Marina Franolic, Managing Director at The Bench, opened the first episode of the IDEEA Podcast with a 25-million-euro question to Marc Finney, Head of International Hotels & Resorts at Colliers.

Listen as Marc shares his insights on which markets in Southeast Europe (SEE) region are the no-brainer opportunities for hospitality investment and those that have the potential to be substantial investment opportunities.

The conversation also touched on the growing interest in leisure products such as resorts, niche products such as pod or capsule hotels and the ever-increasing importance of ESG for hotel owners and consumers.

Listen to the full episode on the go or watch the complete conversation on video below.

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TRANSCRIPT

Intro 00:00

Welcome to the IDEEA Podcast, a channel for the IDEEA Hospitality Investment Forum, which is an annual gathering for the Hospitality Investment Community in Eastern Europe. Tune in to insightful conversations between the IDEEA team and hospitality investment leaders and innovators across Europe. And now let's dive right into today's episode.

Marina Franolic 00:23

Today with me, I have a great guest. He's Marc Finney, he's head of hotels and resort consulting [unintelligible 00:31] in London. And I have to say, It's really amazing to talk about having IDEEA in Greece, and having a real in person event once again. So I haven't seen Marc for quite a number of years now, because of the COVID. And Mark, I have to say, it's really great to see you not as much as in person, and I'm looking forward to seeing you in Greece. But tell me how are you?

Marc Finney 01:03

Very good. Thank you. And thank you for the introduction. And yes, very much enjoying being back in circulation and getting out and about and visiting and meeting people again. So it's a real pleasure to be here today. So thank you for organizing this.

Marina Franolic 01:19

Marc, thank you so much for joining us. I want to start with a really hard question. We know times are challenging, we just passed COVID. We have war in Ukraine, in Europe and it seems inflation and recession are really knocking on the door. So if you would have a client coming to you saying he or she wants to invest 25 million euros, what would be your recommendation?

Marc Finney 01:47

Well, I'd say first of all, thank you very much for letting me spend your money for you. So I think it's always a pleasure to have somebody else's money to spend. But I think what I'd been wanting to do is sit and think very carefully about the different range of opportunities that the region that we're talking about offers. And it is a big region with a lot of varying opportunities, both in terms of the development levels of the individual countries that make up the region, but also in terms of the range of types of products that one might look at. So for example, you've got city center hotels, you've got resort areas, by the coast and inland as well. So there's a lot of different opportunities.

I'd like to sort of look at those individually, and maybe assess those carefully before I committed to it. But certainly, you know, if I was looking at city centers, you know, countries like-- Maybe some of the slightly bigger countries like Poland and Romania would be obvious targets. And when I track the data, of how hotels are doing across Europe, markets, like Warsaw and Bucharest seem to be recovering slightly quicker than some of the others. But I wouldn't also rule out opportunities in the resort sector, there's quite a lot of money out there, looking at resorts at the moment, which didn't use to ever really consider resorts.

So, if I turned my mind back 5 years, resorts was something very difficult to get people to be interested in. But now they are. And now they are understanding that people do spend a lot of their time at leisure, and people spend good money on their holidays. And so there is opportunities in the leisure sector. And you know, I would certainly imagine countries like Greece and Croatia and Montenegro are these countries with good strong coastlines and good accessibility would certainly be areas that we'd be looking at, as well.

The other thing that I would want to look at with this funding is whether a direct investment into the real estate is the right thing, or whether I might be looking at some operating companies that have got a foothold in the industry in that area, you know, maybe a small up and coming management company that has got a number of contracts, and is looking to expand. I think that might also be an interesting place. So I'm probably not giving you a completely clear answer. But what I would say is there's a lot of opportunities to consider before we dive into any individual investment.

If you think about the hotel sector, it's always two businesses. So I always tell people, when you go into the hotel business, you're in two businesses, you're in a real estate business and you're in an operating business. And if you buy a great property, but you run it badly, it will still not make money. And similarly, if you buy a terrible property, but you run it really well, you might be able to make some money. So it's important to have a good interrelation between the operators and the real estate. And certainly I see some great opportunities with young up and coming operating companies that maybe are getting a foothold in the region, and you can get a bigger footprint more quickly through a management company that you could if you have to own every brick that you operate from.

