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Global hospitality insights

Top thoughts for 2015




Appetite for investment: the current capital


Active global M&A in the hospitality


Outbound investment from Asia


Seeking operational excellence: consolidation
of third-party management companies


Lifestyle lodging products


Critical success factors for new lodging


Condominium hotels — lessons learned


Emerging submarkets within mature lodging


Hotel technology 2.0


Investment promotion agencies — catalysts
for tourism investment


Mutual learning opportunities: the sharing
economy and the lodging industry


Global tax considerations


Changes in financial reporting: the new
revenue recognition standard

The global hospitality industry entered 2014 on an upward growth
trajectory; a greater sense of optimism was palpable across most
regions, as accelerating capital markets, favorable supply and
demand balances, and strong investor appetites fueled higher
transaction volumes and strengthened lodging fundamentals.

Robust investor interest worldwide was
reflected in the year’s key industry trends:
• More lodging projects broke ground as
traditional lenders eased restrictions on
construction loan originations.
• Accelerating cross-border capital flows
intensified competition among domestic
and international investor groups for
hotel assets.
• In select secondary markets, investors
evaluated higher-yield opportunities
outside of gateway cities, reflecting
renewed interest in the sector.
• Evolving guest preferences propelled
an influx of new hotel brands.
Even amid geopolitical instability, the
emergence of new health concerns and
stagnant economic growth in certain
regions, the global hospitality industry
thrives in a cycle of accelerating growth,
and optimism prevails in most markets.
Over the next 12 months, further gains in
the global hospitality sector are anticipated.
Major industry players are seeking to
strategically deploy and optimize their
capital investments, and strong investor
appetites, coupled with the availability
of flexible and creative capital sources,
will fuel demand for hotel acquisitions.
The consolidation of asset-light, thirdparty management platforms will remain

prominent, as investors continue to seek
the most qualified operators to improve
the performance of recently acquired
hotel assets. Previously dormant lodging
markets are positioned to gain traction, as
increasingly opportunistic investor groups
weigh higher returns in secondary locations
and emerging submarkets. And the focus on
technology will intensify, as both hoteliers
and customers continue to evaluate their
return on investment in a lodging experience
grounded in sophisticated social, data and
mobile applications.
The global lodging industry will continue
to adapt as new accommodation platforms
emerge. Traditional lodging types now exist
in a shared economy with apartment rental
services and other alternative offerings,
including membership clubs, hostels and
avant-garde lifestyle brands. As global
travel increases across leisure, corporate
and group segments, destinations must
effectively implement and invest in their
tourism strategy to differentiate themselves.
Furthermore, the continued increase in
cross-border capital flows will intensify
competition in gateway markets among
traditional financial investors, presenting
new financial and tax implications for both
domestic and foreign investors.
At EY, we believe hospitality plays an
integral role in building a better working
world by connecting global regions across

economic, investment and experiential
platforms. The impact of hospitality
on our global economy is significant;
across the world, the travel and tourism
industry encompasses 266 million jobs,
and contributes 9.5% of gross domestic
product (GDP) globally. With travel and
tourism sector growth forecast to expand
by 3.9% during 2015, the sector will be
increasingly recognized as a key driver
of economic growth at the local, regional
and global level.
As we strive to address issues important to
the industry, we are excited to present this
year’s edition of Global hospitality insights:
top thoughts for 2015. The report reveals
key issues and trends we believe will be
the primary areas of focus in the global
hospitality industry in the upcoming year.

Howard Roth

Michael Fishbin

EY Global Real Estate, EY Global Hospitality
Hospitality &
& Leisure Leader
Construction Leader

1. “Economic Impact Analysis,” World Travel & Tourism
Council, 2014.

