Fresh off his vacation in Croatia, David Nath, Head of Hospitality CEE & SEE at Cushman & Wakefield joined Marina Franolic for the fourth episode of the IDEEA Podcast.

In the conversation, David shared his thoughts on the challenges for the hospitality industry in the first half of the year, the likely return of interest in urban destinations and how the pandemic has enabled brands and operators to relook Central and Southeast Europe as an area of opportunity and expansion.

Being an essential aspect of today’s hotels, Marina also asked David to share his thoughts on the current perspective of sustainability in the industry and whether it has become a must-to-have or is still a nice-to-have amongst stakeholders.

Watch the entire conversation on video.

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TRANSCRIPT

Intro: 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: Hello everyone. We're here today with IDEEA podcast. On September 26th - 27th in Grand Hyatt Athens in Greece, we will be having IDEEA Hospitality Investment Conference. And today we will be announcing one of our speakers, David Nath. He's Head of Hospitality CEE and SEE from Cushman and Wakefield; and we're going to discuss with David a little bit what's happening on the investment and development market in this region ahead of Athens conference. David, welcome. It's a pleasure to have you here.

David Nath: Likewise, thank you for inviting me Marina. Good morning.

Marina Franolic: How are you?

David Nath: Very good, very good. After a short summer break, so fully energized. So looking forward for Athens of course, and looking forward to moderating my panel and my panelist as well. So thanks very much for the invitation.

Marina Franolic: David, I'll just use this opportunity to do a little bit of promotion and ask you where you have been for your vacation.

David Nath: So as I'm coming from a CEE, and I'm based in Prague, and I naturally have a very tight bond from my childhood with Croatia. I went again to Croatia, this time to [inaudible 01:45] to enjoy your beautiful Kempinski resorts by MP group. So that was my place during the summer. So returning a little bit to the hoteliers in our region.

Marina Franolic: That's nice. David, you enjoyed the vacation, I would assume, right?

David Nath: Yes, yes. Yes. Yes, everything was great.

Marina Franolic: It's nice that actually, since we started talking about Croatia, and you are also responsible for this region within Cushman and Wakefield, I wanted to ask you, what is the greatest challenge in hospitality and change that you saw within investments in the past six months?

David Nath: Thank you. So, I have to say, we are living in a very dynamic world at the moment, from the economical perspective, and I have to say that, actually, hospitality investors are similar to any other investors and are, of course, human beings by nature, and historically, it is proven that the human beings are afraid of fear. And these days, recent days, and recent weeks and months, unfortunately, are showing us that we are surrounded by the fear. And every chairman of the investment boards does, of course, care about the recent worrying news. And those are that we are very close to the war, which is ongoing. There is a China escalation, military escalation towards the Taiwan, energy prices are at the peak. So these and many more are, of course, influencing the investment market in general. Contrary to that, we see as well that the market is so dynamic, that actually, the situations are changing every week. So if you ask me, that's what's happened in the last six months, I can say that it went from the bright blue to dark times and again, going to the sunny horizon. For instance, last week, there was for example, the greatest week on the stock exchange market. Shanghai markets grew 1.32%, NASDAQ by 2.93% in the US, and due to that, investors pumped into the global economy and global exchange market. Actually, one of the biggest lump sums in the past few months for instance. In the US, it was almost $11 billion, which is quite extraordinary amounts given the current dynamic. So, of course, in the US, inflation growth was over than expected and therefore, there is hope that the interest rates will not substantially increase in September, which would cool down the situation a little bit when it comes to the inflation and generally on the markets bring a little bit more confidence. So this positive news are out there, but also signs that there are investors who are very cautious about the long-term investments but rather short-term investments. So they are more confident in doing short-term investments rather than long-term investments. And the threat of recession is there, but banks are in great conditions. We see that unemployment rates are very low. So central bankers are already experienced from the global financial crises, so they are ready to pump money into the economics and into the markets to fight against the recession. So these signs and positive signs are just creating the factor that the investment sentiments towards the real estate market and the hospitality investment market is very positive from the long-term perspective. It's proven that investment in real estate actually brings the lowest value deviation on the long-term perspective, and that's why the investors are more confident by licking the stock exchange market to move into our real estate investment market. Hospitality investors are even more interesting, because from the inflation perspective, ready to consider investment into the hotel sector, as they see that the connection to the revenue of the hotels is able to fight against inflation in general. And that's why depending on the tenancy structure and structure of the operating agreements, we can see that they can just somehow fight against inflation. So that's why investors are selecting, actually the hotel, real estates, and the inflation is helping that factor. But the factor effect is that there is ten times more equity than during global financial crisis, but recently, we noticed that there is eight times less amount of buyers into markets and the lowest number of the sellers in the 10 years history. That's a pure fact.

