any of the above brands. Development Plans Accor s vision is to pursuing its development to maintain its leadership in Europe and at the same time expands into growing markets. Accor will continue to grow in economically mature regions for the hotel business segment, mainly in Europe. At the same time the company will take a more rapid expansion thanks to strong business as well as leisure potential in countries that will drive future growth such as India, China, Brazil and Russia. The structure of the hotel financing and operating structure varies between countries depending on country and the risk element. In the most stable economies Accor generally owns the land and the property for their up-scale market while the mid-scale and economy segments are usually leased properties. In developing countries management contracts are often used. Accor is also growing their mid-scale and economy segments by franchise contract which is a fast way to increase market presence. 4.3 Hilton Hotels Corporation The first Hilton Hotel was acquired in 1919. In 1999 Doubletree, Embassy Suites Hotels, Hampton Inn, Hampton Inn & Suites and Homewood Suites were acquired by the Hilton Corporation. Hilton Hotels Corporation recently acquired Hilton International and upon closure of the deal in the first quarter of 2006 Hilton Hotels Corporation will own, manage or franchise approximately 2,750 hotels with 472,000 bedroom in 80 countries. Table 4.3: Hilton Hotels under Operation as of January 2006 Hilton Conrad Hotels Doubletree Embassy Suites Hampton Inn Hilton Garden Homewood Suites Scandic Hotels Number of 500 20 155 181 1,325 245 162 142 Hotels Number of Rooms 90,535 6,145 40,577 44,134 133,226 33,614 17,954 21,500 Source: Hilton Hotels Annual Report 2005 Scandic Hotels was founded in 1963 as the first Swedish hotel chain. In 1996 it was listed on the stock exchange in Stockholm but the company was acquired by Hilton in 2001. - 21 -
Development Hilton is actively working on increasing their portfolio by management contracts or franchise. At the moment Hilton Hotels Corporation has over 630 hotels and 90,000 bedrooms in the pipeline, which is the largest amount ever. The focus is on the Hilton Garden Inn brand and the Hampton Inn brand but also to continue the development of Hilton and Conrad Hotels. In 2006 Hilton will increase their hotel operation with approximately 200 hotels in North America and 15-20 hotels international - over 33,000 additional bedrooms. For 2007 and beyond the plan is to increase the room stock with approximately 7% annually. 4.4 Rica Hotels Rica Hotels was founded in 1975 by Prince Carl Bernadotte and Jan E. Rivelsrud. The company started with a focus on the restaurant business in the Norwegian market but expanded into hotels in the middle of the 1980s. Today Rica Hotels is the largest hotel chain in Norway and since 1998 the company is also established in Sweden. In total the chain has 18 hotels in Sweden and 70 hotels in Norway. 4.5 Choice Hotels Scandinavia ASA Choice Hotels Scandinavia ASA established in Norway in 1990 and in 1994 the company signed a 20-years exclusive franchise agreement with Choice Hotels International. This gives the company the exclusive right to the Comfort, Quality and Clarion Hotel brand in the Nordic region as well as access to the international booking system. Table 4.4: Choice Hotels Scandinavia s Hotels under Operation by Brand Comfort Hotel Quality Resort Quality Hotel Clarion Collection Clarion Hotel Total number of hotels 29 14 59 34 10 Source: Choice Hotels Scandinavia Annual Report 2005 In 1997 the company was listed on the Oslo stock exchange and also includes subsidiaries in Sweden and Denmark. At the end of 2005 Choice Hotels Scandinavia had 147 hotels with over 18,700 bedrooms in the Nordic countries and the Baltic Sea region. Table 4.5: Choice Hotels Scandinavia s Hotels under Operation by Country Norway Sweden Denmark Finland/Baltic Hotels in operation 68 55 17 7 Number of rooms 8,427 7,449 2,236 620 Source: Choice Hotels Scandinavia Annual Report 2005 Currently approximately 100 of the hotels are operated by Choice themselves and the remaining part are franchise hotels through franchise agreement with external operators. Choice is aiming to be the largest operator in the Nordic countries and is planning to expand rapidly through franchise agreements rather than own management. - 22 -