Top thoughts for 2015

August 2014.Appetite for investment: the current capital climate Real estate fundamentals continue to improve.9% in 2013. 4. “Fed’s Dudley: expectations for mid-2015 rate lift-off reasonable. Argentina and Venezuela.5 billion compared to US$52 billion in 2013. worsening unemployment and currency devaluation. Investors from Canada. including New York City. and debt and equity capital are abundant. . 8. Specifically in the US. despite the boost from the 7. such as high inflation rates. compared to 6. Hotel occupancy in Central and South America through July was down approximately 1. health 2 and terrorism concerns. “US Capital Trends – Hotels.5%. Atlanta. www. many countries. www. “US Capital Trends – Hotels. showing that the industry continues to gain momentum even in the face of accelerating geopolitical instability. Malaysia. “Hotel Investor Sentiment Survey. In Latin America. Cross-border investment into the US increased approximately 137% from 2013 to 2014.6% over the previous year. 3.” Real Capital Analytics.” Jones Lang LaSalle. and a robust global development pipeline of approximately 1. third quarter 2014. potential speculation about a bubble is countered by the fact that risk has been priced into the deals seen 8 throughout 2014. Investment in the US hotel sector was expected to continue accelerating throughout the end of 2014. Global hospitality and leisure transactions increased 8% year-over-year through Q3 6. 5.” Real Capital www. As a result of strong fundamentals and an increasing array of capital sources. which are anticipated to 7 rise in 2015. Japan. with real estate transaction volumes in some markets 4 reaching pre-recession peaks. Houston and Orlando. aspx?articleid=32644. “US Capital Trends – Hotels. strong performance continued in 2014. June 2014. “Global Market Perspective Q4 2014: Hotel investment maintains momentum despite downside risks. “New Hotel Construction Pipeline in Global Shift. Singapore and the Middle East have chosen to deploy a large amount of capital in US 5 hotels. Global hotel investment continues to steadily increase. Greater competition among these investors and subsequently lenders is allowing for more aggressive loan-to-value ratios. with foreign buyers continuing to look beyond traditional gateway markets to secondary markets. Nevertheless. Global hospitality insights 4 Throughout the Americas. These with both the full-service and limited-service sectors demonstrating large pipelines of 6 deals under contract. with 2014’s totals expected to exceed US$54. such as San Francisco and Boston.joneslanglasalle. averaging 5. including Brazil. A wave of new hotels will open in 2015. with the rates in six major metropolitan markets. translated into weaker fundamentals in the first half of 2014.” Jones Lang LaSalle. 17 April 2014. and hotel performance has followed suit amid a rise in business and leisure travel. compared to 66% in 2013. The low rates are highly influenced by the country’s low interest rates. economic and employment numbers have grown increasingly positive.” Hotel Interactive. currently face economic challenges.3 million 3 guestrooms is in place. coupled with their political instability. third quarter 2014. 2.” Real Capital Analytics. with current capitalization rates close to the previous market lows of 2007. 13 November 2014. averaging 73% through Q3 2014. providing a solid foundation for an uptick in transaction volume and overall competition.hotelinteractive. accessed November 2014. China. capitalization rates in the US are anticipated to trend lower.” Reuters.reuters.