Marina Franolic 05:06

Do you think those companies will be disruptors in the future?

Marc Finney 05:10

Yes, I do think they can. And if we cast our mind back some years ago, a lot of people would make bookings directly with a hotel or through one of the brand websites. Nowadays, there are a lot of-- Anybody who has a phone or access to a computer or any other kind of device can book any hotel anywhere in the world. So it's started to occur that the brands who used to own the customers, no longer own the customers and who owns the customers now or more the very large OTAs, like booking.com, Last Minute, Expedia, all of these various companies. And so what's happening now is that people will be able to book directly, and maybe if they're going to a particular location, they will see all of the hotels available, rather than having to go to 10 different websites of individual brands in order to find the hotel that they eventually want to stay in.

Marina Franolic 06:08

Mark, it seems that investors perspective has changed from pre-COVID times-- Pre-COVID, when I would talk to investors 95% of global ones would look to invest in city hotels, prime location, prime market, 120 plus rooms. And a couple of months after COVID started, for the first time, I actually have heard different interests from the investment side, some were looking at leisure hotels, some were looking at the city hotels and still thought that those debt market will come back first. It turned out that investments in leisure assets have incrementally increased. Do you think this appetite will remain even post-COVID?

Marc Finney 06:59

Yeah, very much. So. And I think what we've seen is the strength of the leisure market in all countries. So people who are spending their own money are starting to travel again. And probably they've come back more quickly than business travelers and group and event travelers. So it's become a very important market. And I think also, what we've seen, certainly in most of the markets in which we've studied, is that those individual customers are prepared to pay good rates, that as long as the product is right, they're happy to pay higher prices, maybe even in the business sector. So I think the leisure sector is here to stay definitely.

Marina Franolic 07:44

Oh, there's also one very interesting aspect I would like to discuss with you. So investors are now looking very much to invest in luxury hotels. And it makes sense because people have saved money during COVID. And now they want to spend it and they want to treat themselves. Yet at the same time, we keep talking about inflation striking us and recession coming. And quite tough end of this year, do you think the luxury market will survive and that there's enough demand for such [unintelligible]

Marc Finney 08:19

I think you're absolutely right, and you hit the nail right on the head there when you say a lot of people were treating themselves, you know, we've had 2 years of being miserable, let's go do something really good, you know, rather than just a normal thing. So definitely there was an element of that. Having said that, I think there's a lot of evidence and also shows that people who've had that experience, are now saying, Oh, well, actually, that was quite nice. So I'm good to do that again. And maybe instead of going away 4 or 5 times a year, they might go away once or twice, but really, somewhere nice. So I think once you've had that experience, and you've enjoyed it, it's difficult to go back to a budget hotel, by the side of a motorway again.

Marina Franolic 09:03

Okay, and what about supply and demand? Again, when COVID started, everyone was saying there will be huge amount of distressed assets. But due to governmental support, we haven't seen that it hasn't happened almost at all. So what's the situation now, will hotel be able to survive new crisis in a couple of months?

Marc Finney 09:25

Your first point is really interesting. And I think even if you look back at history, what you find is that investors and large sources of capital, always do a very good job of preparing for the last recession. So the last recession was the great financial crisis. And that was a crisis that was born out of over leverage, lack of liquidity, and the banks all of a sudden retreating away from the market. So this time, everyone prepared very well for that crisis. So there was lots of pools of capital raised in order to buy these loans from the banks. And they thought they were going to make a nice, quick, easy amount of money.

Of course, every crisis is a little bit different. So this time, that wasn't the problem, there wasn't as much of an over leveraged problem, it was more of a lack of market problem. Because obviously, hotels were closed. And there was not a lack of liquidity. But if anything, an excessive liquidity, so there was more money raised than could be spent in the next 5 years, you know, even in a normal market.

So there was a lot of money chasing very few deals. As you rightly pointed out, the governments were very supportive of the sector, across pretty much every country. And also the banking community realized that last time, they made a big mistake, they dumped their loans very cheaply, and everybody else made a lot of money, and they didn't.

