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Appetite for investment: the currentcapital climateReal estate fundamentalscontinue to improve, and debtand equity capital are abundant,providing a solid foundation foran uptick in transaction volumeand overall competition. Globalhotel investment continues tosteadily increase, with 2014’stotals expected to exceed US$54.5billion compared to US$52 billionin 2013. Global hospitality andleisure transactions increased8% year-over-year through Q32014, showing that the industrycontinues to gain momentumeven in the face of acceleratinggeopolitical instability, healthand terrorism concerns. 2 A waveof new hotels will open in 2015,and a robust global developmentpipeline of approximately 1.3 millionguestrooms is in place. 3Throughout the Americas, strongperformance continued in 2014, with realestate transaction volumes in some marketsreaching pre-recession peaks. 4 Specificallyin the US, economic and employmentnumbers have grown increasingly positive,and hotel performance has followed suitamid a rise in business and leisure travel.Cross-border investment into the USincreased approximately 137% from 2013to 2014, with foreign buyers continuing tolook beyond traditional gateway marketsto secondary markets, such as Phoenix,Atlanta, Houston and Orlando. Investorsfrom Canada, China, Malaysia, Japan,Singapore and the Middle East have chosento deploy a large amount of capital in UShotels. 5 Greater competition among theseinvestors and subsequently lenders isallowing for more aggressive loan-to-valueratios, averaging 73% through Q3 2014,compared to 66% in 2013. Investment in theUS hotel sector was expected to continueaccelerating throughout the end of 2014,with both the full-service and limited-servicesectors demonstrating large pipelines ofdeals under contract. 6As a result of strong fundamentals andan increasing array of capital sources,capitalization rates in the US are anticipatedto trend lower, with the rates in six majormetropolitan markets, including New YorkCity, San Francisco and Boston, averaging5.5%, compared to 6.9% in 2013. The lowrates are highly influenced by the country’slow interest rates, which are anticipated torise in 2015. 7 Nevertheless, with currentcapitalization rates close to the previousmarket lows of 2007, potential speculationabout a bubble is countered by the fact thatrisk has been priced into the deals seenthroughout 2014. 8In Latin America, many countries, includingBrazil, Argentina and Venezuela, currentlyface economic challenges, such as highinflation rates, worsening unemploymentand currency devaluation. These issues,coupled with their political instability,translated into weaker fundamentals inthe first half of 2014. Hotel occupancy inCentral and South America through Julywas down approximately 1.6% over theprevious year, despite the boost from the2. “Global Market Perspective Q4 2014: Hotel investmentmaintains momentum despite downside risks,” Jones LangLaSalle, www.jll.com/gmp/market-perspective/hotels, accessedNovember 2014.3. “New Hotel Construction Pipeline in Global Shift,”Hotel Interactive, www.hotelinteractive.com/article.aspx?articleid=32644, 17 April 2014.4. “Hotel Investor Sentiment Survey,” Jones Lang LaSalle,www.joneslanglasalle.com/hotels/EN-GB/Pages/HISS-June-2014-Americas.aspx, June 2014.5. “US Capital Trends – Hotels,” Real Capital Analytics,August 2014.6. “US Capital Trends – Hotels,” Real Capital Analytics,third quarter 2014.7. “Fed’s Dudley: expectations for mid-2015 rate lift-offreasonable,” Reuters, www.reuters.com/article/2014/11/13/ususa-fed-dudley-idUSKCN0IX0ZS20141113,13 November 2014.8. “US Capital Trends – Hotels,” Real Capital Analytics,third quarter 2014.Global hospitality insights4

Investment volume in the Asia-Pacific region decreased fromUS$6.4 billion in the first half of 2013 to US$3.3 billion in the sameperiod in 2014 17 amid investor concerns over political unrest inmarkets such as Hong Kong and Thailand and economic uncertaintyabout the stability of China. But Asian investors dominated hoteltransaction activity in the first six months of 2014, with NorthAsian and Southeast Asian investors completing 58% and 38%,respectively, of all deals in Asia. Hotel sales in Japan accountedfor 47% of transaction volume across the region. Capital flowsinto India climbed, with noticeable volume gains recorded in thefirst two quarters as tourism continues to drive economic growth.India’s half-year total of US$1.8 billion represents a 37% increaseyear-over-year, which is largely a result of a number of institutionalplayers re-entering the market. Much like India, Australia’s strongfundamentals, maturity and transparency have led to steadybuying activity from Asian investors, who see potential yields in thebooming market. 18Certain key themes seen globally are anticipated to continueinto 2015. The rising availability of hotel development financingin mature markets will allow for more robust pipelines; assetsin secondary markets will attract further interest from hoteldevelopers; and Asian investors, private equity funds and REITs areanticipated to remain motivated buyers. However, these upwardtrends may be deterred if political instability and Ebola outbreakscontinue. Barring any of these shocks to the system, the climate forhospitality capital markets activity should remain favorable.17. “Global Capital Trends,” Real Capital Analytics, midyear review 2014.18. “Asia Pacific Hotels MarketView (H1 2014),” CBRE, accessed November 2014.Global hospitality insights6

Top thoughts for 20157

Active global M&A in the hospitality industryFor several years, confidence in theeconomy and in deal markets hasimproved, and the recent surge ofmergers and acquisitions (M&A)activity appears reminiscent of2007. Within hospitality, deals havegained traction, with flush capitaland portfolio optimization remainingkey drivers. Sentiment in the sectorremains positive: a recent EY surveyof more than 75 hospitality andleisure executives found that 99% ofthe respondents expect the globalM&A market to continue to improveor stay the same in the next12 months. 19M&A activity overall and in the RHC sectoris driven by a desire for incremental growth,the strategic merit of transactions and theavailability of debt and equity on favorableterms. The presence of these elements hasfueled M&A in recent years. The highervolume of global capital chasing real estateopportunities has also contributed. In theUS, for example, foreign investors madeapproximately 11% of the US$355 billion inreal property deals last year, with prominentinvestment groups from China, Japan andSingapore fueling transaction volume within20, 21hospitality specifically.The influx of capital has caused fundmanagers to look for new ways toexpand their real estate portfolios in ahypercompetitive environment, withfavorable market conditions encouraginghigher confidence and the risk appetiteto place capital. However, investors out tomake deals should be aware of additionalrisks and complexity in the markets.Across the world, real estate investors havebecome more confident about acquiringreal estate operating platforms with theobjective of owning the underlying realestate, and not necessarily for operatingthe platform as a business. However,the challenge lies in vetting this type ofdeal, particularly under an increasinglyhigh-speed diligence period. Real estateinvestors may be familiar with underwritingindividual hotels, assessing value andmodeling cash flows, but these kinds oftransactions cannot be solely dissectedas real estate portfolio acquisitions. Thereare additional, value-impacting factors toweigh when buying an entire platform,including the appropriate level of overheadrequired to operate the properties, as wellas potential commitments and off-balancesheetliabilities of the business. Additionally,the parties may encounter discrepancies inpricing expectations — for example, if a sellerprices itself as a stand-alone business whilea prospective buyer prices the deal as theacquisition of individual properties.19. “Global Capital Confidence Barometer,” EY, October 2014.20. “Cross-border capital tracker for United States,” Real CapitalAnalytics, 3 March 2014.21. “2013 Year in review,” Real Capital Analytics, January 2014.Global hospitality insights8

For company acquisitions, the real estate portfolio valuation is acritical part of the due diligence process when the real estate is keyto the strategic rationale of the transaction. Yet a top-down businessassessment is also crucial to ensure the property valuation is notmisguided.Within hospitality, a recent trend of acquiring hotel managementplatforms has emerged, in which the real estate is often not asignificant component of the transaction. The strategic rationaleof investors in this space is to acquire a management platform andenlarge it by adding management contracts with minimal capitalinvestment and operating costs, resulting in future earnings growth.However, an operating platform must be carefully evaluated todetermine whether the business can sustain earnings growth.New players are also emerging. In recent years, certain financialinstitutions and other alternative investors, which have been indirectreal estate investors, are now looking to expand to new platforms,taking advantage of their base-level knowledge of real estate fromtheir lending or other investment activities. These new players arenot only diversifying the M&A landscape but are also making it morecompetitive. Within hospitality, new players are mainly competingfor trophy assets in select gateway markets. However, seasonedindustry players with a track record of success are still driving mostactivity in the hotel space.While it is uncertain whether M&A activity in 2015 will outpace thepeak observed in 2007, investors appear to be chasing opportunityand expansion with a newfound discipline. Capital marked for thereal estate markets may once again be abundant, but the way itis channeled continues to reflect the lessons learned since thefinancial crisis.Top thoughts for 20159