skift. In the Middle East and Africa. Investors have displayed great confidence in the continuing strength of London as the pre-eminent European hospitality center. primarily caused by a drop in 16 average daily rate (ADR) from US$279 to US$248 (down 11%). The declining operating fundamentals could also be tied to the fact that the region was the only area globally where 9 additions to supply outpaced demand. investors have looked toward secondary markets. 2 October 2014. foreign capital inflows may soon diminish given investor concerns about tourism in the wake of the recent Ebola outbreak and political instability. South America now has 400 hotels in the pipeline. midyear review 2014. with 151. 28 August 2014. Ibid. “Global Capital Trends. the Middle East and Africa (EMEA). Top thoughts for 2015 5 . an 15 increase of 139 hotels since December 2013. 26 September 2014.054 rooms. “STR Global: MEA pipeline for July. totaling 49.” Hotel News Resource. Lagos’ revenue per available room (RevPAR) declined significantly year-over-year.hotelnewsresource. 10 June 2014. such as Frankfurt and Dusseldorf.4hoteliers. “Central And South America Hotel Development Pipeline For December 2013 Increases to 305 Hotels. which through H1 2014 climbed 70% from a year-ago. “Global hotel pulse: Middle East/Africa news. Germany’s low interest rates and high levels of debt liquidity have 13 fueled high levels of investment. “Germany still the darling of the hotel investment sector with transaction levels heading for €2bn. 15 January 2014.html. www. 16. South Africa and Egypt have experienced continued economic Article/13850/Global-hotel-pulse-Middle-EastAfrica-news. 14 for higher-yielding opportunities.” 4 Hoteliers. 9. the development pipeline continues to grow and now includes 637 hotels. mirroring the wider commercial real estate market.9 billion through July 2014. www. of which 40. development and acquisition activity has been prevalent. Despite rising construction investment and growing occupancy rates among African hotels. www.” Hotel News Now. Despite concerns over slow economic growth. 14.” World Property Journal.” Hotel News Now. While hotels in primary markets. Of the 31 major hospitality destinations in the region.World Cup in Brazil. travelers do appear to be exercising the region had 305 hotels in development 11 in December 2013. Even so. www.” Skift. 13. which was declared free of the virus in October 2014. Countries such as Nigeria. 16 July 2014. In addition. as well as steady increases in its hotel operating 10 metrics. are given the highest valuations across Germany. 15.php.worldpropertyjournal. totaling 65.000 are in Brazil thanks to its surge in corporate and leisure travel. all except for Moscow are expected to show 12 strong trading performance over the next six months. investor sentiment is high regarding future growth and transaction volumes.479 rooms. hospitality investment in Germany rose to US$1. Europe has witnessed a rejuvenated hospitality market. which continues to attract large inflows of foreign capital. Casablanca and Munich. rooms. “Latin America Hotel Market Has 400 Properties Under Development. In Europe. creating demand from institutional investors as well as major hotel brands that see expansion into the region as a source of future growth.” Real Capital Analytics.hotelnewsnow. While security and health concerns have not yet deterred By STR-Global-MEA-pipeline-for-July. such as Munich. 11. including Barcelona. representing a 100% increase in transaction volume as compared to July 2013 figures. 12. In Nigeria. “Latin American Hotels Have a Supply and Demand Problem.

3 billion in the same 17 period in 2014 amid investor concerns over political unrest in markets such as Hong Kong and Thailand and economic uncertainty about the stability of China. India’s half-year total of US$1. which is largely a result of a number of institutional players re-entering the market. Certain key themes seen globally are anticipated to continue into 2015. the climate for hospitality capital markets activity should remain favorable. private equity funds and REITs are anticipated to remain motivated buyers. who see potential yields in the 18 booming market. The rising availability of hotel development financing in mature markets will allow for more robust pipelines. Much like India. Hotel sales in Japan accounted for 47% of transaction volume across the region.8 billion represents a 37% increase year-over-year. with North Asian and Southeast Asian investors completing 58% and 38%. But Asian investors dominated hotel transaction activity in the first six months of 2014.” Real Capital Analytics. 17. accessed November 2014.4 billion in the first half of 2013 to US$3. Global hospitality insights 6 . “Global Capital Trends. midyear review 2014. and Asian investors. 18. Capital flows into India climbed.Investment volume in the Asia-Pacific region decreased from US$6. Barring any of these shocks to the system. Australia’s strong fundamentals. “Asia Pacific Hotels MarketView (H1 2014). of all deals in Asia. these upward trends may be deterred if political instability and Ebola outbreaks continue.” CBRE. with noticeable volume gains recorded in the first two quarters as tourism continues to drive economic growth. However. maturity and transparency have led to steady buying activity from Asian investors. respectively. assets in secondary markets will attract further interest from hotel developers.

Top thoughts for 2015 7 .

