Interview with Vanguelis Panayotis, Chief Developping Officer MKG Group

4 min reading time

Published on 18/07/13 - Updated on 02/01/23

Vanguélis Panayotis

Graduate from the Glion Institute of Higher Education Vanguelis Panayotis was trained in several hotel companies in France and abroad before joining the MKG Group. Head of the group’s international development for several years now, he closely follows the development of the department’s hotels portfolios valuations He looks at changes in doctrine in this sensitive area.

Has the financial crisis of 2009 had a beneficial or destructive effect on a so-called speculative hotel transaction market?

We must quickly make a correction on the appreciation that we may have for market transactions on hotel properties, notably when it was particularly active before the fall of Lehman Brothers. The implementation of asset light strategies by major hotel groups created additional opportunities for real estate and attracted new interest from real estate investors on relatively undervalued asset classes. There was no speculative surge on hotel assets but rather a catching up that may have seemed quick. It was largely justified by the quality of these assets. This should not be confused with the "overfunding" of certain transactions made possible largely by debt provision allocated by banks. The financial crisis has strangled the buyers who relied too much on debt and who have not been able to meet their deadlines. Ultimately, there are few cases of overvalued "distressed assets" transactions and for which the price would have collapsed. Some notable exceptions do not make a trend. Prices are generally maintained and funds specially established to acquire distressed assets have struggled to spend their money. It is safe to say that the financial crisis has led to more caution and professionalism of the valuation methods which have been mastered by quite a few industry experts.
 
Is the attraction for hotel class assets persisting with investors?

Investors who make the comparison to office buildings have quite quickly realized that the «quality» of the operator made a significant difference in favor of the hotel industry. In the case of a lease, contracts run over long periods, renewable and signed with enterprises which pose little risk of default. These are strong partners who guarantee profitability over the long term. Definitively, institutional investors, such as real estate investment trusts, are less attracted by the prestige of the hotel property but rather by the guarantee of performance. This is the type of relationship that allowed hotel groups to outsource their walls with relative ease.
Despite the crisis, the asset light policy led by the majority of groups is still met by positive response on the part of real estate investors.
 
What changed in the understanding of this valorization?

By «historic tradition», the basis of the valorization was quite widely in property or calculated on rental income which gave importance to the value of the walls. In a hotel asset, one must take into account the goodwill that generates revenue and therefore profitability of an investment. This part of the valuation was certainly not sufficiently integrated or at least the right balance between goodwill and the physical property was not found. This becomes a necessity with the - increasingly strong – emergence of a market for hotel goodwills, separated from the walls. There is a true reflection to drive on the subject because real estate cycles and hotel business cycles are different. One is more speculative and the other is just trying to be less volatile.

Are the necessary considerations to appreciate the value very different?

The assessment is more complex, but also more systematic in the case of goodwill. It uses the concepts of performance, measurable by competitive sets; it refers to the notions of quality of service and reputation, also measured by high precision tools, and also takes in consideration customer research and its evolution. The value of goodwill reflects the success of operations and minimizes the impact of speculative bubbles, even if they persist in markets where there is a shortage of assets.
 
Are there universal methods in this area?

Each continent, each country even, has developed its own religion. It is the result of current practices and special market conditions, and accounting standards as well. However, the generalization of the discounted cash flow method provides the ability to speak an equivalent language, whatever considered.
 
Is the value of an asset imposed more naturally to the buyer or seller?

One should not overlook the negotiation exercise which is natural in a sale. The seller will tend to value past performance that has formed the history of the business, while the buyer is planning more in the future that will generates income to recoup his investment. Valuations methods provide a basis for the negotiations where the human dimension, motivation, and timing bring another light. The nature of financing the deal is not trivial either, and bankers are particularly attentive to the future cash flows that will be used to repay the loans. They may be more "generous" if the prospects are good.
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