Marina Franolic: And do you think that this is the sentiment that will remain? Because we pandemic, we actually had most of the investors looking at the city hotels. Now we see a great increase of interest in leisure market. Do you think this is going to stay or will that be balanced in sometime in the future? I know, no one can predict the future, you can't either, but you see that they're actually even for the long-term investments looking to stay in this leisure market and not going back to the city, or you think that the city will pick up at some point?

David Nath: Absolutely, absolutely. No worries about that. It's just only, the investors as I said, are very much in wait and see mode at the moment, and they are just considering on the very short-term periods. What is the right way to go? It's unfortunately a time where you can't really predict what will happen in two months going forward. And that's why they need to adjust very quickly. I'm sure that the urban destinations will again return back. We can see already in the second half of 2022 that there are a lot of discrete talks already between the sellers and the buyers in our region in urban and destinations. For example, one year ago, it was just only about us receiving the calls of investors and being directed towards finding the new attractive destinations in resorts classifications. These days we can see that the shift is there. For example, we can see it on the latest STR numbers in our region, you can see that Prague is booming when it comes to the ref bar. Budapest, Warsaw is reinforcing their positions as well, it looks like they will be returning back even sooner than expected when it comes to 2019 KPIs according to the SDR. So we can see that you know, the market is rehabilitating very quickly and brings the confidence of the investors that they will again relocate back to the urban destinations. In terms of classifications, we can see now that the investors are focusing more on the luxury and economic sector. So it's understandable because luxury is a certain niche in urban destinations and we can see that they feel that there is still some gap which they can fill in and which they can bring some operators which are not existent yet. So those are more opportunistic investors. Economic of course, because economic was always proven as a great investment article, like low cost of operation, high profit margins, fast returns, and so on. Where upscale midscale products, especially the ones which are focused on [inaudible 10:17] are the ones which are looking a little bit behind at the moment. But that all is changing very rapidly and we can see that it's changing almost on a weekly basis at the moment.

Marina Franolic: David is also that you, the investors would approach you to reach or to find new destinations. So can you tell us, I mean, maybe a couple of deals that you've done, and where you actually entered completely new destinations in the region?

David Nath: So I would not say it's completely new destinations, I would say it is already well-established destinations. It's true that the investors are still cautious when it comes to a resort destination, it's a new product for them. So they would rather choose well-established assets on the market, and they will just rather buy the proceeds in that rather than to develop, for example, the new destinations. We have seen mainly in Croatia, where we are introducing a couple of investment opportunities of the bigger scale in well-established destinations that actually investors are more inclining towards the existing operations rather than the developments. It's very natural and it's very understandable given what is happening with the construction costs, uncertainty when it comes to the permitting processes, and so on. So, I would say at the moment previous well-established locations, and if impossible, you can either choose the, let's say, sale and leaseback structure, that's even more interesting. Because what we can see is that even private equity investors, because of lack of investment opportunities and the amount of equity which they raised for post-pandemic acquisitions, they were not able to succeed and to deploy this capital, and they are opening the core funds even as a private equity investor which is quite unique. And they are fighting against actually the well-established core institutional investors. So it shows that actually the pool of the core buyers even for resort destination, if the proper sustainable and highly covenant blue chip tenant is in place can work very well.