investors out to make deals should be aware of additional risks and complexity in the markets. with favorable market conditions encouraging higher confidence and the risk appetite to place capital. the strategic merit of transactions and the availability of debt and equity on favorable terms. 20. “2013 Year in review. January 2014. In the US. However. with flush capital and portfolio optimization remaining key drivers.” Real Capital Analytics. Sentiment in the sector remains positive: a recent EY survey of more than 75 hospitality and leisure executives found that 99% of the respondents expect the global M&A market to continue to improve or stay the same in the next 19 12 months. There are additional. real estate investors have become more confident about acquiring real estate operating platforms with the objective of owning the underlying real estate. foreign investors made approximately 11% of the US$355 billion in real property deals last year. particularly under an increasingly high-speed diligence period. including the appropriate level of overhead required to operate the properties.Active global M&A in the hospitality industry For several years. if a seller prices itself as a stand-alone business while a prospective buyer prices the deal as the acquisition of individual properties. Japan and Singapore fueling transaction volume within 20. Across the world. However. and the recent surge of mergers and acquisitions (M&A) activity appears reminiscent of 2007. The presence of these elements has fueled M&A in recent years. assessing value and modeling cash flows. 21. Additionally. October 2014. 3 March 2014. Global hospitality insights 8 M&A activity overall and in the RHC sector is driven by a desire for incremental growth. confidence in the economy and in deal markets has improved. 21 hospitality specifically. “Cross-border capital tracker for United States. but these kinds of transactions cannot be solely dissected as real estate portfolio acquisitions. the parties may encounter discrepancies in pricing expectations — for example. value-impacting factors to weigh when buying an entire platform.” EY. 19. with prominent investment groups from China. The higher volume of global capital chasing real estate opportunities has also contributed. for example. and not necessarily for operating the platform as a business. The influx of capital has caused fund managers to look for new ways to expand their real estate portfolios in a hypercompetitive environment. Real estate investors may be familiar with underwriting individual hotels. “Global Capital Confidence Barometer.” Real Capital Analytics. deals have gained traction. . the challenge lies in vetting this type of deal. Within hospitality. as well as potential commitments and off-balancesheet liabilities of the business.

While it is uncertain whether M&A activity in 2015 will outpace the peak observed in 2007. Within hospitality. taking advantage of their base-level knowledge of real estate from their lending or other investment activities. seasoned industry players with a track record of success are still driving most activity in the hotel space. the real estate portfolio valuation is a critical part of the due diligence process when the real estate is key to the strategic rationale of the transaction. new players are mainly competing for trophy assets in select gateway markets.For company acquisitions. However. an operating platform must be carefully evaluated to determine whether the business can sustain earnings growth. certain financial institutions and other alternative investors. are now looking to expand to new platforms. which have been indirect real estate investors. a recent trend of acquiring hotel management platforms has emerged. In recent years. in which the real estate is often not a significant component of the transaction. Capital marked for the real estate markets may once again be abundant. resulting in future earnings growth. but the way it is channeled continues to reflect the lessons learned since the financial crisis. These new players are not only diversifying the M&A landscape but are also making it more competitive. New players are also emerging. Top thoughts for 2015 9 . Within hospitality. Yet a top-down business assessment is also crucial to ensure the property valuation is not misguided. However. investors appear to be chasing opportunity and expansion with a newfound discipline. The strategic rationale of investors in this space is to acquire a management platform and enlarge it by adding management contracts with minimal capital investment and operating costs.

who are intent on investing overseas as a way to diversify their portfolio and build their international brand. Representing the largest increase in investment dollars.9% in 2012 and only 25.2% of the cross-border hotel transactions during the 12 months ending October 2014. “Trends & Trades: Third Quarter 2014. 29 October 2014.7 billion during the 12 months ending October 26 2014.9% in 22 2011.5% of total Asian hotel investment globally during the 12 months ending 24 October 2014. Japan and Singapore) represented 43. 24.5% during the 12 months ending 29 October 2014.4 billion entitylevel buyout of a luxury hotel portfolio. 3 November 2014. Downtown Los Angeles has been a target for ground-up hotel mixed-use development. While these Western countries “pull” international buyers to transparent markets for capital preservation and more stable property yields.5% and development site transactions increasing 180. many of these international buyers are also encouraged to invest abroad due to the geopolitics in their home countries. which is 198.9%). China has been one of most active hotel buyers. Australia was a target market for overseas Asian buyers. Hong Kong.6%). For these investors.” Real Capital Analytics. Ibid. One such company is a Shanghai-based state-owned Global Fortune 500 company. Japan’s acquisition activity was predominately related to a Japanese company’s US$1.5%). Hong Kong (12. Currently. “Cross-Border Capital Tracker: October 2014. 27. with hotel transactions increasing 8. Ibid. Toronto and London last year. in 2014. followed by North American and Middle 23 Eastern investors.4% of the total outbound capital from Asia.3% greater than sites in San Francisco. 29. “Cross-Border Capital Tracker: October 2014.7% in 2013. . 23.2% of 2014’s global hotel investments through October. During the past year.2% greater than sites in Manhattan and 645. and the flow of money from Asia into the mature markets of North America. largely due to the abundance of large parking lots that are primed for development and the shortage of hotel rooms within walking distance from the Los Angeles Convention Center. 29. which began construction on its more than US$1 billion hotel mixeduse development project in Downtown Los Angeles last summer and it acquired additional mixed-use development sites in 28 New York.” Real Capital Analytics. versus the year-ago period.Outbound investment from Asia Overseas capital accounted for 41. Over the prior 12 months. Additionally.” Real Capital Analytics. 25. Most notably. buyers from Asia are “pushed” toward outbound investments due to their individual government’s cooling interventions for domestic real estate and the easing of government regulations regarding overseas investments. China’s cross-border hotel investment volume has increased from just US$107. 28. 3 November 2014. the top three global hotel markets for Asian investment are Manhattan. 3 November 2014. In 2014. Ibid. 26. Over the prior 12 months. some of the most active investors from Asia have been stateowned enterprises (SOEs) and large-scale developers. Ibid. “Trends & Trades: October 2014. Asian investors (primarily dominated by China. Singapore (17. 22.” Real Capital Analytics. Asian organizations invested approximately US$844 million in development sites in Los Angeles. Europe and Australia is anticipated to keep rising. Hawaii and London. with six properties located throughout Hawaii 27 and San Francisco.4 million in 2011 to US$2. compared to 34.5%) and Malaysia 25 (9. investing 27. Global hospitality insights 10 A number of “push” and “pull” factors drove the year-over-year increase in cross-border activity. representing 48. followed by Japan (21.