So what they were saying this time is Hang on, why don't we stay-- If we got a good sponsor in a good hotel that would normally be doing fine, let's just wait for things to get better. And if it does get better, we won't lose money, if it doesn't get better, then we can take some action at some time in the future.

What we have seen as a result of that is relatively few opportunities coming to the market, and the ones which have come to the market, there's been a lot of competition for and that's driven prices quite high. And in fact, you know, really, if you look at the some of the prizes being paid now, they're not a discount to 2019. And in fact, in some cases, even exceeding that. And what has then happened on the back of that is that banks have decided-- Okay, rather than pulling the plug on this business, what we're going to do is give them the opportunity to refinance, and then a lot of this money that was raised, has gone now into providing debt for these companies, maybe at a slightly higher price than the banks, maybe for a slightly higher quantum than the banks, but certainly is kind of been more or less a debt replacement, rather than a pulling the plug.

Having said that, I think that now that we're--- Let's say, 6 months a year into the recovery, I think the banks will be taking a very close look at the businesses that they have. And if those businesses haven't already shown some signs of recovering or getting better, then there might be some pressure on those two, for a resolution.

Marc Finney 12:32

If things are getting better and going according to plan, then I'm sure that they will be left alone and allowed to carry on. But you know, sometimes you need a bit of a recession or a downturn or some difficulties to get rid of the bad stock, and then replace it with better newer stock.

Marina Franolic 12:51

Interesting. What about investors? What is the change you're seeing? Are they searching for different types of products and before the pandemic?

Marc Finney 13:00

I think the market is better balanced now, it used to be--- As we said earlier, everyone wanted business hotels, nobody wanted leisure. Now there's a little bit more of an even mix. If you've got a good quality leisure hotel, you have a market now, whereas before, it was always difficult, however good quality work. What I am seeing in city centers is an acceleration of some trends that we were already seeing a little bit beforehand. So for example, the extended stay aparthotel service department market was already growing pre pandemic. And I think we've seen an acceleration of that growth. We've also seen some of these kind of hostile hotels or like these Japanese Pod Capsule [phonetic 13:46] hotels, I've definitely seen an increase in interest in those in city centers. So I would say, it's more niche products that have seen an acceleration. And a lot of those trends were already there before the pandemic, but the pandemic has definitely accelerated the growth of those kind of slightly niche, slightly unusual products but still within the broader hospitality sector.

Marina Franolic 14:13

Oh, there's one so important topic. And that's ESG and sustainability [phonetic 14:18]. So tell me how many adults are coming to you looking to increase their sustainability level in real estate or operations? And what do you suggest to them to be their first step?

Marc Finney 14:32

I would say every owner at the moment is very concerned about ES and G but mostly ENS of that. So the Environment and the Social is becoming very important and many of them have realized that and tried to get on with it anyway. Others have been dragged to it really because of the-- We've all seen, for example, companies just abandoning Russia with many hundreds of millions invested, simply because it's no longer acceptable. And if people don't leave-- If people are not seen to be socially responsible, then the customers around the rest of the world will not follow them. So, if you are not following Sound, Environmental, and Social practices, you will very soon find you have no business, and if so, it will be very limited.

Also, throughout the investment community, starting primarily with institutions, but also coming down into individual purchases, have now realized that if they don't have a product that meets sound environmental principles, then nobody's going to buy it from them. Because a lot of these new funds that are being raised with very strict criteria. And they won't be allowed to invest in products that don't meet those criteria, or which can't be made to meet that criteria. So we're seeing-- You know, we started off 20 years ago with, Okay, put your towel on the floor, we won't wash it, and then you know, that's got slightly-- [phone rings] So started off with the towels, which was a very easy one, then we start seeing people moving towards maybe not having single use plastics, maybe not having plastic straws, maybe not having the little individual portions of butter, then maybe moving on into areas like bowel communities. So you have the soap bottle rather than individual pieces. So these kinds of things are, I would say the low hanging fruit, the things that everybody can do. And then the next phase after that is looking at, where do you buy your electricity from? Is that a sustainable company that you buy it from? Is it making it with gas? Or is it making it with wind or some more sustainable thing? And actually, if you think about it, if you source your energy from a renewable supplier, that it doesn't really matter if you use a little bit too much energy because it's being reasonably sourced and sustainably produced.

