Professional Documents
Culture Documents
Robust investor interest worldwide was prominent, as investors continue to seek economic, investment and experiential
reflected in the years key industry trends: the most qualified operators to improve platforms. The impact of hospitality
the performance of recently acquired on our global economy is significant;
More lodging projects broke ground as
hotel assets. Previously dormant lodging across the world, the travel and tourism
traditional lenders eased restrictions on
markets are positioned to gain traction, as industry encompasses 266 million jobs,
construction loan originations.
increasingly opportunistic investor groups and contributes 9.5% of gross domestic
Accelerating cross-border capital flows weigh higher returns in secondary locations product (GDP) globally. With travel and
intensified competition among domestic and emerging submarkets. And the focus on tourism sector growth forecast to expand
and international investor groups for technology will intensify, as both hoteliers by 3.9% during 2015, the sector will be
hotel assets. and customers continue to evaluate their increasingly recognized as a key driver
return on investment in a lodging experience of economic growth at the local, regional
In select secondary markets, investors grounded in sophisticated social, data and and global level.
1
Real estate fundamentals Throughout the Americas, strong As a result of strong fundamentals and
continue to improve, and debt performance continued in 2014, with real an increasing array of capital sources,
estate transaction volumes in some markets capitalization rates in the US are anticipated
and equity capital are abundant, 4
reaching pre-recession peaks. Specifically to trend lower, with the rates in six major
providing a solid foundation for in the US, economic and employment metropolitan markets, including New York
an uptick in transaction volume numbers have grown increasingly positive, City, San Francisco and Boston, averaging
and overall competition. Global and hotel performance has followed suit 5.5%, compared to 6.9% in 2013. The low
amid a rise in business and leisure travel. rates are highly influenced by the countrys
hotel investment continues to
low interest rates, which are anticipated to
steadily increase, with 2014s Cross-border investment into the US 7
rise in 2015. Nevertheless, with current
increased approximately 137% from 2013
totals expected to exceed US$54.5 capitalization rates close to the previous
to 2014, with foreign buyers continuing to
billion compared to US$52 billion look beyond traditional gateway markets
market lows of 2007, potential speculation
in 2013. Global hospitality and about a bubble is countered by the fact that
to secondary markets, such as Phoenix,
risk has been priced into the deals seen
leisure transactions increased Atlanta, Houston and Orlando. Investors
throughout 2014.
8
2. Global Market Perspective Q4 2014: Hotel investment 4. Hotel Investor Sentiment Survey, Jones Lang LaSalle,
maintains momentum despite downside risks, Jones Lang www.joneslanglasalle.com/hotels/EN-GB/Pages/HISS-June-2014-
LaSalle, www.jll.com/gmp/market-perspective/hotels, accessed Americas.aspx, June 2014. 7. Feds Dudley: expectations for mid-2015 rate lift-off
November 2014. 5. US Capital Trends Hotels, Real Capital Analytics, reasonable, Reuters, www.reuters.com/article/2014/11/13/us-
3. New Hotel Construction Pipeline in Global Shift, August 2014. usa-fed-dudley-idUSKCN0IX0ZS20141113, 13 November 2014.
Hotel Interactive, www.hotelinteractive.com/article. 6. US Capital Trends Hotels, Real Capital Analytics, 8. US Capital Trends Hotels, Real Capital Analytics,
aspx?articleid=32644, 17 April 2014. third quarter 2014. third quarter 2014.
9. Latin American Hotels Have a Supply and Demand Problem, Skift, skift.com/2014/09/26/latin-
american-hotels-have-a-supply-and-demand-problem, 26 September 2014.
10. Latin America Hotel Market Has 400 Properties Under Development, World Property Journal,
www.worldpropertyjournal.com/latin-america-vacation-news/new-hotels-in-latin-str-global-june-2014-
str-global-construction-pipeline-report-luxury-hotels-in-brazil-new-hotels-in-mexico-new-hotels-in- 13. Germany still the darling of the hotel investment sector with transaction levels heading for 2bn,
colombia-8362.php, 16 July 2014. 4 Hoteliers, www.4hoteliers.com/news/story/13221, 2 October 2014.