Outbound investment from AsiaOverseas capital accounted for41.2% of 2014’s global hotelinvestments through October,compared to 34.7% in 2013,29.9% in 2012 and only 25.9% in2011. 22 Asian investors (primarilydominated by China, Hong Kong,Japan and Singapore) represented43.2% of the cross-border hoteltransactions during the 12 monthsending October 2014, followedby North American and MiddleEastern investors, 23 and the flow ofmoney from Asia into the maturemarkets of North America, Europeand Australia is anticipated to keeprising. Currently, the top threeglobal hotel markets for Asianinvestment are Manhattan, Hawaiiand London, representing 48.5% oftotal Asian hotel investment globallyduring the 12 months endingOctober 2014. 2422. “Trends & Trades: Third Quarter 2014,” Real Capital Analytics,3 November 2014.23. Ibid.24. Ibid.A number of “push” and “pull” factors drovethe year-over-year increase in cross-borderactivity. While these Western countries“pull” international buyers to transparentmarkets for capital preservation and morestable property yields, many of theseinternational buyers are also encouragedto invest abroad due to the geopolitics intheir home countries. Most notably, buyersfrom Asia are “pushed” toward outboundinvestments due to their individualgovernment’s cooling interventions fordomestic real estate and the easing ofgovernment regulations regarding overseasinvestments.Over the prior 12 months, China has beenone of most active hotel buyers, investing27.4% of the total outbound capital fromAsia, followed by Japan (21.6%), Singapore(17.5%), Hong Kong (12.5%) and Malaysia(9.9%). 25 Representing the largest increasein investment dollars, China’s cross-borderhotel investment volume has increased fromjust US$107.4 million in 2011 to US$2.7billion during the 12 months ending October2014. 26 In 2014, Japan’s acquisitionactivity was predominately related to aJapanese company’s US$1.4 billion entitylevelbuyout of a luxury hotel portfolio, withsix properties located throughout Hawaiiand San Francisco. 2725. “Cross-Border Capital Tracker: October 2014,” Real CapitalAnalytics, 3 November 2014.26. “Trends & Trades: October 2014,” Real Capital Analytics,29 October 2014.27. “Cross-Border Capital Tracker: October 2014,” Real CapitalAnalytics, 3 November 2014.During the past year, some of the mostactive investors from Asia have been stateownedenterprises (SOEs) and large-scaledevelopers, who are intent on investingoverseas as a way to diversify their portfolioand build their international brand. Forthese investors, Downtown Los Angeles hasbeen a target for ground-up hotel mixed-usedevelopment, largely due to the abundanceof large parking lots that are primed fordevelopment and the shortage of hotelrooms within walking distance from the LosAngeles Convention Center.Over the prior 12 months, Asianorganizations invested approximatelyUS$844 million in development sites in LosAngeles, which is 198.2% greater than sitesin Manhattan and 645.3% greater than sitesin San Francisco. One such company is aShanghai-based state-owned Global Fortune500 company, which began constructionon its more than US$1 billion hotel mixedusedevelopment project in DowntownLos Angeles last summer and it acquiredadditional mixed-use development sites inNew York, Toronto and London last year. 28Additionally, in 2014, Australia was a targetmarket for overseas Asian buyers, withhotel transactions increasing 8.5% anddevelopment site transactions increasing180.5% during the 12 months endingOctober 2014, versus the year-ago period. 2928. Ibid.29. Ibid.Global hospitality insights10

Australia is likely to continue to be a target market due to itsgrowing Chinese population and visitation levels; favorable taxregime; weakening currency versus the Chinese renminbi overthe past five years, which is expected to persist; and higher yieldscompared to other gateway cities in the US and Europe.While SOEs and developers will continue to acquire and developsignificant assets in major gateway cities, a second wave of investorsfrom Asia is beginning to emerge: insurance companies. Forinstance, in September, a Chinese insurance company acquired theWaldorf Astoria, a luxury hotel with more than 1,400 keys in NewYork City, for almost US$2 billion, representing the highest pricepaid for a single hotel property in the US and the largest acquisitionof a US property by a Chinese company. 30 It is predicted that Asianinsurers will become one of the largest investor groups in thecoming years, with an estimated US$75 billion to invest in globalreal estate by 2018, as regulatory restrictions continue to ease. 31The China Insurance Regulatory Commission first allowed insurancecompanies to invest abroad in 2012 and increased the maximumallocation in real estate (both domestic and foreign) from 20% to30% of total assets in February 2014. 32 Real estate investmentrestrictions have also been lowered in South Korea and Taiwanover the past couple of years, increasing the maximum real estateallocations permitted as well as streamlining the procedures forinvesting in property abroad. 33 Furthermore, a number of othercompanies, in industries such as air travel and construction, areinvesting and developing hotel properties in order to diversify theirincome stream.30. “Chinese Insurer Buys Waldorf Astoria for a Record $1.95B,” Forbes, www.forbes.com/sites/michaelcole/2014/10/06/chinese-insurer-buys-waldorf-astoria-for-a-record-1-95b, accessed30 October 2014.31. “Asian Insurers Target Global Real Estate As Regulatory Restrictions Ease,” CBRE, www.cbre.com/EN/aboutus/MediaCentre/2014/Pages/Asian-Insurers-Target-Global-Real-Estate-.aspx, accessed27 October 2014.32. Ibid.33. Ibid.In addition to acquiring stand-alone properties, overseasinvestments are also expanding upon existing platforms. Besidesinvesting in US-based hotel management companies, this cycle isalso witnessing an expansion of Asian-based hotel managementcompanies. For example, Wanda Group, one of the largestcommercial developers in China, is developing billion-dollar mixeduseprojects in London, Chicago and Australia’s Gold Coast in orderto build luxury hotels utilizing the company’s five-star hotel brand.The developer’s ambitious goal is to build at least 15 luxury hotelsin 15 international cities by 2020 and expand its China-based hotelbrand. Another example is a Hong Kong-based company, which isacquiring four- and five-star hotels to reflag under its luxury hotelbrand and three-star hotels to convert to its newly formed lifestylehotel brand. 34Considering the current geopolitical environment in Asia, limitedinvestment opportunities in their home countries and the perceivedstability in Western countries, Asian investors will continue to bemajor players in global capital markets in 2015 and beyond. Inaddition, increasing outbound China tourism is expected to fueladditional Chinese investment in the global hotel market.While London and New York have been prominent outboundmarkets for the past five years, other key cities are beginning togarner international attention, such as Sydney, which is enteringits third year in the cycle. Moreover, as gateway markets becomemore expensive and investors mature, it is anticipated thatoutbound activities will expand beyond the most common type ofinvestment — individual asset acquisitions — to include a greaternumber of joint venture and platform-level investments. Theforecast for the global hospitality market is strong, and cross-bordertransaction levels are expected to continue to rise, with Asianinvestors at the forefront of the activity.34. “Wanda Acquires ‘Jewel Project’ in Australia’s Gold Coast,” PR NewsWire, www.prnewswire.com/news-releases/wanda-acquires-jewel-project-in-australias-gold-coast-271068181.html, accessed30 October 2014.Top thoughts for 201511

Seeking operational excellence: consolidationof third-party management companiesProminent in North Americanlodging markets, third-partymanagement companies providedaily property and operationalmanagement services as well asyear-round financial and accountingsupport for hotel owners, whilemarketing the hotel brand througha franchise agreement. 35 Improvinghotel fundamentals globally andincreased access to capital haveled investors to seek out thisoperational expertise to maximizeinvestment on both newly acquiredand existing hotel assets.By providing a value-add strategy forcompanies to leverage scale and rapidlyachieve growth initiatives, third-partymanagement platforms have driven M&Awithin the hospitality industry in recentyears. Investment funds, foreign buyersand existing management companies are alllooking to capitalize on expected industrygrowth — and they are increasingly investingin these in-demand third-party managementcompanies.Third-party management companies arefar more mature in the US, a country thatis a leader in the sector’s M&A activity,which has surged in the past five years. 36Transactions in the US have includedsome of the country’s largest third-partyoperators. As of year-end 2013 in the US,18 management companies each operated aportfolio of 50 or more hotels, with the top15 each managing a portfolio in excess of8,000 rooms. 37The same trend is making its waythroughout the world, but on a smallerscale. Europe and Latin America areestimated to be 5 to 10 years behind theUS in terms of transaction activity in thesector but are, however, experiencingsignificant growth in the creation of thirdpartymanagement companies. In the MiddleEast and Asia, the presence of third-partyoperators is limited and transaction activityis minimal as investors favor the franchisemodel, and manage properties themselves,while brands continue to develop andbecome fully integrated into the market.For investors, acquiring proven managementcompanies that can expand is attractivebecause they can achieve relativelyhigher returns given the prevailing lowcost of capital on a risk-return spectrum.Consolidation in the industry has becomean effective way to grow and diversifyportfolios by providing opportunities forgeographic expansion and to rapidly35. Hotel Investments Handbook, Chapters 19 to 21,HVS.com, 2008.36. “Third Party Management Companies: Key Trends and Issues,”Hotel Analyst, 22 January 2014.37. “2014 Hotel Management Survey,” hotelmanagement.net,March 2014.Global hospitality insights12

