London, April 28, 2017: While hotel lease contracts have traditionally been very popular in Europe and continue to be preferred by many institutional investors, management contracts have become increasingly prevalent as many other investors have sought to share further in their hotel’s trading profit and, at the same time, most major international hotel operators have become far less willing to offer leases.
Furthermore, the nature of management contracts is becoming more complex, they are taking longer to negotiate and contain a wider variety of terms and restrictions, often requiring the assistance of a specialist advisory firm, according to a new report by global hotel consultancy HVS London.
The report suggests that while owners have become far more knowledgeable in recent years, major global operators have also become larger and more powerful, through recent consolidation and mergers and acquisition of hotel operators in the industry, which might make it more difficult for owners to negotiate with them.
“A well-‐negotiated management agreement should align the interests of both parties,” said report co-‐ author Dayk Balyozyan, senior associate, HVS London.
“As an owner, the major goals should be to select the management company that will maximise profitability and therefore the value of the asset, and to secure the best possible contract terms ensuring the operator is properly incentivised to maximise the owner’s net income.”
Many owners have developed a greater understanding of hotel operations and become more sophisticated in their selection of operators and the negotiation of contract terms. As hotels are becoming more mainstream assets, a number of alternative operating models have emerged, including the growing use of third-‐party operators’ agreements, which offer more flexibility to the owner – usually for shorter periods and with a greater willingness of the operator for the contract to be terminated prematurely.
Hybrid lease/management contracts are also becoming more common, as are ‘manchises’, whereby hotel owners engage a branded hotel company to manage the hotel for an initial period of time, after which the agreement converts into a franchise contract and the owner assumes management responsibility but retains the operator’s brand, in exchange for an annual franchise fee.
“This is particularly advantageous for hotel operators looking to launch a new brand, enabling strict operating controls to be established in the initial years as the hotel is going through its ramping up period,” added report co-‐author Sophie Perret, director, HVS London.
“As with any major commercial contract, negotiating the terms of a hotel management agreement should not be approached lightly. As well as characterising the property’s identity for many years to come, a hotel’s performance and therefore value are intricately linked to the selection of operator and the terms of the management agreement” concluded Chris Martin, senior director, HVS Hodges Ward Elliott.
Corporate Comm India(CCI Newswire)