11. Central And South America Hotel Development Pipeline For December 2013 Increases to 305 14. Ibid.
Hotels, Hotel News Resource, www.hotelnewsresource.com/article75877.html, 15 January 2014. 15. Global hotel pulse: Middle East/Africa news, Hotel News Now, www.hotelnewsnow.com/
12. STR Global: MEA pipeline for July, Hotel News Now, www.hotelnewsnow.com/Article/14329/ Article/13850/Global-hotel-pulse-Middle-EastAfrica-news, 10 June 2014.
STR-Global-MEA-pipeline-for-July, 28 August 2014. 16. Global Capital Trends, Real Capital Analytics, midyear review 2014.
17. Global Capital Trends, Real Capital Analytics, midyear review 2014.
18. Asia Pacific Hotels MarketView (H1 2014), CBRE, accessed November 2014.
For several years, confidence in the M&A activity overall and in the RHC sector Across the world, real estate investors have
economy and in deal markets has is driven by a desire for incremental growth, become more confident about acquiring
the strategic merit of transactions and the real estate operating platforms with the
improved, and the recent surge of availability of debt and equity on favorable objective of owning the underlying real
mergers and acquisitions (M&A) terms. The presence of these elements has estate, and not necessarily for operating
activity appears reminiscent of fueled M&A in recent years. The higher the platform as a business. However,
2007. Within hospitality, deals have volume of global capital chasing real estate the challenge lies in vetting this type of
opportunities has also contributed. In the deal, particularly under an increasingly
gained traction, with flush capital
US, for example, foreign investors made high-speed diligence period. Real estate
and portfolio optimization remaining approximately 11% of the US$355 billion in investors may be familiar with underwriting
key drivers. Sentiment in the sector real property deals last year, with prominent individual hotels, assessing value and
remains positive: a recent EY survey investment groups from China, Japan and modeling cash flows, but these kinds of
of more than 75 hospitality and Singapore fueling transaction volume within transactions cannot be solely dissected
20, 21
hospitality specifically. as real estate portfolio acquisitions. There
leisure executives found that 99% of are additional, value-impacting factors to
the respondents expect the global The influx of capital has caused fund
weigh when buying an entire platform,
managers to look for new ways to
M&A market to continue to improve expand their real estate portfolios in a
including the appropriate level of overhead
or stay the same in the next required to operate the properties, as well
hypercompetitive environment, with
19 as potential commitments and off-balance-
12 months. favorable market conditions encouraging
sheet liabilities of the business. Additionally,
higher confidence and the risk appetite
the parties may encounter discrepancies in
to place capital. However, investors out to
pricing expectations for example, if a seller
make deals should be aware of additional
prices itself as a stand-alone business while
risks and complexity in the markets.
a prospective buyer prices the deal as the
acquisition of individual properties.
Overseas capital accounted for A number of push and pull factors drove During the past year, some of the most
41.2% of 2014s global hotel the year-over-year increase in cross-border active investors from Asia have been state-
activity. While these Western countries owned enterprises (SOEs) and large-scale
investments through October, pull international buyers to transparent developers, who are intent on investing
compared to 34.7% in 2013, markets for capital preservation and more overseas as a way to diversify their portfolio
29.9% in 2012 and only 25.9% in stable property yields, many of these and build their international brand. For
22 international buyers are also encouraged these investors, Downtown Los Angeles has
2011. Asian investors (primarily
to invest abroad due to the geopolitics in been a target for ground-up hotel mixed-use
dominated by China, Hong Kong,
their home countries. Most notably, buyers development, largely due to the abundance
Japan and Singapore) represented from Asia are pushed toward outbound of large parking lots that are primed for
43.2% of the cross-border hotel investments due to their individual development and the shortage of hotel
transactions during the 12 months governments cooling interventions for rooms within walking distance from the Los
ending October 2014, followed domestic real estate and the easing of Angeles Convention Center.
government regulations regarding overseas
by North American and Middle investments.