penetrate markets that align with strategic initiatives. Investorsare finding opportunities to enhance bottom-line performance bygaining expanded market penetration and operational strength,as well as buying power for various operating systems to bettercompete in the market. 38Key drivers in recent transactions have illustrated that investorsparticularly value operationally sound third-party managementcompanies with established infrastructure, which can bring themaccess to new deals and lucrative operating platforms. In addition,investment firms are specifically targeting companies with strongrelationships and experience within the real estate and hospitalityindustries, which also can provide access to prospective transactionsand significantly increase deal flow.Management companies are also using outside investment as analternative means to finance strategic growth initiatives. Capitalpartnerships often provide opportunities to leverage resourcesthat would not otherwise be at the company’s disposal, whichcan significantly improve market share and economies of scale.Consolidation provides opportunities for management companiesto form new relationships and create synergies in infrastructure,procurement, reservations, sales and revenue management, andother technology systems.In addition, the increasingly competitive environment in the sectorhas made management companies more inclined to offer key moneyor sliver equity in order to secure new contracts. 39 With equityparticipation anticipated to continue in coming years, the demandfor capital partnerships is expected to continue to grow.Third-party management consolidation also continues to supportthe hospitality industry’s strategy toward an asset-light model. Byconstructing a hotel business with an asset-light structure, it allowsthe business to separate itself from owning the bricks and mortar ofreal estate while providing the brand the ability to capitalize on itsoperating strengths. 40 The asset-light strategy allows managementcompanies to enter and exit markets with less risk and moreflexibility and to achieve increasing returns with each new contractdue to economies of scale. Investors, therefore, gain quicker accessacross borders, oftentimes with local management expertise.Market indicators point to robust transaction activity in the sectorthrough 2015 and onward. The US is expected to remain theleader in M&A activity as the third-party operator model continuesto mature throughout other parts of the world. Investors andthird-party managers have significant opportunities to fuel growththrough consolidation, particularly in emerging markets, which willlead to an active trading environment in the sector in 2015 andlikely beyond.38. “Interstate Maintains Strong Growth Here and Abroad,” Hotel Management,www.hotelmanagement.net/operator-owner/interstate-maintains-strong-growth-here-andabroad-29159,accessed 13 October 2014.39. “Hotel Management Companies and Equity Contributions: Benefits and Risks,” HVS, August 2014.40. “Third Party Management Continues Consolidation,” Hotel Analyst, 30 July 2014.Top thoughts for 201513

Lifestyle lodging productsOver the past several years,the millennial generation hasincreasingly impacted the lodgingindustry, calling into questionproducts and offerings that have fordecades been industry mainstays.Today’s emerging traveler,millennials and millennial-mindedtravelers, is more cost-consciousand experience-focused thanever before, whether traveling forbusiness or leisure. To meet thesechanging demand preferences,hoteliers are seeking innovativealternatives to traditional lodgingproducts. Several of these productsinitially emerged in Europe andAsia, as highly fragmented markets,less stringent lodging standardsand cultural preferences fosteredinnovation in lodging concepts.Now, in the US, these concepts arebecoming increasingly attractive tohoteliers and investors seeking tocapitalize on this changing demandbase while increasing investmentreturns.Historically, the European alternativelodging industry has largely catered tostudents and backpackers, offering no-frillsaccommodations and communal spaces thatprovided cost savings and enhanced socialatmospheres. As these new products andexperiences began to evolve over the lastseveral years, affordability and a focus onsocial experiences were maintained.Substantially aligned with the desires ofmillennials and millennial-minded travelers,these low-cost, amenity-rich hostel, lifestylebudget hotel and hostel/hotel combinationconcepts are now becoming viable inmajor US and Asian markets, such as NewYork, Los Angeles, Miami, Singapore andTokyo, where traditional hotel rates areprohibitively expensive, as well as marketssuch as Detroit, New Orleans, Nashvilleand Portland, where unique atmospheres,architecture and cultural elements drawgreater demand. With a focus on limitedservice with added conveniences, theseproducts are able to decrease costs byremoving unnecessary and high-costelements, such as large guestrooms with fullfurniture sets, full-service restaurants, roomservice and daily housekeeping. It replacedthem with more practical alternatives,such as smaller rooms, grab-and-go foodand beverage outlets, daily housekeepingto hotel rooms but not to hostel rooms,free bicycles, free Wi-Fi and iPad usageand pay-as-you-go amenities such as airconditioning, towels, toiletries and highqualityin-room coffee machines.These new products and concepts oftenemphasize common areas, lounges and barsas the focal point of the property and inviteguests to spend more time congregatingin revenue-generating areas of the hotel,in turn maximizing revenue per occupiedroom (RevPOR) spent. Communal spacesare often intended to be inviting to guestsby seamlessly blending with the lobby,while their concepts and designs focus onattracting local demand.As the demand for experience-basedlodging has increased, a specialized lodgingconcept that has gained popularity overthe last several years in the US, Europeand Asia is lifestyle membership clubs.More similar to a traditional day club than ahotel, these concepts offer members-onlyfacilities, such as meeting and event spaces,food and beverage outlets, nightclubs,pools, and spas, and they include boutiquehotel components that leverage the club’sGlobal hospitality insights14

membership base as a primary demand generator. With a focuson providing social interaction and workspaces for like-mindedindividuals, often in niche industries such as fashion, fitness, artsand cinema, these concepts aim to produce a creative and localexperience.Membership clubs often feature programs and events with culinary,academic and wellness elements, appealing to a broad array ofnon-member hotel guests. With multiple components, lifestylemembership clubs benefit from diversified revenue streams,including annuities from membership fees and guest fees, andhave greater flexibility to use lower-cost, nontraditional spaces,sometimes with locations across various venues throughout a city.Although these club concepts initially originated in major cities withsignificant artistic influences, such as New York and London, similarconcepts have emerged in cities with expanding creative scenes,such as Berlin, Budapest, Nashville and Shanghai.As development costs and land prices in metropolitan cities continueto soar, alternative lodging concepts have presented developers withunique opportunities to reduce costs while maintaining the abilityto generate strong demand. With shorter development periods,smaller rooms and the ability to use nontraditional spaces, theseconcepts can have lower development costs than traditional fullservicehotels.Additionally, through efficient uses of space, lower operatingcosts and management terms that are both less expensive andmore flexible than traditional chain management agreements,these products can have higher operating margins than traditionalfull-service properties. As a result, many of these alternativelodging products have penetrated some of the most expensiveand highly trafficked neighborhoods in the world, including TimesSquare in New York and South Beach in Miami. However, as theseproducts typically emphasize design as a component of the hotel’sexperience, hoteliers must ensure that soft costs and furniture,fixtures and equipment expenses are appropriately managed.Despite their growing popularity, many investors and lendersconsider alternative lodging products as appealing only to aspecialized consumer whose preferences will ultimately changewith trends. As demand for new lodging products and experiencescontinues to grow, hoteliers will need to balance satisfying thisdemand with investments in traditional products.Top thoughts for 201515

Critical success factors for new lodging brandsThe global lodging industry hasexperienced strong growth overthe past 12 months, laying thegroundwork for an emerging trendof launching new hotel brandsworldwide.The competitive environment for new hotelbrands may be better than ever thanks totechnology integration within the industry,which has leveled the playing field. Newentrants now coexist with long-establishedglobal players in an online world oftransparent pricing, social media marketingand digital reputations.Alongside this paradigm shift in technology,hoteliers are developing brands thatcater to a new set of demographic andpsychographic customer profiles. Millennialtravelers — those born roughly between1980 and 2000 — and older affluent butyoung-minded travelers are the primarytargets of today’s brand developers. Thesetravelers seek experiential products andbrands that reflect their personal values.Accordingly, new brands from established ornewly formed companies are departing fromthe “home away from home” philosophyof hospitality, favoring hotels that featuresmaller guestrooms emphasizing functionaldesign, public spaces designed to stimulatesocial interaction, amenities and offeringsthat promote wholesome and healthylifestyles, enhanced technology throughoutproperties, the integration of local culturalelements into the guest experience, andaffordable luxury design and service levels.Across the globe, newly launched brands aretargeting market opportunities at differentchain scales. In North America and Europe,most are seeking to capture travelers at themiddle to upper price tiers.You can see a similar trend toward themiddle price tier in the Middle East. Luxurybrands have traditionally dominatedthe hotel landscape in Dubai; however,as Dubai’s government has waived themunicipality fee on each room night forthree- and four-star hotel developments,market participants have now beenincentivized to introduce brands withinlower to middle price tiers and focus ondeveloping lifestyle lodging offerings.Across Asia, development of new brandshas been most prominent in China, wherethey have the opportunity to build long-termbrand equity in a market with little existingbrand loyalty. New brand development isprominent across all price tiers but is slightlymore concentrated in the upper level.As more lodging products are launchedin today’s competitive global market,new contenders must understand themost important aspects for developing,successfully launching and positioningGlobal hospitality insights16

themselves for growth. Here are several critical success factors forgrowing and developing new hotel brands:• Analyze the market for opportunity gaps. When developing abrand, identify unfulfilled demand needs by chain scale, geographyand market positioning.• Understand your target customer segments and stay relevantto them. Customers do not buy a “stay”; they buy a feelingand want to share your belief. New brands are establishingthemselves in increasingly niche markets. Allocating resources tounderstand and anticipate a target segment’s lifestyle and lodgingpreferences is crucial. It’s also important to identify the innovatorsand early adopters — your key target segments when launching anew brand or product.• Ensure that the foundation of your differentiating concepttranslates into unique guest experiences. A focused brandpromise is key to delivering a signature guest experience.Successful brands infuse their values into each aspect of theguest stay to create a product that is perceived and valued astruly unique.• Identify whether the best route to address your targetcustomer segment is through developing a new brand orextending an existing brand. Leveraging existing brands toaddress a customer niche can work to accelerate growth but isnot always the appropriate choice. You can contrast the W andWaldorf-Astoria brands, which are excellent examples of how boththese routes can be used.• Lead with a purpose-driven brand and build a culture basedon your purpose. Brands and organizations that have anaspirational and humanistic purpose in place internally andinfused in all customer touch points enjoy the benefit of having allstakeholders — from sales representatives and IT staff to C-suiteexecutives — galvanized around the same belief.• Plan the long-term execution of the brand appropriately.Successful brand developers consider their developmentbusiness model, including greenfield versus brownfield as wellas franchising, management contracts, JVs or ownership.For example, a company can focus on greenfield to managequality, but brownfield conversions — especially in Europe — willaccelerate growth.To achieve a successful brand launch in today’s environment, branddevelopers need to keep pace with the trends and dynamics of themarket. With technology disseminating information faster than everbefore, customer preferences and insights need to be anticipated toevolve a brand ever more rapidly. The successful lodging brands oftomorrow will invest to understand key differentiating market andcustomer insights and move forward with concept and experiencedevelopment today in order to stay relevant in the long term.Top thoughts for 201517

