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Analysis

#GLF18 | Investment / Renovation: Who invests, who pays?

Analysis and perspectives by Fabrice Collet, CEO, B&B Hôtels - Dominique Ozanne, COO Hotels & Hospitality Management, Foncière des Régions - Jean-Luc Guermonprez, Deputy executive Hotel division, Vinci Immobilier

 

  • Sharing a renovation case with Fabrice Collet and Dominique Ozanne

 

Fabrice Collet, B&B Hôtels: "Dominique and I wanted to discuss investment and renovation in hotels because I think this is one of the two major projects in our business. The first is growth; we are all addicted to growth: what is the classification, how many rooms, who is growing, etc. It is essential, and it is, of course, very demanding in terms of investment and very expensive. The second is to answer these questions: how do our hotels age? How can we prevent them from getting older? How do we keep them up to date? How do we meet our customers' needs?

At B&B Hotels, this subject concerns us a great deal. Our fleet is constantly growing, but since it started in 1990, a certain number of hotels are over 10 years old. This subject is very much shared with Foncière des Murs since of our 440 hotels today, approximately half of them are owned by Foncière des Murs, which purchased 160 of them in 2012. These hotels were opened between 1990 and 2006-2007.

We asked ourselves how we should sustain this portfolio, then turned to our partners and decided two years ago to launch a massive investment program. We invested 100 million euros in 160 hotels. Costs were distributed in a balanced manner as follows: 80 hotels to renovate in 2017, 40 in 2018, 40 in 2019. Since the returns were encouraging we did a little more than 80 in 2017, and this year we will do a little more than 50 and the remainder will be completed in 2019.

We knew that for this project we had shared profits and interests: Dominique Ozanne (Foncière des Murs) owns the walls and we own the business; in the end it's the same goal, the same customers who will sleep there and if these customers are satisfied, then our two assets will be valorized.

The return on investment is very clear, we see occupancy rates rising, the RevPAR progressing, we also see the gains in market share so for us, hotel operators, so it is an obvious and direct return."

 

Dominique Ozanne, Foncière des Murs: "In 2011 we had no B&B Hotels, today we have 240. When we buy hotels we renovate them completely, so when B&B Hotels came to us saying that such and such hotels needed to be renovated, we immediately felt it important to accompany them in this process. We therefore agreed on a work program where everything that was heavy work was the responsibility of the lessor and everything that was lighter work was the responsibility of B&B Hotels. Of course, we negotiated compensation, such as lease extensions, and agreed to finance this work. We are very proud of that today.

The partnership with B&B Hotels is very fruitful because we were, I think, the first to accompany them in financing new projects, in their German development and now in their Spanish expansion."

 

  • How do we introduce this digital disruption?

Jean-Luc Guermonprez, Vinci Immobilier: "We are real estate developers, so our vocation is to develop, design, build and deliver turnkey hotels that will constitute 80% of our portfolio that is currently being built through new hotels and also restructuring. Some are with Foncière des Murs and B&B Hotels, which are recurring clients and partners, as in the dozen or so operations in progress this year, we have two B&B Hotels and a Motel One which will be purchased by Foncière des Murs.

Smart-building is something we approach very upstream of our operations, sometimes too upstream since it can be 3 or 4 years before delivery. The smart-building property is notably Ready 2 Service: being able to operate a certain number of silos, infrastructure elements (centralized technical management, SSI...) between them."

 

  • How are the roles divided between investors, promoters, operators? How do we bring about this digital transformation?

F. Collet : "In my opinion, it is limited between hard and soft. It is up to the builder, the owner to think about how to bring WiFi and bandwidth into the rooms. On our side, we must make sure that the software (intangible services that we bring to customers) is efficient. I have the feeling that this is increasingly a "soft" subject rather than a "hard" one. It's up to us to make it evolve, to make it live."

 

  • What about domotics?