Over the prior 12 months, Asian
23 organizations invested approximately
Eastern investors, and the flow of
Over the prior 12 months, China has been US$844 million in development sites in Los
money from Asia into the mature one of most active hotel buyers, investing Angeles, which is 198.2% greater than sites
markets of North America, Europe 27.4% of the total outbound capital from in Manhattan and 645.3% greater than sites
and Australia is anticipated to keep Asia, followed by Japan (21.6%), Singapore in San Francisco. One such company is a
rising. Currently, the top three (17.5%), Hong Kong (12.5%) and Malaysia Shanghai-based state-owned Global Fortune
25
(9.9%). Representing the largest increase 500 company, which began construction
global hotel markets for Asian
in investment dollars, Chinas cross-border on its more than US$1 billion hotel mixed-
investment are Manhattan, Hawaii hotel investment volume has increased from use development project in Downtown
and London, representing 48.5% of just US$107.4 million in 2011 to US$2.7 Los Angeles last summer and it acquired
total Asian hotel investment globally billion during the 12 months ending October
26
additional mixed-use development sites in
28
during the 12 months ending 2014. In 2014, Japans acquisition New York, Toronto and London last year.
24 activity was predominately related to a
October 2014. Japanese companys US$1.4 billion entity-
Additionally, in 2014, Australia was a target
market for overseas Asian buyers, with
level buyout of a luxury hotel portfolio, with
hotel transactions increasing 8.5% and
six properties located throughout Hawaii
27 development site transactions increasing
and San Francisco.
180.5% during the 12 months ending
29
October 2014, versus the year-ago period.
Prominent in North American By providing a value-add strategy for The same trend is making its way
lodging markets, third-party companies to leverage scale and rapidly throughout the world, but on a smaller
achieve growth initiatives, third-party scale. Europe and Latin America are
management companies provide management platforms have driven M&A estimated to be 5 to 10 years behind the
daily property and operational within the hospitality industry in recent US in terms of transaction activity in the
management services as well as years. Investment funds, foreign buyers sector but are, however, experiencing
year-round financial and accounting and existing management companies are all significant growth in the creation of third-
looking to capitalize on expected industry party management companies. In the Middle
support for hotel owners, while
growth and they are increasingly investing East and Asia, the presence of third-party
marketing the hotel brand through in these in-demand third-party management operators is limited and transaction activity
35
a franchise agreement. Improving companies. is minimal as investors favor the franchise
hotel fundamentals globally and Third-party management companies are
model, and manage properties themselves,
increased access to capital have while brands continue to develop and
far more mature in the US, a country that
become fully integrated into the market.
led investors to seek out this is a leader in the sectors M&A activity,
36
operational expertise to maximize which has surged in the past five years. For investors, acquiring proven management
Transactions in the US have included companies that can expand is attractive
investment on both newly acquired some of the countrys largest third-party because they can achieve relatively
and existing hotel assets. operators. As of year-end 2013 in the US, higher returns given the prevailing low
18 management companies each operated a cost of capital on a risk-return spectrum.
portfolio of 50 or more hotels, with the top Consolidation in the industry has become
15 each managing a portfolio in excess of an effective way to grow and diversify
37
8,000 rooms. portfolios by providing opportunities for
geographic expansion and to rapidly
38. Interstate Maintains Strong Growth Here and Abroad, Hotel Management,
www.hotelmanagement.net/operator-owner/interstate-maintains-strong-growth-here-and- 39. Hotel Management Companies and Equity Contributions: Benefits and Risks, HVS, August 2014.
abroad-29159, accessed 13 October 2014. 40. Third Party Management Continues Consolidation, Hotel Analyst, 30 July 2014.
Over the past several years, Historically, the European alternative such as smaller rooms, grab-and-go food
the millennial generation has lodging industry has largely catered to and beverage outlets, daily housekeeping
students and backpackers, offering no-frills to hotel rooms but not to hostel rooms,
increasingly impacted the lodging accommodations and communal spaces that free bicycles, free Wi-Fi and iPad usage
industry, calling into question provided cost savings and enhanced social and pay-as-you-go amenities such as air
products and offerings that have for atmospheres. As these new products and conditioning, towels, toiletries and high-
decades been industry mainstays. experiences began to evolve over the last quality in-room coffee machines.
several years, affordability and a focus on
Todays emerging traveler, These new products and concepts often
social experiences were maintained.