Condominium hotels — lessons learnedImprovement in the global secondhomeand overall lodging markets,particularly in gateway and primaryresort destinations, combined withan updated regulatory framework iscausing a resurgence of interest incondominium hotels.Condominium hotels vary in structure andoperation throughout the globe. While inmost locations they physically resemble acondominium development, offering largeunits with kitchen facilities and little publicspace beyond a reception area, in otherlocations the asset resembles a typicaltransient lodging operation. This lattermodel became popular during the last realestate upcycle in the 2000s, particularlyin the US. In this model, the ownershipstructure is divided between a hotel lotowner, who owns the building’s publicspaces and ancillary revenue-generatingfacilities, and individual unit owners, who,if participating in an available rentalprogram, share in the revenues andexpenses associated with the rental of theirunits as transient lodging accommodations.This kind of condominium hotel features thepublic space, amenities and level of finishesconsistent with a hotel operated by theaffiliated brand.Regardless of the physical appearance oroperating structure, condominium hotels areoften considered attractive to developers,lodging operators and unit owners alike.In markets where traditional constructionlending was limited, the presale of units hadallowed developers to obtain constructionfinancing, aligning themselves with ahotel operator to gain pricing premiumson unit sales. Lodging operators benefitedfrom new inventory under managementand potentially earning a licensing fee onthe sale of the units. Unit owners oftenpurchased units assuming that values wouldcontinue to appreciate and that the incomegenerated from their revenue split wouldcover their costs of ownership.With the global economic decline, however,many condominium hotels, particularlythose located in the US, have facedlitigation, restructuring or bankruptcy,mostly due to issues surrounding control,income allocation and securities issues. Atthe core of the complexity has been theapplicability of securities laws to the offeringof condominium hotel units.The US Securities and Exchange Commission(SEC), in a 1973 release (SEC Release 33-5347) and in subsequent no-action letters,has addressed the issue of when the saleof condominium units constitutes the saleof a “security.” In brief, the SEC’s guidanceprohibits (a) the pooling of income, (b)emphasis of the investment aspects of thecondominium and (c) restrictions on useof the condominium (such as a mandatoryrental program). This issue affected projectstargeting both US buyers, a major sourceof global investment in second-home realestate, and international buyers, who,familiar with the concept back home, facedadditional complexity and risk.Global hospitality insights18

Most developers sought to avoid the costly and impracticalregistration process and set up procedures to avoid having toregister, or targeted non-US buyers, who were except from suchregulations. They offered optional rental programs, avoidedsharing or discussing any information related to the economics andseparated the rental program and purchasing decisions. Incomeand expenses were individually allocated to unit owners whose unitparticipated in the rental program. This complexity was furtherexacerbated by the deal being put together prior to unit ownersbeing involved. For example, revenue and expense allocations mayhave made sense to the operator and developer but often did not sitwell with unit owners, who ended up sometimes facing higher thananticipated maintenance fees and capital expenditure requirementswith lower than expected revenue.The impact of avoiding SEC registration produced relativelyuninformed purchase decisions by the primary contributor ofcapital to the project, the unit purchaser. Buyers, not having beenprovided forward-looking income estimates, often overestimatedoccupancy and rate assumptions. Further, by splitting revenue, thehotel operation often struggled. Given the high prices paid for highlyamenitized units during this era, the revenue that a given unit couldproduce often calculated negative returns. Unit owners blamed thehotel brands and the developer for lack of financial returns despiteoften being in markets in which hotel performance may not havebeen feasible given the prices paid per unit.Given that the rental program participation could not be mandated,owners frequently rented their units outside the hotel operator’svoluntary program, with the unit guest unable to access thehotel operator’s services and amenities. Operators, strugglingwith managing inventory around owner usage and varying rentalprogram participation, also were required to address frequent unitowner calls for explanations, accounting for each unit’s income andexpenses separately, and carefully balancing rotation of units amongdeveloper and unit owner inventory.These issues, combined with a complex set of agreements that oftenwere unclear or inconsistent with the structure, led some projects tofail. And the global economic downturn exacerbated the situation.Recently, in the US, the Jumpstart Our Business Startups (JOBS)Act contained provisions that are being applied to condominiumhotels and serve to bring the structure more closely aligned withother global markets. This, and a resurgent global economy andreal estate market, may give new hope to branded condominiumhotels. In the JOBS Act, the new Rule 506(c) allows for greatergeneral solicitation and advertising as long as buyers are accreditedinvestors.If a condominium hotel is under the new rule, a developer couldthen pool revenues and expenses, mandate participation in a rentalpool and provide greater information that may emphasize economicbenefits. These new provisions serve to provide more information tothe buyer.While many questions remain regarding compliance with rulesconcerning securities sales, many globally recognized lodgingoperators are weighing the pros and cons of managing condominiumhotels and/or have developed procedures to control risk (requiringa certain percentage of units to be dedicated hotel inventory, forexample).In the right markets, condominium hotels can be mutually beneficialfor all parties when interests are aligned and the details are carefullythought through, disclosed and documented.Top thoughts for 201519

Emerging submarkets within maturelodging marketsIn recent years, urban revitalizationand population growth in outlyingareas surrounding major cities havecreated a wealth of opportunitiesoutside mature lodging markets.These once untouched andundesirable submarkets acrossthe world are now attractingstakeholder attention, as evidencedby the significant public andprivate investment taking place inthese areas.The expansion of major urban centers hasresulted in higher market rents, limiteddevelopment opportunities and moreaggressive competition; this, in turn, hascreated higher barriers to entry and loweryields for investors. As a result, residentsand developers are being priced out of theurban cores and they have been forced tolook for more desirable opportunities inperipheral areas. Typical characteristics ofthese submarkets include easy accessibilityto the urban core, authentic food, beverageand retail offerings, and lower levels ofcongestion.Lodging investors and brands have theopportunity to pioneer a neighborhoodby entering the market in the early stagesof development, introducing brands thatcomplement the area and create socialspaces that welcome both local residentsand visitors. Tourists are initially attractedto these submarkets by the lower price oflodgings. However, as these areas becomemore established, the thriving food, art andmusic scene often attracts visitors seeking amore authentic and unique experience.One example of a submarket that hasbenefited from expansion and urban renewalis Brooklyn, New York. In the early 2000s,as real estate prices in Manhattan continuedto increase, investors and residents beganto seek out more affordable opportunitiesin nearby Brooklyn. In 2004, to support andencourage the revitalization of Brooklyn,the local government rezoned severalneighborhoods and invested US$400million to promote retail, residential andcommercial development in the borough.Brooklyn immediately experienced asignificant increase in development. Sincethen, the number of apartment unitshas tripled, the number of affordableapartments has increased from zero toover 400 41 and downtown Brooklyn isnow the third-largest office district in NewYork City, with 17.3 million square feet ofoffice space. 42Since 2007, Brooklyn’s hotel inventoryhas doubled, with new properties primarilyconsisting of midscale to upper-upscaleand independent properties. As of October2014, the Brooklyn pipeline has 27projects totaling 2,378 rooms, representingan 11.6% increase in rooms from theprior year and proving that investor41. “Downtown B’klyn Seen as ‘Shining Example,’” Crain’s NewYork Business, www.crainsnewyork.com/article/20140715/REAL_ESTATE/140719927/downtown-bklyn-seen-as-shiningexample,15 July 2014.42. “Downtown Brooklyn,” New York City Economic DevelopmentCorporation, www.nycedc.com/sites/default/files/filemanager/Services/Location_Services/Downtown_Brooklyn/CBD_1Q11_DB.pdf, accessed November 2014.Global hospitality insights20