F. Collet: "Grey area"

J-L. Guermonprez: "It is also our responsibility to clarify the grey areas and to know who pays for what, and a certain number of reports by experts enable us to do so. To summarize, our responsibility is to provide the biggest pipelines possible since the demand for WiFi bandwidth has grown exponentially in recent years. What we design and sell today is one WiFi terminal per room. We don’t know what we will need to conceive of in 3-4 years yet."

D. Ozanne: "I am struck by the growing demand for services and this is obviously true in the hotel business. This hotel culture spreads to all real estate products."

  • What new elements, services of tomorrow need to be brought to the customer?

J-L. Guermonprez: "RJ45s are standard equipment at a number of major international chains that ask us for 4 or 5 per room. We put USB ports everywhere."

 

  • When should innovation be triggered?

D. Ozanne: "We usually renovate assets we have just purchased. When we see a margin that behaves badly in the hotel, in general it is related to its obsolescence, that is one trigger. The second can be the operator changing strategy."

F. Collet: "Investment  decisions are often motivated by key events related to the portfolio's activity (asset disposal project, acquisition...). The basic criterion should always remain our customer, he is the one who tells us about his satisfaction. We cannot ignore what our customers think of our products. It must even be done before RevPAR reacts, as soon as dissatisfaction begins to appear."

 

  • What are the indicateurs?

F. Collet: "These are our staff on the ground. The frequency of investments is not necessarily fixed, it depends on the hotels. Logically, if operators do their job, talk to customers, then the information gets back to us quickly."

J-L. Guermonprez: "The trigger for these new operations must be provoked. As far as renovation operations are concerned, it is a bit different, you have to know with the help of a business case, which is the best solution to create value."

 

  • Is the convergence of various products (offices, hotels, etc.) a lever of value?

D. Ozanne: "First of all, before that, the operator has to set up long-term partnerships with investors. The return on investment is happens over a long period. What is important is to be free enough in the choice of transformation of a hotel (example: new concepts)".

 

  • Does the golden rule mean the one who has the gold who sets the rule?

D. Ozanne: "This is not a taboo subject. When you are in the centre of large European metropolises, on well-located premium assets, all discussions are possible with the operators, from taking charge of the works, structural works to key money, it depends on the strategic aspect of the asset. Obviously, if you are in a secondary zone, on an asset that has always had difficulties being profitable, you will certainly not get any key money but there is no difficulty discussing this subject today."

 

  • When you are an operator faced with competitors, what elements will make the difference to an investor?

F. Collet: "I think we are faced with people who are certainly interested in key money, the immediate price, etc., but when you are the owner you have a vision of the project’s solidity, the signature, the durability."

 

  • Are there any changes in the sharing of Opex-Capex ?

J-L. Guermonprez: "We see a very strong change in our customers' structure. Five years ago, we asked the operators for hotels; today they no longer exist. 2-3 years ago, we sold our hotels to property companies. This year, we are selling more and more of our hotels to family offices, franchisees (both investors and operators) who, to maximize value creation, want leverage from real estate investment and the operator."

D. Ozanne: "We no longer consider ourselves to be a real estate company, today we have assets under management contracts and there are assets that we operate under franchise contracts with our own teams. We consider ourselves more as a global integrated operator in the hotel sector. For Opex-Capex sharing, it is not at all the same answer depending on whether you lease or own walls and land. In leases, the major Capex that are the owner’s responsibility, with compensating extensions of leases, over-rents or additional rents. In premises and business assets, the owner assumes all the charges."

 

  • What good practice allowed you to get the most out of an investment project?

J-L. Guermonprez: “One precise example: an operation we sold last year in Paris at Porte d’Italie to build an Ibis Budget with 185 rooms to a big franchisee of the Accor group. The key to the operation in real estate is location, and in this case the right product in the right location.” 

F. Collet: “To me good practice is remembering that the owner and the operator have the same interest at stake and that is to grow the value of an asset. When you keep that in mind, you have the key to solutions that are productive and profitable.”

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