millennials and millennial-minded emphasize common areas, lounges and bars
Substantially aligned with the desires of as the focal point of the property and invite
travelers, is more cost-conscious
millennials and millennial-minded travelers, guests to spend more time congregating
and experience-focused than these low-cost, amenity-rich hostel, lifestyle in revenue-generating areas of the hotel,
ever before, whether traveling for budget hotel and hostel/hotel combination in turn maximizing revenue per occupied
business or leisure. To meet these concepts are now becoming viable in room (RevPOR) spent. Communal spaces
changing demand preferences, major US and Asian markets, such as New are often intended to be inviting to guests
York, Los Angeles, Miami, Singapore and by seamlessly blending with the lobby,
hoteliers are seeking innovative Tokyo, where traditional hotel rates are while their concepts and designs focus on
alternatives to traditional lodging prohibitively expensive, as well as markets attracting local demand.
products. Several of these products such as Detroit, New Orleans, Nashville
As the demand for experience-based
initially emerged in Europe and and Portland, where unique atmospheres,
lodging has increased, a specialized lodging
architecture and cultural elements draw
Asia, as highly fragmented markets, concept that has gained popularity over
greater demand. With a focus on limited
less stringent lodging standards service with added conveniences, these
the last several years in the US, Europe
and Asia is lifestyle membership clubs.
and cultural preferences fostered products are able to decrease costs by
More similar to a traditional day club than a
innovation in lodging concepts. removing unnecessary and high-cost
hotel, these concepts offer members-only
Now, in the US, these concepts are elements, such as large guestrooms with full
facilities, such as meeting and event spaces,
furniture sets, full-service restaurants, room
becoming increasingly attractive to service and daily housekeeping. It replaced
food and beverage outlets, nightclubs,
hoteliers and investors seeking to pools, and spas, and they include boutique
them with more practical alternatives,
hotel components that leverage the clubs
capitalize on this changing demand
base while increasing investment
returns.
The global lodging industry has The competitive environment for new hotel Across the globe, newly launched brands are
experienced strong growth over brands may be better than ever thanks to targeting market opportunities at different
technology integration within the industry, chain scales. In North America and Europe,
the past 12 months, laying the which has leveled the playing field. New most are seeking to capture travelers at the
groundwork for an emerging trend entrants now coexist with long-established middle to upper price tiers.
of launching new hotel brands global players in an online world of
You can see a similar trend toward the
worldwide. transparent pricing, social media marketing
middle price tier in the Middle East. Luxury
and digital reputations.
brands have traditionally dominated
Alongside this paradigm shift in technology, the hotel landscape in Dubai; however,
hoteliers are developing brands that as Dubais government has waived the
cater to a new set of demographic and municipality fee on each room night for
psychographic customer profiles. Millennial three- and four-star hotel developments,
travelers those born roughly between market participants have now been
1980 and 2000 and older affluent but incentivized to introduce brands within
young-minded travelers are the primary lower to middle price tiers and focus on
targets of todays brand developers. These developing lifestyle lodging offerings.
travelers seek experiential products and
Across Asia, development of new brands
brands that reflect their personal values.
has been most prominent in China, where
Accordingly, new brands from established or they have the opportunity to build long-term
newly formed companies are departing from brand equity in a market with little existing
the home away from home philosophy brand loyalty. New brand development is
of hospitality, favoring hotels that feature prominent across all price tiers but is slightly
smaller guestrooms emphasizing functional more concentrated in the upper level.
design, public spaces designed to stimulate
As more lodging products are launched
social interaction, amenities and offerings
in todays competitive global market,
that promote wholesome and healthy
new contenders must understand the
lifestyles, enhanced technology throughout
most important aspects for developing,
properties, the integration of local cultural
successfully launching and positioning
elements into the guest experience, and
affordable luxury design and service levels.
Improvement in the global second- Condominium hotels vary in structure and from new inventory under management
home and overall lodging markets, operation throughout the globe. While in and potentially earning a licensing fee on
most locations they physically resemble a the sale of the units. Unit owners often
particularly in gateway and primary condominium development, offering large purchased units assuming that values would
resort destinations, combined with units with kitchen facilities and little public continue to appreciate and that the income
an updated regulatory framework is space beyond a reception area, in other generated from their revenue split would
causing a resurgence of interest in locations the asset resembles a typical cover their costs of ownership.