So I think that this is the next phase that we're going to see already we're seeing with new developments. A lot of local authorities and municipalities are insisting on these things before they allow you to have permission to build a hotel. So I think new products generally are very good. And we've seen a few examples here in the UK recently of lifetime net zero carbon hotels. So that's very good. There is a tendency towards trying to convert rather than completely new build, because again, 40% of the carbon in a hotel is in the building construction. So if the structure is already there, obviously it's more efficient to do that.

There's also a big program on reducing waste. And I think that hotels are quite wasteful, both in food and beverage and in other aspects.

So the more we can cut back on waste, I think that's a big area as well. But certainly investors are starting to not buy properties unless they meet certain criteria. I think we're finding customers, more and more, actually colleagues just doing a piece of research at the moment where we've contacted the 100 largest companies in the UK, and ask them if they have a policy on where their employees are allowed to stay. Is there any ESG [unintelligible 18:43] So we haven't got the results of that yet. But I'm suspecting that a lot of those big employers are already saying, if the hotel doesn't meet this standard, we're not going to say that. And certainly governments and local authorities are already doing that. So I think we're going to find that if you don't follow these principles, you will have no customers, no investors, and very soon no business. And so I think it's something which is not avoidable. And anyone who thinks they can avoid it is going to have a big problem.

Marina Franolic 19:14

Oh, yes. And I believe that great step forward would happen if banks would restrict their loans, do non-grid [phonetic] hotels or offering green premium for those that have sustainability either technology or even certification for the hotel.

Marc Finney 19:29

And it's interesting, because there's a lot of talk in the investment community now of Is it a green premium or a brown discount? So in other words, do you pay more because it's meets the criteria or do you pay less? Because you need to then invest the money to bring it up to standard? I think we're seeing evidence of both of those.

Marina Franolic 19:49

Marc, do you plan to join idea and why do you think it is valuable to attend?

Marc Finney 19:56

Well, definitely I tend to be that so I'm looking forward to being there. And I think people should attend for many reasons.

One, we're in very uncertain times, you know, it's funny because uncertain times used to mean or small things here and there uncertain times now means big things; pandemics, wars, all sorts of things happening. Inflation, which everyone has almost forgotten-- I'm old enough to remember, inflation of 20%. So it's not frightening for me. But a lot of people have their whole lives without this kind of inflation. And these are very strong reasons for people to educate themselves and find out from their colleagues, their peers, from the industry, exactly what's happening, and how they have managed to deal with it, and what kind of strategies you might employ. So I think it's really important to do that.

Secondly, having spent two years sitting at home and doing zoom calls, I can say, it's great fun to get out again, I've been the last 6 months working every day in the office I'm loving every minute of it. And it's nice to be out, meeting people, and getting back in contact with people who you maybe haven't seen for some time. So I'm very much looking forward to that aspect of it. And humans are very sociable people; we like to go out, we like to learn, we like to have good business reasons. But it's also time to re-engage with people on a personal level. And I think that's very important for all of us. But I think your events that you organize, are always very well structured in terms of bringing high quality speakers together, that people can learn from, discuss with, network with, and then you always come away from these events, feeling that you've taken some benefit, and you come back to your office more energized to face the challenges that we all have.

Marina Franolic 21:56

Thank you so much. It was great to speak to you. I'm so much looking forward to seeing you also at this September 26th, 27th. So that's in just couple of weeks. I wish you all the best and see you soon.Thanks. Bye.

Marc Finney 22:14

My pleasure. Bye.

Outro 22:18

Thank you for listening to the IDEEA Podcast, the channel for the IDEEA Hospitality Investment Forum. You can find a full transcript of this conversation in the Content Library on ideaa-forum.com. With other reports and insights. We look forward to welcoming you and your colleagues in person at IDEEA in Athens, Greece on the 26th through 27th of September 2022. If you haven't registered yet, please go to ideaa-forum.com. To purchase your past today and save before ticket prices increase. Please feel free to email us with any questions at Hello at the bench.com.

Until the next episode, stay safe and keep well. Bye-bye for now.