Marina Franolic: For that reason, I really hope that those couple of deals that you do have in Croatia will end up very successful. David, regarding the operators, what do you see the change in maybe the contracts, the terms? Do they have any challenges on the market now, because we still see quite lots of new brands coming but we also, as you mentioned, the service department sector, that's a completely new area that developed strongly during the pandemic and this region especially being connected to leisure market, it really developed strongly. So what about operators? How are they dealing with the situation?

David Nath: So, I will answer in twofold. So one question when it comes to what is new on the operational sentiment or operators’ sentiment. So they, of course, are trying to implement towards the recent situation on the market. I think it's worked very well both ways. Because pre-pandemic of course, the owners/ landlords in case of a lease contracts, were not ready for such situation which is happening now. So that's why post-pandemic we can see that in the lease contracts, there are many of the pandemic clauses which are protecting the operator as well as the owner. So it's also somehow establishing the correct working platform based on which operators and the owners can work on in case another pandemic situation is happening. So for example, the shift towards the variable lease or shift towards the hybrid lease. So there are certain positions which are working like that. There is a possibility of shortening the agreements, there is a shortening or diminishing a certain amount of the fixed component of the lease and extending the lease term and so on. I would say they are the operators are acting very pragmatically and they are trying more precise contractual situation with the landlords and trying to prevent that there will be this kind of misunderstanding on both ways in case another pandemic situation will arise. On the management agreements, we see, of course that when it comes to the forecasting and presenting the budgets, the owners need to be following the certain market trends and be understandable to the forced measure situations. So, I would say that the major trends are following this way, to protect both actually the owner and the manager/ landlord and the lessee. On the other side, what we see that operators are extremely hungry for the new opportunities. Previously well-established destinations where they were not able to penetrate the market. Because first they were independent owners, which were not using any brands and they were very confident because the markets were strong. So they are using the time of the post-pandemic situation and the owners being tired of operating on their own and being only dependent on the domestic market, so that they will employ or engage the manager who will enhance the sales potential of their product or hotel towards the international sphere. And secondly, of course, some operators were not managing the situation very well during the pandemic situation. And of course, there are some winners and some losers in our industry, and therefore, actually, they are scouting for these kinds of assets and opportunities and trying to replace the managers which were not behaving well towards the owners during the pandemic crisis. So this is actually more on the operator or operational sentiment. And the second question, sorry, was more towards service departments. So as hotels were very kind of impacted during the pandemic restrictions, the service departments were somehow allowed to operate. They were somehow able to still attract the customers and the quarantine workers or actually, the corporate clientele which were seeking for accommodations, where the hotels were fully closed and so on enabled the hotel owners to potentially think of changing the concept from hotel to the service departments, where possible and where the asset was decently big, so that they can do such conversion. And there are a couple of couple of hotel player or service department players which were using the post-pandemic situation for their substantial growth such as 18:00 New Mastaes or the Julius from Julius Meinl or Saunder, and so on. So those are the new players, which are clearly let's say, the winners of the opportunity for the future and for them the pandemic crisis were definitely the substance for growth going forward.

Marina Franolic: Do you think they will be the new disruptors on the market? I mean, we had the online agencies that were disrupted couple of years ago, then we had the Airbnb; do you think that this now is going to be something that will additionally interrupt the hospitality market? Or do you think also that many hoteliers and hotel operators will go towards this service department sector?

David Nath: I think it shows very clearly, that typical hotel establishments on their own as we used to know from the pre-pandemic times will need to adapt and change post-pandemic.

Marina Franolic: Don't say anymore, we'll talk about more of this IDEEA because I know this is such an interesting topic. I have just one last question. ESG, I mean, now everyone talks about ESG. But on one of your recent posts on LinkedIn, you actually said the hotels are more interested in investing into properties that have some kind of ESG credentials. So what kind of credentials, what are they looking for? What do you see they're doing especially in the region, where the new things that start in Western Europe, they come here a couple of years later. Maybe this is not the situation in this case, but I would love to know what are actually hoteliers doing regarding ESG and sustainability, and how the investors and operators are encouraging each other to do more, in order to be just more sustainable?