transient lodging operation. This latter
condominium hotels. With the global economic decline, however,
model became popular during the last real
many condominium hotels, particularly
estate upcycle in the 2000s, particularly
those located in the US, have faced
in the US. In this model, the ownership
litigation, restructuring or bankruptcy,
structure is divided between a hotel lot
mostly due to issues surrounding control,
owner, who owns the buildings public
income allocation and securities issues. At
spaces and ancillary revenue-generating
the core of the complexity has been the
facilities, and individual unit owners, who,
applicability of securities laws to the offering
if participating in an available rental
of condominium hotel units.
program, share in the revenues and
expenses associated with the rental of their The US Securities and Exchange Commission
units as transient lodging accommodations. (SEC), in a 1973 release (SEC Release 33-
This kind of condominium hotel features the 5347) and in subsequent no-action letters,
public space, amenities and level of finishes has addressed the issue of when the sale
consistent with a hotel operated by the of condominium units constitutes the sale
affiliated brand. of a security. In brief, the SECs guidance
prohibits (a) the pooling of income, (b)
Regardless of the physical appearance or
emphasis of the investment aspects of the
operating structure, condominium hotels are
condominium and (c) restrictions on use
often considered attractive to developers,
of the condominium (such as a mandatory
lodging operators and unit owners alike.
rental program). This issue affected projects
In markets where traditional construction
targeting both US buyers, a major source
lending was limited, the presale of units had
of global investment in second-home real
allowed developers to obtain construction
estate, and international buyers, who,
financing, aligning themselves with a
familiar with the concept back home, faced
hotel operator to gain pricing premiums
additional complexity and risk.
on unit sales. Lodging operators benefited
In recent years, urban revitalization The expansion of major urban centers has One example of a submarket that has
and population growth in outlying resulted in higher market rents, limited benefited from expansion and urban renewal
development opportunities and more is Brooklyn, New York. In the early 2000s,
areas surrounding major cities have aggressive competition; this, in turn, has as real estate prices in Manhattan continued
created a wealth of opportunities created higher barriers to entry and lower to increase, investors and residents began
outside mature lodging markets. yields for investors. As a result, residents to seek out more affordable opportunities
These once untouched and and developers are being priced out of the in nearby Brooklyn. In 2004, to support and
urban cores and they have been forced to encourage the revitalization of Brooklyn,
undesirable submarkets across
look for more desirable opportunities in the local government rezoned several
the world are now attracting peripheral areas. Typical characteristics of neighborhoods and invested US$400
stakeholder attention, as evidenced these submarkets include easy accessibility million to promote retail, residential and
by the significant public and to the urban core, authentic food, beverage commercial development in the borough.
private investment taking place in and retail offerings, and lower levels of Brooklyn immediately experienced a
congestion. significant increase in development. Since
these areas. then, the number of apartment units
Lodging investors and brands have the
has tripled, the number of affordable
opportunity to pioneer a neighborhood
apartments has increased from zero to
by entering the market in the early stages 41
over 400 and downtown Brooklyn is
of development, introducing brands that
now the third-largest office district in New
complement the area and create social
York City, with 17.3 million square feet of
spaces that welcome both local residents 42
office space.
and visitors. Tourists are initially attracted
to these submarkets by the lower price of Since 2007, Brooklyns hotel inventory
lodgings. However, as these areas become has doubled, with new properties primarily
more established, the thriving food, art and consisting of midscale to upper-upscale
music scene often attracts visitors seeking a and independent properties. As of October
more authentic and unique experience. 2014, the Brooklyn pipeline has 27
projects totaling 2,378 rooms, representing
an 11.6% increase in rooms from the
prior year and proving that investor
45. Oakland Turning Into Hot Market for Business, Real Estate. ABC7 News San Francisco,
43. Brooklyn Lures Hotel Investors, Customers, as Alternative to Manhattan, Hotel Management , http://abc7news.com/archive/9116764, 26 May 2013.
www.hotelmanagement.net/investment/brooklyn-lures-hotel-investors-customers-as-alternative-to- 46. Visit Oakland 2014/15 Strategic Plan, VisitOakland.org, http://visitoakland.org/wp-content/
manhattan-29057, 2 October 2014. uploads/2014/02/VO14008_strategic-plan_web.pdf, accessed November 2014.
44. Project Gentrify in Oakland, SocialistWorker.org, http://socialistworker.org/2014/10/02/project- 47. Oakland primed to seize on demand for hotels, SFGATE, 4 September 2014.
gentrify-in-oakland, 2 October 2014. 48. Ibid.
