An introduction to HIRE by Vanguélis Panayotis, CEO of MKG Consulting. How and why generate more value for an asset? Is mixed-use the answer?
An overview of the European market
In Europe, there is a little slow-down in RevPAR performance in 2018. It was stronger in 2017. This slow-down is particularly strong in Spain which had experienced a strong “remontada” since 2014.
Italy is behind its European competitors. The impact of terrorist attacks in France is clearly visible, as it is in Brussels for Belgium.
If you look at the key markets, key European economic gateways in Europe, sampling a long cycle from 2007 to 2018, comparing the average annual growth in the RevPAR, the evolution is between -3.3% for Rome and -1.1% for Madrid while it reaches +3.5% for Nice and Cannes. So, did Europe outperform inflation? Not really.
Looking at a short term period of analysis – 2012 to 2018 – the situation is much more interesting and stronger. There is a difference between the segments, but very strong growth in the RevPAR is evident at all the key European destinations.
Project costs are increasing
Construction costs in 2018 in France, are higher than average cost observed since 1986. Real estate prices in urban areas and construction costs are inflating. For instance, for The Ritz, the cost per room is 1.6M€, for the Cheval Blanc project in the La Samaritaine building it is 1.8M€ per room.
In order to stand out in this very competitive environment, to create value, to guarantee the value creation of the asset you own in the next, 10, 15 or 20 years is strong, differentiation is very important, as is knowing how to achieve it and how to secure cash flow to drive yield. This is resulting in the birth of many “lifestyle” projects.
Return on investment
Investors are looking for EBITDA per square meter and Return On Equity because project costs are increasing. Should we have a unique destination in a building, or shall we create mixed use to generate more cash-flow and secure a higher return on investment?
In key urban cities, it makes sense, for a program with retail, social housing, offices, art gallery, a hotel. Revenues will then be generated through many services plus the hotel rooms. The approach of having operators specialized in managing real estate to maximize the yield of the asset is going to be a strong trend.
Coworking, co-living …..
This new trend makes it possible to mutualize resources, generate more revenue and reduce costs. For instance, Bouygues Immobilier and Accor have made a joint venture to create the coworking brand Wojo, so did Covivio with Wellio, and Mama Shelter with Mama Works …
There is clearly a strong development in this new way of operating square meters for asset owners and investors.
Wework, now WeCompany, is among the leaders of “co” worldwide. It is the largest owner of private offices in Manhattan, Washington D.C. & London. Members of Wework locations grew from 80,000 in 2017 to 400,000 in 2019.
Development is very strong and is expected to grow from 522,600 coworking space members to 5,100,000 by 2025, representing a 38.5% increase in just a few years. When we look at the trends, it becomes clear how important it is to understand how we need to combine revenue generation within one asset.
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