David Nath: It's not only about the E. So being environmental and responsible, sustainable, but it's also about the social and governance. So, S and G as well. I would say there are there three areas for them to improve, so to say. And we cannot further as a hotel industry, blind our eyes and think it's something which is more related to other commercial real estate. Because unfortunately, due to the long period of time by pretending that this belongs to some others and this is someone else’s problem than ours become the black sheep in ESG. So, the hotels are very heavy on carbon production and they need to really start to work on adapting on the situation. Unfortunately or fortunately, the macroeconomic situation and the increase of the energy costs and the dependency on the Russian oil and gas, that all have started to spin the wheels of this adaptation even faster than we thought we will be undergoing. So actually, you see that the trends are going very quick. There is adaptation of the European legislation which will go across the entire European Union, no matter what, but if you are part of European Union, you need to adapt to it and it will start already by the energy certificate sheets attached and glued on each of the assets, including hotels, as of next year. So it's there, it's happening and we will need to follow that up and it will be more and more in an eye and focus of not only investors but also the banks. So if you want as a hotel owner to go and in the future, just withdraw the depth on your assets you will be questioned when it comes to your ESG activities. as well as. if you are an investor and you are underwriting any investment opportunities the first question, we will be looking at is how dependent is the assets on energy and how it is fulfilling the ESG norms. So that will be something we still keep.

Marina Franolic: You keep saying this in future tense. When do you think this will start happening? When the banks and the financial institutions will actually come and say okay guys, you really need to have this in order for us to look at your deal.

David Nath: So, we can see already by now, for example, on core investors or institutional investors that they are very cautious about investing into the assets now, to acquire demanding or energy demanding assets, which does not have any kind of future pattern to become carbon zero. So we can see that ESG is implemented as of now for these big institutions. On the opportunistic investors, we can see that they are still willing to acquire the assets, which has some further pattern to go towards being carbon zero or carbon neutral, and they are looking more into it in the sense that they will provide a discount because of the future CapEX which needs to be invested into these hotel assets to become neutral and ESG friendly. And so the owner, the seller is diminished by the factor that he did not improve his assets to be fully compliant with ESG factors as of today. And these opportunistic investors will use the finance and equity to become ESG friendly and then after will go to the institutional sphere, and then it will sell the assets which is fully stabilized from the operational perspective. And it's also able to be called as a carbon zero/ carbon neutral, which the institutional investors will appreciate by the more compressed yields upon the acquisition. So it's happening already by now. The banks are already asking for the ESG reports, they're asking already for the energy sheets and the information when it comes to the carbon demand. So it's not proven yet, because even the banking sector is just getting used to it and how to implicate, let's say, in a risk profile of the asset, the ESG dependency and also the necessity for becoming ESG Neutral. So I cannot tell you at the moment what is the premium on top of not being ESG friendly, so to say, but actually, it's already happening by now. So the field is prepared, and the ground is there.

Marina Franolic: So that is good. I think we can just go on and on for a couple of hours like this. But I think now we have to stop because we still have the event in September that we need to keep something for that. I just want to mention two things. So we will have two sustainability or ESG sessions, one focused on real estate and other focused on operations. And we're really going to look at what hotels can do in order to follow this path to become more energy efficient, but also implementing all the ESG credentials. But I also wanted to mention, David, you will be moderating a session called location concept and operating contract flexibility, what key players are doing to keep reading the game. And that's on Monday, September 26th right before lunch. So I know this is going to be a very interesting session with top brands, talking about how they're delivering their promises and how they see the future. David, thank you very much for this. I'm really looking forward to seeing you in Athens in a couple of weeks.

David Nath: Likewise. Thank you Marina for the invitation and looking forward to see you in Athens. And of course, all my business partners and friends from the hospitality industry.

Marina Franolic: Perfect! Thank you David. I'll see you soon.

David Nath: Thank you. Likewise. Bye bye.

Marina Franolic: Bye.

Outro: 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 pass today and save before ticket prices increase. Please feel free to email us with any questions at Hello@thebench.com.

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