New advances in technology Well begin with todays traveler. According According to a 2014 US survey by USamp
continue to alter the relationship to a 2013 global survey by TripAdvisor, and Smith Micro Software, more than 60%
87% of travelers use a smartphone and of travelers prefer to purchase and reserve
between hotels and guests. User- 44% use a tablet while traveling. As such, hotel guest services using mobile devices
friendly and powerful smartphones hotels are rethinking all aspects of the hotel rather than face-to-face with hotel staff.
53
and tablets are changing travelers experience, with a focus on accommodating As such, hotel companies are turning to
online preferences and habits, these devices in guestrooms, meeting products and applications that empower
50
spaces, lobbies and front desks. guests to browse inventory, book amenities,
redefining how they research, plan
complete reservations and purchase a
and book a trip. Empowered with For example, one international hotel brand
variety of services (such as room service)
has taken a more proactive approach by
more knowledge and social media, via mobile devices to drive engagement
partnering with a leading engineering
todays hotel guest is pushing hotels and technology university to redesign the
and increase revenue-generating
54
for improved products and services opportunities. Other mobile innovations
future hotel experience and find innovative
include mobile keys, check-in kiosks and
in their travel experience. From an ways of making public areas more exciting,
mobile-enabled property management
ownership standpoint, advances user-friendly and relevant to the technology
51 systems, allowing hotel employees to
needs of todays traveler. In Silicon Valley,
in data analytics are transforming one major brand recently launched a robot
interact more with guests.
the hospitality industry with the butler equipped with a tablet to facilitate Moreover, recent advances in wearable
potential to enhance a hotels interaction between guests and staff. For technology, such as smart watches and
financial performance and offer instance, a guest may call the front desk to glasses, are expected to revolutionize
request a forgotten toiletry; the hotel staff the way customers access the web and
detailed insight into customer
then inputs the guests room number into contribute personal content. For example,
preferences. As the use of mobile the robots tablet interface and places the hotel reviews that feature video instead of
devices, social media and advanced toiletry on the robot, which delivers the item just text will place even more emphasis on
52
analytics continues to proliferate, directly to the room. hotel reputation and performance.
and as online distribution
channels become more accessible,
technology has created new
opportunities for hotels to drive 50. Social Media, Smartphones & Tablets Now Essential Travel
operating efficiencies and engage Tools for U.S. Travelers, TripAdvisor, http://ir.tripadvisor.com/
releasedetail.cfm?releaseid=808058, accessed October 2014;
with guests, from booking to Mobile/Smartphones, European Travel Commission, http://
etc-digital.org/digital-trends/mobile-devices/mobile-smartphones/
49
checkout. regional-overview/north-america/, accessed October 2014. 53. Majority of Consumers Prefer to Purchase and Reserve Hotel
51. The Future Hotel Experience, MIT Mobile Experience Services Using Mobile Devices, Smith Micro, www.smithmicro.
Laboratory, http://mobile.mit.edu/projects/the-future-hotel- com/company/news-room/press-releases/2014/06/23/majority-
experience, accessed October 2014. of-consumers-prefer-to-purchase-and-reserve-hotel-services-using-
52. Starwood Introduces Robotic Butlers At Aloft Hotel In mobile-devices, accessed October 2014.
49. Conrad Hotels empowers travelers with end-to-end mobile Cupertino, TechCrunch, http://techcrunch.com/2014/08/13/ 54. 10 Hospitality Technology Trends You Need To Know About,
customer experience, Mobile Marketer, www.mobilemarketer.com/ starwood-introduces-robotic-butlers-at-aloft-hotel-in-palo-alto, Smart Brief, www2.smartbrief.com/hosted/ad2187/Hospitality_
cms/news/database-crm/18296.html, accessed October 2014. accessed August 2014. Trends_2013.pdf, accessed October 2014.