confidence in Brooklyn’s lodging market remains high. Despitethis, Brooklyn represents one of the nation’s most underservedmetropolitan areas for lodging. The area has only one hotel room forevery 589 residents; in Manhattan, this per-capita rate is more than29 times higher, showing that Brooklyn needs more hotels to meetdemand. Lodging development in Brooklyn offers developers moreaffordable land prices, as well as favorable tax incentives. Brooklyn’shotels exhibit strong operating performance, with occupancy and anaverage daily rate (ADR) well above national averages. 43Brooklyn, which now attracts millions of visitors annually, has alsobecome a tourist destination in its own right. It is now popular withfor leisure and business travelers seeking a more authentic and localexperience.Similar to Brooklyn, development and urban renewal have surgedin Oakland, California, over the past decade. Oakland benefits fromits proximity to a major urban city, San Francisco, which is about 20miles away. Given its location north of Silicon Valley, diverse touristand cultural attractions, its status as a major hub for technology andbiotech employment and that it is a gateway market to Asia, SanFrancisco has become one of the world’s most sought after marketsfor real estate investment.However, as prices in San Francisco continue to rise, investors arelooking to peripheral areas, particularly Oakland, for additionalopportunities. In the 1990s, Oakland’s mayor introduced the “10KPlan,” which was intended to attract 10,000 new residents. Morerecently, it launched the “10K Two Plan” to attract an additional10,000 residents. It is doing this through 15 major housingdevelopment projects, totaling more than 7,500 units. 44 Oaklandhas also focused on increasing public areas, such as Lathan Square,to support additional development and enhance the community.Companies, particularly start-ups, are choosing Oakland due tothe value proposition: large and more affordable office space. Theresidential population has shifted to a younger, professional crowd,attributable to Oakland’s cultural diversity, as well as its authenticrestaurant and bar scene. Recently, the city has been recognizedas a highly desirable travel destination by well-known publicationsthroughout the US. 45 In 2013, Oakland attracted more than 2.5million visitors. 46Oakland experienced significant development over the past decade.However, lodging offerings in Oakland are limited, with just 94 hotels(only 14 of which are branded properties), while San Francisco hasmore than 200. 47 As such, occupancy rates in Oakland are higherthan in most other California submarkets due to the extremelylimited supply and high demand. According to Visit Oakland,Oakland is experiencing revenue per available room (RevPAR)growth of approximately 13%, well above the US national average. 48Other neighborhoods in cities across the world, including EastLondon, Kreuzberg in Berlin, Trastevere in Rome and Revolucni inPrague, have exhibited similar qualities to Brooklyn and Oakland,including urban renewal, an increase in newer lodging brands,boutique properties, proximity to urban cores and increased publicand private investment. As visitors continue to choose to stay inthese peripheral areas, the lodging need within these submarkets,and the emergence of new submarkets across the globe, isanticipated to expand.43. “Brooklyn Lures Hotel Investors, Customers, as Alternative to Manhattan,” Hotel Management ,www.hotelmanagement.net/investment/brooklyn-lures-hotel-investors-customers-as-alternative-tomanhattan-29057,2 October 2014.44. “Project Gentrify in Oakland,” SocialistWorker.org, http://socialistworker.org/2014/10/02/projectgentrify-in-oakland,2 October 2014.45. “Oakland Turning Into Hot Market for Business, Real Estate.” ABC7 News San Francisco,http://abc7news.com/archive/9116764, 26 May 2013.46. “Visit Oakland 2014/15 Strategic Plan,” VisitOakland.org, http://visitoakland.org/wp-content/uploads/2014/02/VO14008_strategic-plan_web.pdf, accessed November 2014.47. “Oakland primed to seize on demand for hotels,” SFGATE, 4 September 2014.48. Ibid.Top thoughts for 201521

Hotel technology 2.0New advances in technologycontinue to alter the relationshipbetween hotels and guests. Userfriendlyand powerful smartphonesand tablets are changing travelers’online preferences and habits,redefining how they research, planand book a trip. Empowered withmore knowledge and social media,today’s hotel guest is pushing hotelsfor improved products and servicesin their travel experience. From anownership standpoint, advancesin data analytics are transformingthe hospitality industry with thepotential to enhance a hotel’sfinancial performance and offerdetailed insight into customerpreferences. As the use of mobiledevices, social media and advancedanalytics continues to proliferate,and as online distributionchannels become more accessible,technology has created newopportunities for hotels to driveoperating efficiencies and engagewith guests, from booking tocheckout. 4949. “Conrad Hotels empowers travelers with end-to-end mobilecustomer experience,” Mobile Marketer, www.mobilemarketer.com/cms/news/database-crm/18296.html, accessed October 2014.We’ll begin with today’s traveler. Accordingto a 2013 global survey by TripAdvisor,87% of travelers use a smartphone and44% use a tablet while traveling. As such,hotels are rethinking all aspects of the hotelexperience, with a focus on accommodatingthese devices in guestrooms, meetingspaces, lobbies and front desks. 50For example, one international hotel brandhas taken a more proactive approach bypartnering with a leading engineeringand technology university to redesign thefuture hotel experience and find innovativeways of making public areas more exciting,user-friendly and relevant to the technologyneeds of today’s traveler. 51 In Silicon Valley,one major brand recently launched a robotbutler equipped with a tablet to facilitateinteraction between guests and staff. Forinstance, a guest may call the front desk torequest a forgotten toiletry; the hotel staffthen inputs the guest’s room number intothe robot’s tablet interface and places thetoiletry on the robot, which delivers the itemdirectly to the room. 5250. “Social Media, Smartphones & Tablets Now Essential TravelTools for U.S. Travelers,” TripAdvisor, http://ir.tripadvisor.com/releasedetail.cfm?releaseid=808058, accessed October 2014;“Mobile/Smartphones,” European Travel Commission, http://etc-digital.org/digital-trends/mobile-devices/mobile-smartphones/regional-overview/north-america/, accessed October 2014.51. “The Future Hotel Experience,” MIT Mobile ExperienceLaboratory, http://mobile.mit.edu/projects/the-future-hotelexperience,accessed October 2014.52. “Starwood Introduces Robotic Butlers At Aloft Hotel InCupertino,” TechCrunch, http://techcrunch.com/2014/08/13/starwood-introduces-robotic-butlers-at-aloft-hotel-in-palo-alto,accessed August 2014.According to a 2014 US survey by USampand Smith Micro Software, more than 60%of travelers prefer to purchase and reservehotel guest services using mobile devicesrather than face-to-face with hotel staff. 53As such, hotel companies are turning toproducts and applications that empowerguests to browse inventory, book amenities,complete reservations and purchase avariety of services (such as room service)via mobile devices to drive engagementand increase revenue-generatingopportunities. 54 Other mobile innovationsinclude mobile keys, check-in kiosks andmobile-enabled property managementsystems, allowing hotel employees tointeract more with guests.Moreover, recent advances in wearabletechnology, such as smart watches andglasses, are expected to revolutionizethe way customers access the web andcontribute personal content. For example,hotel reviews that feature video instead ofjust text will place even more emphasis onhotel reputation and performance.53. “Majority of Consumers Prefer to Purchase and Reserve HotelServices Using Mobile Devices,” Smith Micro, www.smithmicro.com/company/news-room/press-releases/2014/06/23/majorityof-consumers-prefer-to-purchase-and-reserve-hotel-services-usingmobile-devices,accessed October 2014.54. “10 Hospitality Technology Trends You Need To Know About,”Smart Brief, www2.smartbrief.com/hosted/ad2187/Hospitality_Trends_2013.pdf, accessed October 2014.Global hospitality insights22

From an ownership standpoint, new technology has also impactedhow guests are acquired in the discovery and booking phases, astravelers are increasingly looking online to book hotel rooms andcustomer acquisition costs continue to rise. According to 2014research by eTrack, eMarketer and Alexa.com, 57% of all travelreservations are taking place online, while internet travel bookingrevenue has grown by more than 73% over the past five years. 55At the same time, the competition to gain control of the distributionchannel has intensified. 56 Through acquisitions of propertymanagement and digital marketing platforms, online travel agents(OTAs) are providing additional services to encourage hoteliers todistribute rooms on their sites. 57On the other hand, hotel brands seek to drive bookings to theirown proprietary websites by leveraging the power of loyaltyprograms and streamlining the booking experience. In 2014, amajor international hotel company stated that it booked over 50%of its reservations through its direct central reservations system dueto its strong rewards program. 58 Other innovative online reservationplatforms can also provide hotels with a source of additionalrevenue by allowing non-hotel guests to book meeting space on anhourly basis. 59Leading hotel companies are also leveraging advances in dataanalytics and artificial intelligence (AI) technologies to increaseonline reservations, improve the return on advertising spend(ROAS), better understand guest preferences and build strongercustomer relationships. 60 In 2014, one international hotel companyreported an impressive ROAS increase of approximately 2,100% bydeploying a new online advertising platform, which combined dataanalytics with AI technologies. 61 AI technologies utilize powerfulalgorithms to determine the most appropriate media to focusadvertising spend. Other big data and AI applications focus onenhancing a hotel’s revenue management system by dynamicallychanging room rates based on a number of changing variables,including the hotel’s website activity or weather conditions. 62Hotels must holistically embrace social, mobile and analytics to drivebusiness improvements, enhance hotel guests’ experiences anddeliver results. A hotelier’s ability to keep up with rapid technologychanges and embrace the latest technology tools will differentiatesuccessful hotel organizations going forward.55. “Internet Travel Hotel Booking Statistics,” Statistic Brain, www.statisticbrain.com/internet-travelhotel-booking-statistics,accessed October 2014.56. “Hospitality Asset Managers Association (HAMA) Study Documents Growing RevenueAcquisition Costs Outpacing Hotel Revenue Growth,” HospitalityNet, www.hospitalitynet.org/news/154000320/4066627.html, accessed October 2014.57. “Evolution in Electronic Distribution: Effects on Hotels and Intermediaries,” Cornell UniversitySchool of Hotel Administration, www.hotelschool.cornell.edu/research/chr/pubs/reports/abstract-13606.html, accessed October 2014.58. “5 Tech Trends That Will Shape Hospitality,” Hotel News Now, www.hotelnewsnow.com/article/14016/5-tech-trends-that-will-shape-hospitality, accessed October 2014.59. “Office Space, by the Hour,” The New York Times, www.nytimes.com/2013/02/19/business/hotels-carve-out-work-spaces-rented-hourly.html, accessed October 2014.60. “Major global study reveals how big data will transform the hospitality industry,” Amadeus, www.amadeus.com/hotels/newsrepository/articles/major-global-study-reveals-how-big-data-will-transformhospitality-industry,accessed October 2014.61. “Hotel chain utilizes new digital advertising platform to great success,” .Rising, www.dotrising.com/2014/01/13/hotel-chain-utilises-new-digital-advertising-platform-to-great-success, accessedOctober 2014.62. “Duetto Raises $21M Led By Accel To Equip Hotels With Big Data Surge Pricing,” TechCrunch,http://techcrunch.com/2014/07/09/duetto, accessed October 2014.Top thoughts for 201523

