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.
Different segments
The guest profile of hotel assets has an impact on capex too. There has been a general trend of more capex in the luxury segment and less in the select and midscale. Justifying investment in new luxury public amenities can be easier than communicating the necessity of replacing all the bathrooms in a 250-bedroom Ramada.
“I think owners look at the higher end assets, which are continuing to drive revpar, and say, I'm going to get my money back on this so I'm going to spend on this lobby or spa upgrade. In select service, we're getting more to that point in the cycle where things might turn, and so spending has slowed,” said McIntyre.
Clare Anna, CCO, London Rock Partners, noted that the bleisure trend potentially puts more pressure on capex requirements if a hotel aims to provide both leisure and business amenities. She said that investing in public spaces such as the lobby area is the most realistic way of capturing bleisure revenue.
Halanen reckoned that managing guest expectations is “almost impossible” and he stressed the importance of getting the basics right such as the bed, the shower, the Wi-Fi, USB ports, bedside lamps.
“People very quickly run away with fancy ideas, and then the capex is going on something that's perhaps not going to actually deliver a comfortable guest experience,” he commented.
Capex that clearly demonstrates efficiencies and ROI is the easiest to sell to owners. Since 2020 Halanen has led a sustainability programme for Wyndham’s managed properties that shows ROI and reductions in utility expenses over four years.
“You can directly see the impact of a change in a specific property from energy inefficient fixtures and fittings to energy efficient ones. It's quantifiable, real data that we can demonstrate to franchisees,” he said.
Are there easy ways to reduce capex without sacrificing the guest experience? The traditional replacement cycle for much FFE is seven or eight years. McIntyre suggested that for hotel casegoods (chests, dressers, bookshelves, desks, wardrobes, etc.) the cycle could be extended to 15 years.
All quotes taken from the panel ‘Strategic Capex: Rethinking Procurement as a Powerful Tool for Asset Management Success’ at the AHC 2024 in Manchester.