Over the last decade, tourism, Competitive destinations across the globe or department. Recently, however, a more
spurred by foreign direct have recognized the value in tourism and public-private trend has emerged yielding
developed new, or enhanced existing, more nimble organizations that use a
investment, has evolved into a destination management organizations business model similar to that of a private
key economic driver for many (DMOs) to include investment promotion business, which is producing the most
destinations, promoting income agencies (IPAs) or divisions. This is a effective results. The public-private
growth and job creation in local strategic shift that aims to drive local and structure has proven to add technical
foreign investment into the destination investment expertise, efficiencies and
economies. While global tourism has
to improve both the product offering and flexibility to dealmaking, while reducing
grown rapidly, there is tremendous visitor experience. The most effective IPAs political whims in the process. This structure
future potential: international act as an investment concierge entities also enhances their ability to attract and
tourist arrivals worldwide are that help foreign investors navigate local retain highly qualified real estate and
projected to increase about 70% rules and regulations, traverse bureaucracy, hospitality professionals with track records
access market data and research and assist in finance, development and acquisitions.
between 2013 and 2030, reaching with investment opportunity identification.
63 Effective DMOs often include leadership,
1.8 billion. Tourism currently Whether a hotel development, golf course
such as chief investment officers and
accounts for nearly 9.5% of the or tourism infrastructure, the IPA takes a
investment managers, both supported
worldwide GDP and is projected to multi-dimensional view on the best channels
by teams of analysts. By reducing
64 for increasing tourism matching the
increase to 10.3% by 2024. The uncertainty, and consequently spurring
most suitable investors with tourism
hospitality and tourism sectors investment and development, these
needs. For investors unfamiliar with
teams create the foundation for the rest
have emerged as key value drivers specific destinations, IPAs effectively
of the DMO to promote and market the
and differentiators in a competitive reduce due diligence costs, which broaden
destination. The investment division of the
economy, including in emerging the pool of potential investors, while
DMO, the IPA, in addition to identifying
creating a competitive and transparent
economies, where growth has investment process.
potential investment trends and tourism
shifted away from goods and investment opportunities, is responsible for
DMOs and IPAs are generally organized as developing and maintaining strong working
products toward services, with public entities, often as a division within the relationships with current and prospective
tourism and hospitality accounting tourism or economic development ministry capital partners. Additional responsibilities
for a significant portion.
The sharing economy has cast The rise of many of these businesses has while increasing overall confidence in the
consumers as service providers, been impressive, as some have reached experience. This enhanced trust in both
valuations on par with well-established, the product and brand enables a faster
enabling underutilized assets to 65
publicly traded companies. Not only are selection process for the customer. In
be operated for financial gain. their valuations making headlines, but their comparison, lodging platforms under the
The leading companies in this growth is as well. Uber, only in its sixth year sharing economy model typically provide
new sharing economy market of operation, already controls about 17% non-standardized products, which can vary
of the US$100 billion global taxi/limousine widely in physical attributes, quality and
have initially been focused on the 66
market. In a year, Airbnb, a company that level of service; this requires more initial
transportation sector, including enables people to rent out lodging, added research by the customer before making a
well-known ridesharing companies more listings to its existing inventory than buying decision.
Uber and Lyft, which connect the largest hotel companies introduced as
67 While the numerous types of accommodations
passengers with private drivers. new units combined over the same period.
in a sharing company can be an advantage
In addition, they have also made As shared economy concepts continue for travelers seeking a unique, less-
inroads into the hospitality space by, to grow their footprint in the hospitality traditional experience, attracting other
and leisure sector, both the traditional specific segments of the market can be a
for example, connecting travelers lodging industry and the new-age sharing challenge. For example, business travelers
with home or apartment owners economy companies can learn from one seek certainty, reliability and ease when
and matching part-time cooks with another. Some examples include segmenting making lodging decisions. Hotel companies,
adventurous eaters. customers, changing consumer preferences, on the other hand, have segmented their
creating customer loyalty and managing products based on different consumer
feedback, to name a few. preferences into various brands, each
associated with a differentiated product
Most established lodging brands are
type, design, price point and facility and
intentionally standardized, which, from
amenity package, enabling consumers to
a consumers perspective, helps set
make their lodging choices faster and with a
expectations for the product and services
greater degree of confidence.