Investment promotion agencies —catalysts for tourism investmentOver the last decade, tourism,spurred by foreign directinvestment, has evolved into akey economic driver for manydestinations, promoting incomegrowth and job creation in localeconomies. While global tourism hasgrown rapidly, there is tremendousfuture potential: internationaltourist arrivals worldwide areprojected to increase about 70%between 2013 and 2030, reaching1.8 billion. 63 Tourism currentlyaccounts for nearly 9.5% of theworldwide GDP and is projected toincrease to 10.3% by 2024. 64 Thehospitality and tourism sectorshave emerged as key value driversand differentiators in a competitiveeconomy, including in emergingeconomies, where growth hasshifted away from goods andproducts toward services, withtourism and hospitality accountingfor a significant portion.Competitive destinations across the globehave recognized the value in tourism anddeveloped new, or enhanced existing,destination management organizations(DMOs) to include investment promotionagencies (IPAs) or divisions. This is astrategic shift that aims to drive local andforeign investment into the destinationto improve both the product offering andvisitor experience. The most effective IPAsact as an “investment concierge” – entitiesthat help foreign investors navigate localrules and regulations, traverse bureaucracy,access market data and research and assistwith investment opportunity identification.Whether a hotel development, golf courseor tourism infrastructure, the IPA takes amulti-dimensional view on the best channelsfor increasing tourism — matching themost suitable investors with tourismneeds. For investors unfamiliar withspecific destinations, IPAs effectivelyreduce due diligence costs, which broadenthe pool of potential investors, whilecreating a competitive and transparentinvestment process.DMOs and IPAs are generally organized aspublic entities, often as a division within thetourism or economic development ministryor department. Recently, however, a morepublic-private trend has emerged — yieldingmore nimble organizations that use abusiness model similar to that of a privatebusiness, which is producing the mosteffective results. The public-privatestructure has proven to add technicalinvestment expertise, efficiencies andflexibility to dealmaking, while reducingpolitical whims in the process. This structurealso enhances their ability to attract andretain highly qualified real estate andhospitality professionals with track recordsin finance, development and acquisitions.Effective DMOs often include leadership,such as chief investment officers andinvestment managers, both supportedby teams of analysts. By reducinguncertainty, and consequently spurringinvestment and development, theseteams create the foundation for the restof the DMO to promote and market thedestination. The investment division of theDMO, the IPA, in addition to identifyingpotential investment trends and tourisminvestment opportunities, is responsible fordeveloping and maintaining strong workingrelationships with current and prospectivecapital partners. Additional responsibilities63. “Tourism highlights: 2014 edition,” UN World TourismOrganization, http://mkt.unwto.org/publication/unwto-tourismhighlights-2014-edition,accessed November 2014.64. “Travel & Tourism Economic Impact 2014: World,” WorldTravel & Tourism Council, www.wttc.org/~/media/files/reports/economic%20impact%20research/regional%20reports/world2014.ashx, accessed November 2014.Global hospitality insights24

include evaluating risk and return metrics for competing investmentopportunities, coordinating with government entities to increaseaccess to investment opportunities within the destination anddeveloping and implementing the overall investment strategy toincrease the attractiveness of the destination from an investmentand tourism perspective.The role of government as a partner is critical to the success ofan IPA. Leading IPAs work with governments to draft incentiveand concession legislation to induce capital investment. With thecooperation and support of public offices, IPAs have the ability toincentivize investors through a variety of channels. Governmentinvolvement — via debt, equity contributions or guarantees —serves as an indication of confidence in local investments andits commitment to the success of the tourism value chain, whilereducing investor risk. Moreover, government-sponsored investmentprograms, such as commercial immigration (e.g., the US EB-5program), are prime examples of aligned public and privateinterest with positive economic benefit. Currently, much-neededdevelopment is taking place on new hotels and mixed-use resortprojects in the Caribbean using commercial immigration to attractinvestors. Profit repatriation benefits and residence work permitsfor key investors and development staff are among some of theincentives used. Governments with investment arms that canprovide transparency and one-stop facilitation and that can deploypublic capital have increased confidence among private investors,which in turn leads to economic development and job opportunities.IPAs have recognized that reliable business intelligence andlocal data are crucial for attracting foreign investors. The mosteffective IPAs have the proper systems and people in place tocollect qualitative and quantitative data needed for foreign directinvestment. This data includes hotel performance metrics by chainsegment, room supply pipeline, macroeconomic data, constructioncosts, zoning and permitting information and an overview ofavailable investment opportunities. The data should be accessibleand accurate to provide real added value for investors, withresponsive IPA staff filling requests for it as needed.Key performance indicators are essential for IPA teams trackingthe effectiveness and success of the investment plan. IPAsmeasure their performance by assessing the changes in three keymetrics, including international and domestic visitation, tourismexpenditure and tourism sentiment over time. IPAs can benchmarktheir progress in other areas by setting strategic goals such asthe amount of capital funds raised, investor sentiment, marketingpromotions and tourism job creation.For a destination, it is not enough to just show promise — tocapitalize on the global expansion of hospitality and tourism marketsand attract investors, well-structured IPAs have proven to becrucial. Thanks to their transparency and responsiveness, they havereduced hesitation in the capital markets and shown that tourism isan important economic differentiator.Top thoughts for 201525

Mutual learning opportunities:the sharing economy and the lodging industryThe sharing economy has castconsumers as service providers,enabling underutilized assets tobe operated for financial gain.The leading companies in thisnew sharing economy markethave initially been focused on thetransportation sector, includingwell-known ridesharing companiesUber and Lyft, which connectpassengers with private drivers.In addition, they have also madeinroads into the hospitality space by,for example, connecting travelerswith home or apartment ownersand matching part-time cooks withadventurous eaters.The rise of many of these businesses hasbeen impressive, as some have reachedvaluations on par with well-established,publicly traded companies. 65 Not only aretheir valuations making headlines, but theirgrowth is as well. Uber, only in its sixth yearof operation, already controls about 17%of the US$100 billion global taxi/limousinemarket. 66 In a year, Airbnb, a company thatenables people to rent out lodging, addedmore listings to its existing inventory thanthe largest hotel companies introduced asnew units combined over the same period. 67As shared economy concepts continueto grow their footprint in the hospitalityand leisure sector, both the traditionallodging industry and the new-age sharingeconomy companies can learn from oneanother. Some examples include segmentingcustomers, changing consumer preferences,creating customer loyalty and managingfeedback, to name a few.Most established lodging brands areintentionally standardized, which, froma consumer’s perspective, helps setexpectations for the product and serviceswhile increasing overall confidence in theexperience. This enhanced trust in boththe product and brand enables a fasterselection process for the customer. Incomparison, lodging platforms under thesharing economy model typically providenon-standardized products, which can varywidely in physical attributes, quality andlevel of service; this requires more initialresearch by the customer before making abuying decision.While the numerous types of accommodationsin a sharing company can be an advantagefor travelers seeking a unique, lesstraditionalexperience, attracting otherspecific segments of the market can be achallenge. For example, business travelersseek certainty, reliability and ease whenmaking lodging decisions. Hotel companies,on the other hand, have segmented theirproducts based on different consumerpreferences into various brands, eachassociated with a differentiated producttype, design, price point and facility andamenity package, enabling consumers tomake their lodging choices faster and with agreater degree of confidence.65. “Airbnb Weighs Employee Stock Sale at $13 Billion Valuation,”The New York Times Dealbook, http://dealbook.nytimes.com/2014/04/21/morning-agenda-airbnbs-10-billion-valuation,23 October 2014.66. “A Disruptive Cab Ride to Riches: The Uber Payoff,” Forbes,www.forbes.com/sites/aswathdamodaran/2014/06/10/adisruptive-cab-ride-to-riches-the-uber-payoff,accessed16 October 2014.67. “Airbnb: The Hotel Disruptor Unconstrained by RealEstate,” Bloomberg TV, www.bloomberg.com/video/airbnb-the-hotel-disruptor-unconstrained-by-real-estateg34TH4zdTiiQgq1z~WLt~A.html,accessed 18 August 2014.Global hospitality insights26

