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Hospitality Investment Real Estate "Certainly prices are rising, but the truth is they are market prices"

Product mix, accelerated fluidity between business and leisure functions, hybrid and multi-use concepts, space optimization, privileged connection with external customers, increased domotization: new concepts redefine the hotel's role in the destination and the benefits of real estate assets. One Covivio investor, two operators - Akena Hotels and B&B Hotels - and a Vinci Immobilier developer discussed the adaptations and changes that are underway to adapt to these new trends.

Laurent Bonnefous works in development at B&B Hotels, an colony hotel brand present in 12 countries and three more in a few months. We are approaching 500 hotels and have a strong growth rate of 55 to 60 hotels a year primarily in Europe. We do not offer dining or MICE events. Our properties have 80 to 400 rooms.

Régis Chapron for Covivio Hôtels. The Covivio group specializes in three types assets, primarily office spaces in France and Italy, residential in Germany and the hotel industry on a European scale. Covivio hotels represents €6 billion in assets with around 400 hotels homogeneously distributed among the United Kingdom, Germany, Spain and France. We work with thirty or so brands. We are primarily owners of walls but also business capital which allows us to look for value that is sometimes crystallized in the framework of contractual relations between lessee and lessor.

Jean-Luc Germonprez, Vinci Immobilier. Contractor, accompanist. He is responsible for the hotel pole of the Vinci Immobilier group, which develop, realize, build deliver, operational hotels across all ranges: economy, midscale, full service. The hospitality division realized a dozen hotels per year or around 2,000 rooms.

Marc Plisson, Akena Hotels. We have 35 hotels in operation. I took over the chain four years ago and our goal is to develop 10 new-build hotels yearly. This is what we will do in 2019. We have repositioned the brand that lacked an identity when I took over in 2015. We benefited from the crisis that had a major impact on France’s hotel industry to reposition it in the 3- and 4-star segment. Very soon we will announce our first 4-star hotel. One year ago we entered into relations with Fasthôtel which manages 80 properties. They operate the economy and midscale segment, Akena brings its expertise regarding construction, which was absent at Fasthôtel, and will now concentrate on 3- and 4-star hotels by developing services.

Laurent Bonnefous, sometimes there is a “one-size fits all” stereotype for standardized hotels and particularly for a group that has only one brand. Is this a myth or reality?

LB: In terms of product, B&B has the particularity of having a simple structure: a room with breakfast, which may be paired with a conference room. We do not do F&B. However, the B&B products are different from one country to the next. If you go to Germany, the product will be slightly different in terms of size, colors… in Spain our product is more of a boutique hotel. Most of our clientele are proportionately local; in Switzerland, for example, 54% of our clientele are Swiss. This particularity means that we must have a product that corresponds to expectations of local clientele.
As far as development and our ability to do something more than a hotel, a long time ago – 13 years ago, when I arrived – we began to combine different products, different hotels, offices, etc… I believe I think it is the right way to get what we want, meaning a great variety of hotels, to be able to be present in city centers and outside. It is highly possible that in the future we will see 10,000m² spaces where there will be hotels, co-working, and probably co-living, which will allow each to live their different experiences at different times. This will make it possible to host the same client at different times along with elements that mix together naturally.

When an investor comes to see B&B, does he absolutely have to fit into a mould or can he imagine more mixed products?

We marry very well with other operators in the same operation. We have set up projects with Marriott, Radisson and other brands without any problems. We consider that the segmentation is powerful enough that there are very few friction zones. If we were to bring the ranges of offers closer together, it would of course be much more complicated.
There is nothing to stop B&B from making 18m² rooms in Spain, Germany or France. However, what would be a problem for me would be that I would be asked to do 3 restaurants. I would not be able to do it and we would not be able to operate it.

Jean-Luc Germonprez, how do you explain that prices are increasing? Construction costs increase how is it valued in the projects?

Of course prices are rising, but the truth is market prices. We manage to find a balance on the market by selling a Novotel or an ibis in Saint-Etienne, which was not the case until a few years ago. In our business, we don't just sell construction costs, we sell a ready-to-use project. It is a land, a location, construction costs, fees (architect, decorator etc...) as well as the entire FF&E part. Our price is more driven by demand than by our cost price. When you draw up an operating budget, you know the market, you know the expectations of both investors and operators. Our job is to organize this three stakeholders partnership. We ensure that the value creation we achieve in the short term enables the investor and operator to create value in the long term. If we do not succeed in providing this added value, we have no reason to exist. We bring this added value by developing, finding locations, providing hotel project opportunities on mixed operations.
Mixed projects with several hotel ranges, from the hotel residence office as we recently realized in Bordeaux near St Jean station with the opening of a B&B is what we are developing most currently. It also meets the demand of local authorities who want more and more diversity in new programmes, which corresponds to a new vision of urban planning. I would like to remind you that bringing a hotel into a mixed operation is bringing a living space that is open 24 hours a day and is one of the few products of this type.
It also allows the real estate developer to make an equalization between offices, housing, social housing, coworking, co-living and hotels. This makes it possible to offer hotel investors products that can be below cost price while earning our living on the whole operation.