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, accessed
7 November 2014.
As lodging players look to 2015, During 2015, significant cross-border and updating applicable tax laws to remain
certain tax issues must be carefully capital flows will continue to draw focus competitive in the global marketplace,
from a tax standpoint. The deployment of tax advisors must continually review the
evaluated as an integral part of capital by sovereign wealth funds and other investment structures being utilized, as
a companys overall investment global institutional investors will require structures that may have been optimal in
strategy. This year, several key careful consideration of tax regimes and the recent past may no longer be the most
tax considerations, including the withholding requirements in traditional tax-efficient structure.
markets, as well as emerging ones. As new
continued growth and sophistication The strategic use of REIT structures to
markets gain momentum, with new alliances
of cross-border hospitality hold lodging assets across the globe will
and joint ventures formed, tax advisors can
continue to gain investor attention in 2015.
investments, the acceleration of no longer focus on one tax regime when
As observed over the past year, the wave of
the use of Opco/Propco structures structuring hospitality investments and
countries adopting REIT structures keeps
and spin-offs, escalating tax operations.
growing, with more than 30 countries
enforcement initiatives and an Instead, advisors must carefully consider having now enacted some version of REIT-
increasing number of indirect taxes, the tax consequences of where the capital like structures. Global REITs will gain even
originates, where the investment vehicle is more traction, fueling cross-border capital
will remain top of mind for industry located and where the capital is deployed. flows, whether through publicly held REITs
participants looking to invest in the Given the heightened tax scrutiny that traded on exchanges or through private
hospitality sector globally. investor groups are now subject to, they REITs, sometimes referred to as baby REITs,
must also properly manage cross-border which may own only a single property.
tax implications that could adversely affect
Another prominent trend that will remain
profitability. In response, tax advisors are
important in the lodging sector in 2015 is
now called on to develop robust tax models
the separation of operations and property
that project capital flows and the related
ownership, commonly known as Opco/
tax consequences throughout the life of the
Propco structures. Opco/Propco structures
investment.
involve the separation of the real estate
These models, which incorporate multi- into one company and operating assets
jurisdictional tax analysis, are ongoing into another company. The structure
management tools that allow what if allows for organizations to identify and
scenarios at any point in the investment focus on one core business, whether it be
cycle. As countries are regularly revising owning lodging facilities, operating them or
maximizing the values of brands and other
The way that hospitality companies The standard uses a five-step model to obligations. Specific contractual obligations
recognize revenue will soon change outline the principles an entity must apply to may include arranging services for hotel
measure and recognize revenue and related guests, employing hotel personnel,
after the long-awaited revenue cash flows from contracts with customers. providing revenue management and
recognition standard is issued by The models core principle is that an entity accounting services, granting the right to
the Financial Accounting Standards will recognize revenue at an amount that use intellectual property and trademarks
Board (FASB) and the International reflects the consideration to which it expects and performing marketing activities.
to be entitled in exchange for transferring Substantial judgment will be necessary
Accounting Standards Board (IASB)
69 goods or services to a customer. to determine which of these stipulations
(collectively, the Boards). The individually, or when bundled with other
When applying this model, hospitality
standard will supersede nearly all promises in the arrangement, represent
companies must use greater judgment and
revenue recognition guidance in make more estimates than they currently
performance obligations.
US generally accepted accounting do under todays guidance. Areas needing After performance obligations are identified
principles (GAAP) and IFRS; as increased judgment may include identifying in an arrangement, the transaction price
a result, hospitality companies the performance obligations (i.e., promises is determined. The transaction price
to transfer distinct goods or services to a includes an entitys estimates of variable
around the globe will need to customer) in the contract, making estimates consideration that it may be entitled to
re-evaluate their policies and of the amount of variable consideration from the arrangement when it is probable
70
practices for recognizing revenue to include in the transaction price and that a significant reversal of revenue will
for arrangements associated with determining how the transaction price not occur in a future period. The standard
should be allocated to each performance refers to this threshold as a constraint.
owned, managed and franchised
obligation. This differs from current guidance, which
properties. allows for revenue recognition only when
For example, a hotel management
amounts are fixed and determinable.
company offers services to hoteliers
Variable consideration may include amounts
governed by the stipulations of a hotel
that are earned based on the underlying
management contract. Under the new
performance of the property (e.g., a
revenue recognition rule, the management
percentage of hotel revenues) or incentives
agreement must be analyzed to determine
that are earned when certain performance
if the stipulations represent performance
thresholds are met.
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michael.fishbin@ey.com Troy Jones
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