Segmentation in the shared economy is possible, as seen by Uber,which has adopted the use of brand categories with the introductionof uberX, UberBLACK and uberXL. These differentiated categoriesnot only help segment the customers based on different producttypes and needs, but it also allows the consumer to make a quickerbuying decision.Loyalty programs are one significant driver of bookings fortraditional hotels. Hotel companies pride themselves on the strengthof their reward programs to create brand affinity and loyalty andultimately to generate revenue. These programs are an especiallyimportant contributor to business-travel demand, as they enabletravelers to earn points on business trips that can then be redeemedfor personal travel. Given the success of these programs forestablished hospitality companies, a lot can be learned from them.Currently, the only major company in the sharing economy that haslaunched its own loyalty program is Uber. The introduction of rewardprograms appears to be a logical next step for many of the businessmodels in the sharing economy in order to foster and strengthenloyalty among their users. However, these programs will likely besomewhat different from the existing hotel companies’ programsbased on how customers can redeem points and how the ultimateservice provider gets compensated. This is due to the decentralizednature of most of the sharing economy models.One of the key challenges in the sharing economy is the lack ofcontrol over inventory. Traditional lodging companies control theirinventory not only in terms of supply but also in terms of pricing andexecution of the service. Business models in the sharing economyare commonly based on a third-party host setting the price andproviding the service. Pricing may prove particularly challenging forhosts who lack the necessary experience to effectively assess themarket value of the service they are providing. 68The lodging and travel sector, particularly airlines, have long seenpricing as a key success factor and developed sophisticated pricingmodels and revenue management tools. While some companies inthe sharing economy have started to adopt similar strategies, mostprograms are still in their infancy. Airbnb, which originally had leftpricing at the discretion of its hosts, has spent significant effort ondeveloping a pricing model following feedback from users who faceddifficulties setting the right price point for their listings.The predictive pricing algorithm provides hosts with a recommendedprice for their listing depending on many factors, including roomstyle, property type, number of reviews, capacity, location,seasonality, pricing of other listings, hotel and airline demand, andeven temperature changes at the destination. However, it still allowsthe host to ultimately set the final price.Customers are increasingly seeking unique, authentic experiencesanchored in the destination they are visiting. Part of the appeal ofthe shared economy concepts has been their ability to cater to thosespecific needs. Given the diversity of unit locations in any particularmarket that companies like Airbnb offer, customers are able tohave a differentiated experience by, for example, staying in localneighborhoods that do not feature traditional hotel accommodationsand but offer unique amenities. Other examples include Feastly orEatWith, which offer home-cooked tasting menus that could changedaily in the intimate setting of the chef’s home.The traditional lodging industry has taken note, as we are seeinga shift toward adding lifestyle brands, allowing customization andincorporating authentic local offerings. For new and existing lodgingprojects to succeed, it’s imperative for them to take this shift inguests’ preferences into account.68. “Fueled Fix: How Airbnb Should Unleash Market Pricing,” Forbes, www.forbes.com/sites/rameetchawla/2014/11/07/fueled-fix-how-airbnb-should-unleash-market-pricing, accessed7 November 2014.Top thoughts for 201527

These days, the hospitality and leisure industry has becomesignificantly focused on monitoring and managing reviews postedby travelers on third-party sites. Research has shown the correlationbetween the relative quality of reviews and the demand for aparticular property or establishment. The reliance of consumers onthird-party sites as part of their buying decision process appears tobe continuously increasing. However, as the reviews are submittedon external sites, companies have limited control over managing andinfluencing the actual content, typically only by posting responsesto the individual feedback submitted. In addition, the authenticityof the posted reviews is often put into question due to the use of“professional reviewers.”Companies in the sharing economy, on the other hand, havefound an arguably better solution. By hosting reviews on their ownwebsites, they are able to better oversee and control content. Inaddition, their process, which in most cases allows only one reviewper service experience, provides full transparency to both usersand hosts and better ensures the authenticity of the feedback. Thisconcept could offer traditional companies in the hospitality industryan alternative solution to the current approach of relying on thirdpartywebsites for publicly available customer feedback, whichwould also bring the process in-house.Looking ahead, both emerging and traditional hospitality platformsmust adapt to changing customer preferences, various consumersegments and loyalty programs, which will all drive future growth.Companies in both groups have the opportunity to learn from eachother by studying each other’s best practices and strategies toenhance their own business models.Global hospitality insights28

Top thoughts for 201529

Global tax considerationsAs lodging players look to 2015,certain tax issues must be carefullyevaluated as an integral part ofa company’s overall investmentstrategy. This year, several keytax considerations, including thecontinued growth and sophisticationof cross-border hospitalityinvestments, the acceleration ofthe use of Opco/Propco structuresand spin-offs, escalating taxenforcement initiatives and anincreasing number of indirect taxes,will remain top of mind for industryparticipants looking to invest in thehospitality sector globally.During 2015, significant cross-bordercapital flows will continue to draw focusfrom a tax standpoint. The deployment ofcapital by sovereign wealth funds and otherglobal institutional investors will requirecareful consideration of tax regimes andwithholding requirements in traditionalmarkets, as well as emerging ones. As newmarkets gain momentum, with new alliancesand joint ventures formed, tax advisors canno longer focus on one tax regime whenstructuring hospitality investments andoperations.Instead, advisors must carefully considerthe tax consequences of where the capitaloriginates, where the investment vehicle islocated and where the capital is deployed.Given the heightened tax scrutiny thatinvestor groups are now subject to, theymust also properly manage cross-bordertax implications that could adversely affectprofitability. In response, tax advisors arenow called on to develop robust tax modelsthat project capital flows and the relatedtax consequences throughout the life of theinvestment.These models, which incorporate multijurisdictionaltax analysis, are ongoingmanagement tools that allow “what if”scenarios at any point in the investmentcycle. As countries are regularly revisingand updating applicable tax laws to remaincompetitive in the global marketplace,tax advisors must continually review theinvestment structures being utilized, asstructures that may have been optimal inthe recent past may no longer be the mosttax-efficient structure.The strategic use of REIT structures tohold lodging assets across the globe willcontinue to gain investor attention in 2015.As observed over the past year, the wave ofcountries adopting REIT structures keepsgrowing, with more than 30 countrieshaving now enacted some version of REITlikestructures. Global REITs will gain evenmore traction, fueling cross-border capitalflows, whether through publicly held REITstraded on exchanges or through privateREITs, sometimes referred to as baby REITs,which may own only a single property.Another prominent trend that will remainimportant in the lodging sector in 2015 isthe separation of operations and propertyownership, commonly known as Opco/Propco structures. Opco/Propco structuresinvolve the separation of the real estateinto one company and operating assetsinto another company. The structureallows for organizations to identify andfocus on one core business, whether it beowning lodging facilities, operating them ormaximizing the values of brands and otherGlobal hospitality insights30

intellectual properties. The creation of an Opco/Propco structureis often accomplished through a spin-off of one company to theshareholders of the previously combined enterprise, initially creating“brother-sister” companies. Over time, the overlapping ownershipsubsides, as the Opcos and Propcos attract dedicated investors intoone company or the other.Before creating the Opco/Propco structure, advisors must evaluateif the spun-off entity qualifies for tax-free treatment, or whetherthe creation of the Opco/Propco structure qualifies as a taxabletransaction for the company, and in turn, the shareholders. Athorough analysis of potential taxable gains, as well as analysis ofindirect taxes, such as transfer and property taxes, is necessaryto make an decision about whether to convert to an Opco/Propcostructure. Many Opco/Propco structures utilize REITs to serveas the Propco; the Propco will then lease the property to theOpco, which operates the lodging asset. The lease structure ofthe Opco often includes both a fixed base component as well asa contingent or participating rent component based on the grossrevenues of the Opco.In addition to Opco/Propco separations, the lodging sector willcontinue to witness spin-offs among major industry players. Havinggained considerable recognition in recent years, lodging companiesare now using spin-offs to strategically segregate their portfolios.For instance, some hospitality players have segregated their limitedserviceproperties into a separate entity from their portfolio oflarger, full-service properties. This segregation can be accomplishedvia a spin-off, similar to the Opco/Propco separation. If properlystructured, it may be possible to execute a tax-free spin-off toseparate the property classes. However, even if a tax-free spin-off isnot a viable option, lodging REITs may still consider taxable spin-offsin an effort to segregate their property types and gain efficiencies.Global tax enforcement will go on evolving and expanding in2015, causing hospitality companies to prioritize the trackingand monitoring of global tax compliance issues and related taxcontroversy matters. Many companies are turning to electronicplatforms to not only identify and monitor global tax risks, but toalso proactively manage them. For example, a leading practiceamong successful hospitality companies is to maintain a realtimedashboard that monitors global tax filings and alerts themto upcoming filing deadlines and other critical tax milestones.In addition, many lodging companies have increased their focuson transfer pricing, both globally and domestically. Companiesmust ensure that the “transfer pricing” of their intercompanytransactions, as well as cost allocations, are at “arm’s length” andcompliant with the relevant tax regimes.Finally, in 2015, indirect taxes, such as transfer taxes, propertytaxes and value-added taxes (VAT), will be increasing burdens forhospitality companies, as governments across the globe carryon with introducing and expanding indirect tax obligations toraise revenue. While indirect taxes may not have been as muchof a material burden for companies in the past, going forwardindirect taxes will present a meaningful cost for the lodging sector.Tax advisors have sometimes found that even intercompanytransactions may generate unexpected tax liabilities, and newindirect “change of control” transfer taxes — triggered when subtleownership changes are made at the parent company level — can bea burden. Thus, investors will want to review applicable indirect taximplications before initiating new structures or activities.Top thoughts for 201531