In the end, the one who pays is the investor, how does he ensure that all interests are well aligned and that everything is going well?

Régis Chapron for Covivio Hotels: we will focus on the ability of each square meter to generate cash flow. Mixing makes a lot of sense because it makes it possible to provide a service offer. Having different users coming at different times will allow you to better amortize the services you will offer for different customers who come for the same service even if they come at different times. The next step would be to see how the spaces can be modularized according to the volume of requests.

Marc Plisson, how is the support going? Your specialty is to support people who do not have a strong expertise in the hotel sector but who have a strong appetite for hotel assets.

Our particularity is to tell our customers, at Akena, we take care of you from A to Z. This can range from the search for land to the opening of the hotel. There is now a question that arises as a result of the increase in costs and the increase in comfort requested by customers. This forces us to review our profession. The hotel is a 24-hour destination tool, so how do you manage to make 24-hour income where you used to make income from 4:00 PM to 9:30 the next morning? At Akena, with our resources, we are thinking about how to bring back service and turnover. This can result in coworking areas, the transformation of rooms between weekdays and weekends, we are working more and more on the modularity of spaces to provide our customers with more services. The coworking part is already in place.
We are currently testing co-living on a hotel in Bordeaux with a reception and a common restaurant room and we are testing the mix between hotel and residence. The costs per room between my arrival in 2015 and now have increased by about 15%. It is a question of finding ways to allow the hotelier to maintain his profitability over 15 years while ensuring that the hotel is renovated every 7 years.

Laurent Bonnefous, what has fundamentally changed in the development of hotel projects today?

In the 70s and 80s, when budget hotels were launched, the objective was simple: to make basic needs accessible that were not met by the hotels of the time. The budget hotel industry has been able to meet these needs for about twenty years. Since 2010, we have noticed the emergence of other needs called lifestyle, we take care of the customer experience. This results in a refocusing of needs towards urban areas. This can be seen in all sectors, certainly in the hotel business, but also in supermarkets, car sales, etc. In the hotel business, this means that customers want to avoid causing too much trouble during their stay. So we're seeking to see other people, we want to have a drink, eat, chat, be able to open our computers... All these things have changed the way hotels are run. Until recently, making 80 rooms at the exits of cities was common everywhere and all over the world. What has changed is the desire of customers to be able to access the heart of the city in order to live an experience that was previously only provided by luxury hotels. This need to find occupations makes things more complicated because the price of land is higher and, being in an urban area, creates difficulties in assembling the product.
In the end, projects to become more urban, will have to be mixed because we will enter an urban environment, we will invent a new story, we will pay a higher price. The customer is willing to pay 10/15€ more to meet the same basic need but with the possibility of going for a beer.

Inflation in costs, inflation in services... will the real estate development business be the same tomorrow as it has been until now? You have been able to innovate by offering dedicated hotel support at Vinci and now?

Jean-Luc Germonprez: I am quite optimistic, we are in a very healthy sector of activity and which, despite economic accidents, continues to ensure growth, people are travelling more and more, our investor and hotel partners are all posting good results. I am therefore quite optimistic that we will have to continue to build hotels, renovate the park, there will be new products, so we will have to continue our role as BtoBtoC and to serve our partners.
However, we will do our job in a totally different way, I am convinced that we will work more and more on mutability, on the renovation of existing buildings. We are coming at a time when in many cities there are increasingly obsolete buildings with all kinds of uses that are changing very quickly and usage habits that are changing even more rapidly. I think the cities will stop expanding but will change. For example, we will transform a building built in 1992 that was a tax centre in Paris into a Novotel on behalf of a Spanish fund.

The professions are changing, walls, walls and funds, management contracts, franchising, direct operations... What is this mutation that is taking place at Covivio?

Régis Chapron: there is necessarily a search for yield because we realize that by owning walls and land we increase our yield. This gives us many more possibilities to find the right project for example on a renovation project, extension project etc....

Marc Plisson what attracts investors who do not know the hotel business?

Today it is very clearly the yield, it is one of the best asset classes on the market on this aspect. For some investors, there is also the notion of a tax niche. The hotel business also makes it possible to bring value through the business and the walls when you have a prime location. Today, the investor's view is very clearly what return for an investment in a hotel product? By putting €1 million or €1.5 million on the table, what yield can we expect? This covers 30% of equity capital for ultimately, excluding land to have a property with 60/70 rooms. In our portfolio, we have the Reims hotel, which offers 70 rooms and cost around 3 million euros in 2012, today the hotel is totally profitable and we are making a second investment with this investor. It remains a relatively simple investment, because our business remains simple, it is service.

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