4.6 Abbes Budget Hotels Abbes Budget Hostels is the largest hostel chain in Stockholm with six hostels and approximately 400 beds in the city centre. The chain is aiming to expand in the city as well as to other locations. 4.7 Home Properties AB (former Capona AB) Home Properties AB, which is one of the larger hotel property companies in the Nordic region, actively own and manages hotel properties. Capona started in 1997 after Diligentia and PriFast consolidated 37 hotel properties in Sweden, Norway and Denmark into a joint company. Since 1999 Capona is listed on OM Stockholm Exchange under CAPO. In January 2006 their portfolio consisted of a total of 22 properties with a total number of hotel rooms of approximately 2,600. 18 of the hotel properties and one project property are located in Sweden and the remaining three hotels in Norway. The project property, Centralposthuset in Gothenburg is currently under construction and is a conversion into a high-class hotel. Since the end of March 2006 Capona has broaden their operation to include ownership and management of other type of properties as well as hotels and at the same time the company changed name to Home Properties AB. 4.8 Pandox Pandox is one of Scandinavia s leading pure hotel property companies and it is focused on hotel properties and hotel operation. Pandox focuses on medium to high price range hotel in central location in capitals and major cities in northern Europe. Most of the leases are flexible leases related to the turnover or revenue with a minimum rental guarantee. Pandox started in 1995 after Skanska and Securum had consolidated seven respective eleven hotel properties in a joint owned company. The aim was to increase value by actively manage the properties and focus on hotels. The company was listed on the OM Stockholm Exchange In 1997 but de-listed in 2004 when Eiendomsspar AS and Sundt AS had attained a holding of 96 percent of the shares in Pandox. Today Pandox' hotel property portfolio consist of 36 hotel properties in five countries with approximately 7,800 bedrooms. 4.9 Norgani Hotels ASA Norgani Hotels ASA is the leading Nordic hotel property company. It was formed in 2005 and has been listed on the Oslo Stock Exchange since November 2005. Norgani aims to have at least 75% of its property portfolio in city-centre areas and operated under one of the larger hotel distributors name. - 23 -
Today Norgani owns 64 hotels with over 10,000 bedrooms in Sweden, Norway, Denmark and Finland. All hotels are leased out to leading international and regional hotel chains predominately on long-term revenue based leases with a minimum rental guarantee adjusted annually to the consumer price index (CPI). 4.10 Tagehus Tagehus is a family owned property company who also manage four hotel- and conference centers. Tagehus also has two hotel developments in the municipality of Stockholm; Haga Hotel which is under construction and Hotel Kristineberg. - 24 -
5. Macro Trends 19 As mentioned previously the performance in the hotel industry in Stockholm is closely related to the general- and regional economy which in turn is dependent on macro trends. Below follows an overview of trends affecting the economy and indirect the hotel industry. The chapter concludes with results from the interviews. 5.1 General Economics Sweden With a total land mass of around 450,000 square kilometres, Sweden is the third-largest country by size in Western Europe after France and Spain, yet the country s population is just above 9 million. GDP Sweden has the 9 th largest economy in Europe with a nominal GDP of SEK 2650 billion in 2005, placing it ahead of its Nordic neighbours. Sweden is a wealthy country by international standards; the GDP per head was EUR 32,415 in 2004 which is well above the EU15 average of EUR 26,506. GDP growth was 2.4% in 2005 and is expected to be 3.6% in 2006 and down to 3.1% in 2007. This compares to the EU average of 1.8%. Inflation Swedish consumer price inflation (CPI) was above the average for European OECD countries during the 1970s and 1980s, but has declined considerably since the recession in the early 1990s. The inflation outlook is currently low and has averaged 1.7% over the last five years, reflecting robust productivity growth, low import prices and modest wage increases. As a result of strengthening economic conditions and Riksbanken s target goal, CPI is forecast to be 1.2% in 2006 and 2% on average in the following years. Labour Market Sweden has traditionally had one of the highest labour market participation rates in the OECD, with approximately 78% of those aged between 15 and 64 currently actively engaged in the labour market. At present the unemployment rate is 5.4% of the workforce, and it is forecast to decline slightly over the next five years as a result of the overall improvement of the economy. Despite a marked reduction in the number of public-sector jobs following the implementation of economic austerity measures in the middle of the 1990s, the state sector is still a large employer and of significant value. As in most other highly developed economies, services contribute the lion s share of total GDP, at approximately 70%. The public sector accounts for about 28% of all services provided in Sweden. 19 Invest in Sweden, Real Estate. 2006. - 25 -