Changes in financial reporting:the new revenue recognition standardThe way that hospitality companiesrecognize revenue will soon changeafter the long-awaited revenuerecognition standard is issued bythe Financial Accounting StandardsBoard (FASB) and the InternationalAccounting Standards Board (IASB)(collectively, the Boards). 69 Thestandard will supersede nearly allrevenue recognition guidance inUS generally accepted accountingprinciples (GAAP) and IFRS; asa result, hospitality companiesaround the globe will need tore-evaluate their policies andpractices for recognizing revenuefor arrangements associated withowned, managed and franchisedproperties.The standard uses a five-step model tooutline the principles an entity must apply tomeasure and recognize revenue and relatedcash flows from contracts with customers.The model’s core principle is that an entitywill recognize revenue at an amount thatreflects the consideration to which it expectsto be entitled in exchange for transferringgoods or services to a customer.When applying this model, hospitalitycompanies must use greater judgment andmake more estimates than they currentlydo under today’s guidance. Areas needingincreased judgment may include identifyingthe performance obligations (i.e., promisesto transfer distinct goods or services to acustomer) in the contract, making estimatesof the amount of variable considerationto include in the transaction price anddetermining how the transaction priceshould be allocated to each performanceobligation.For example, a hotel managementcompany offers services to hoteliersgoverned by the stipulations of a hotelmanagement contract. Under the newrevenue recognition rule, the managementagreement must be analyzed to determineif the stipulations represent performanceobligations. Specific contractual obligationsmay include arranging services for hotelguests, employing hotel personnel,providing revenue management andaccounting services, granting the right touse intellectual property and trademarksand performing marketing activities.Substantial judgment will be necessaryto determine which of these stipulationsindividually, or when bundled with otherpromises in the arrangement, representperformance obligations.After performance obligations are identifiedin an arrangement, the transaction priceis determined. The transaction priceincludes an entity’s estimates of variableconsideration that it may be entitled tofrom the arrangement when it is probable 70that a significant reversal of revenue willnot occur in a future period. The standardrefers to this threshold as a “constraint.”This differs from current guidance, whichallows for revenue recognition only whenamounts are fixed and determinable.Variable consideration may include amountsthat are earned based on the underlyingperformance of the property (e.g., apercentage of hotel revenues) or incentivesthat are earned when certain performancethresholds are met.69. The FASB issued the new revenue standard in AccountingStandards Update 2014-09, Revenue from Contracts withCustomers. The guidance will be codified in Accounting StandardsCodification 606, Contracts with Customers. The IASB issued thenew revenue standard in IFRS 15, Contracts with Customers.70. The IASB standard uses “highly probable,” which has the samemeaning as “probable” in US GAAP.Global hospitality insights32

Once the performance obligations are identified and the transactionprice is determined, companies must allocate the transaction priceto each performance obligation. The standard generally requiresthat entities allocate the transaction price to the performanceobligations in proportion to their stand-alone selling prices.However, in certain circumstances, variable consideration may beallocated to a distinct service in a series of distinct services (e.g.,the management services performed in the second month of a oneyearcontract). Revenue for each performance obligation is thenrecognized when the performance obligation has been satisfied,which is when the good or service has been transferred to thecustomer.The new revenue recognition standard also provides specificguidance for recognizing revenue from sales-based royaltiesearned in exchange for granting distinct licenses of intellectualproperty (e.g., use of brand names and trademarks) that differsfrom the general model described above. Under this specificguidance, royalties from such arrangements are not recognized asrevenue before the subsequent sales occur. As a result, hospitalitycompanies would not be required to include in the transaction priceamounts expected to be received in exchange for distinct licenses ofintellectual property until the subsequent sales occur.The accounting for gains and losses on the sale of certainnonfinancial assets, including real estate properties, also maychange in certain circumstances. Under the new standard, when realestate is sold and a management or franchise agreement is retained,it is more likely that the transaction will qualify for sale recognition,and that revenue (i.e., gain on sale) will be recognized soonerthan it is under today’s accounting. In comparison, under currentguidance, 71 the restrictive recognition criteria that must be appliedto real estate sale transactions often delays the recognition of a saleand/or results in a deferral of the associated gain on sale.Other considerations that hospitality entities will need toevaluate include how to recognize amounts paid to real estateowners to secure management or franchise contracts, whetherreimbursements received for payroll and other costs incurredshould be presented on a gross or net basis, and the accounting forcustomer loyalty points programs.Most public entities will adopt the standard in 2017, while mostprivate entities will adopt it the following year. Early adoption isallowed under IFRS; however, public companies that report under USGAAP are not permitted to early adopt, while nonpublic companiesapplying US GAAP may elect to adopt the standard at the same timeas public companies.The standard allows for either “full retrospective” adoption, meaningit is applied to all periods presented in the financial statements, or“modified retrospective” adoption, meaning it is applied only to themost current period presented in the financial statements, but otherdisclosures are required.71. Accounting Standards Codification 360-20, Real Estate Sales.Top thoughts for 201533

With over two years until the effective date, it may appear that thereis ample time to prepare for adoption of the new guidance. Butcompanies should begin working with auditors and other advisorsto evaluate their existing revenue arrangements and addressinterpretation and application issues. While some companies may beable to implement the standard with limited effort, many companieswill find implementation to be a significant undertaking. Companieswith more work in front of them will need to move at a faster paceand may need to consider adding resources. An early assessment isvital to managing implementation.Early communication with key stakeholders (e.g., audit committees,investors) will be important if a company anticipates significantchanges in the timing and presentation of revenues. In addition,consideration should be given to whether any changes are needed ininternal control over financial reporting.In addition to their internal preparations, hospitality companiesshould monitor the discussions of the hospitality industry taskforce that was formed by the American Institute of Certified PublicAccountants (AICPA) to discuss the standard’s application tocommon industry transactions. They also may want to monitor thediscussions of the Joint Transition Resource Group for RevenueRecognition (TRG) established by the Boards to help them determinewhether additional guidance or clarification is needed.Global hospitality insights34

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ContactsGlobalHoward RothGlobal Real Estate, Hospitality &Construction LeaderNew York+ 1 212 773 4910howard.roth@ey.comMichael FishbinGlobal Hospitality & LeisureLeaderNew York+ 1 212 773 4906michael.fishbin@ey.comAfricaEbrahim DhoratJohannesburg+ 27 11 772 3518ebrahim.dhorat@za.ey.comAsiaJeff GreenHong Kong+ 852 2849 9431jeffrey.green@hk.ey.comHarvey CoeLead Advisory/M&AHong Kong+ 852 2846 9833harvey.coe@hk.ey.comRick SinkulerJapan Markets Leader,Real Estate, Hospitality &ConstructionTokyo+ 81 3 3503 1885sinkuler-rchrd@shinnihon.or.jpEuropeCameron CartmellEuropean Hospitality LeaderLondon+ 44 207 951 5942ccartmell@uk.ey.comNam QuachLead Advisory Leisure LeaderLondon+ 44 20 7760 9264nquach@uk.ey.comHelena BurstedtMadrid+ 34 91 572 50 26helena.burstedt@es.ey.comChristian MoleLondon+ 44 207 951 3034cmole@uk.ey.comIndiaGaurav KarnikGurgaon+ 91 124 671 4032gaurav.karnik@in.ey.comMiddle EastYousef WahbahDubai+ 971 4 312 9113yousef.wahbah@ae.ey.comAmericasTroy JonesUS West Transaction Real EstateSector LeaderLos Angeles+ 1 213 977 3338troy.jones@ey.comMark LuntUS Southeast, Latin Americaand Caribbean Hospitality LeaderMiami+ 1 305 415 1673mark.lunt@ey.comBrian TressUS Northeast and Mid-AtlanticHospitality LeaderNew York+ 1 212 773 8359brian.tress@ey.comMark VroomanToronto+ 1 416 943 3954mark.vrooman@ca.ey.comOceaniaDavid ShewringMelbourne+ 61 3 8650 7696david.shewring@au.ey.comRussia and CISOlga ArkhangelskayaMoscow+ 7 495 755 9854olga.arkhangelskaya@ru.ey.comEY | Assurance | Tax | Transactions | AdvisoryAbout EYEY is a global leader in assurance, tax, transaction and advisoryservices. The insights and quality services we deliver help build trust andconfidence in the capital markets and in economies the world over. Wedevelop outstanding leaders who team to deliver on our promises to allof our stakeholders. In so doing, we play a critical role in building a betterworking world for our people, for our clients and for our communities.EY refers to the global organization, and may refer to one or more, ofthe member firms of Ernst & Young Global Limited, each of which isa separate legal entity. Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide services to clients. For moreinformation about our organization, please visit ey.com.About EY’s Global Real Estate, Hospitality & Construction CenterToday’s real estate sector must adopt new approaches to addressregulatory requirements and financial risks, while meeting the challengesof expanding globally and achieving sustainable growth. EY’s GlobalReal Estate, Hospitality & Construction (RHC) Center brings togethera worldwide team of professionals to help you succeed — a team withdeep technical experience in providing assurance, tax, transactionand advisory services. The Center works to anticipate market trends,identify the implications and develop points of view on relevant sectorissues. Ultimately it enables us to help you meet your goals and competemore effectively.© 2015 EYGM Limited.All Rights Reserved.EYG no. DF0196CSG/GSC2014/1510181ED NoneThis material has been prepared for general informational purposes only and is not intended tobe relied upon as accounting, tax, or other professional advice. Please refer to your advisors forspecific advice.ey.com/hospitality