and cross-border transaction levels are expected to continue to rise. overseas investments are also expanding upon existing platforms. as regulatory restrictions continue to ease. www. accessed 27 October 2014. which is expected to persist. with Asian investors at the forefront of the activity. 32. Ibid.” CBRE. is developing billion-dollar mixeduse projects in London. Furthermore. The forecast for the global hospitality market is strong. and higher yields compared to other gateway cities in the US and Europe. In addition to acquiring stand-alone properties.400 keys in New York EN/aboutus/MediaCentre/2014/Pages/Asian-Insurers-Target-Global-Real-Estate-. limited investment opportunities in their home countries and the perceived stability in Western countries. it is anticipated that outbound activities will expand beyond the most common type of investment — individual asset acquisitions — to include a greater number of joint venture and platform-level investments.” PR NewsWire.Australia is likely to continue to be a target market due to its growing Chinese population and visitation levels. other key cities are beginning to garner international attention. are investing and developing hotel properties in order to diversify their income stream. in industries such as air travel and construction. a number of other companies. Another example is a Hong Kong-based company. Ibid. increasing outbound China tourism is expected to fuel additional Chinese investment in the global hotel market. www.95B. For example. Considering the current geopolitical environment in Asia. 34. Top thoughts for 2015 11 .html. The developer’s ambitious goal is to build at least 15 luxury hotels in 15 international cities by 2020 and expand its China-based hotel brand. “Chinese Insurer Buys Waldorf Astoria for a Record $1. While London and New York have been prominent outbound markets for the past five years. a second wave of investors from Asia is beginning to emerge: insurance It is predicted that Asian insurers will become one of the largest investor groups in the coming years. which is acquiring four. Chicago and Australia’s Gold Coast in order to build luxury hotels utilizing the company’s five-star hotel brand. a Chinese insurance company acquired the Waldorf Astoria. weakening currency versus the Chinese renminbi over the past five years. “Asian Insurers Target Global Real Estate As Regulatory Restrictions Ease. a luxury hotel with more than 1. for almost US$2 billion. as gateway markets become more expensive and investors mature. Besides investing in US-based hotel management companies. For instance. in michaelcole/2014/10/06/chinese-insurer-buys-waldorf-astoria-for-a-record-1-95b. Real estate investment restrictions have also been lowered in South Korea and Taiwan over the past couple of years. Asian investors will continue to be major players in global capital markets in 2015 and beyond.prnewswire. with an estimated US$75 billion to invest in global 31 real estate by 2018.aspx. increasing the maximum real estate allocations permitted as well as streamlining the procedures for 33 investing in property abroad. “Wanda Acquires ‘Jewel Project’ in Australia’s Gold Coast. Wanda Group. one of the largest commercial developers in China. this cycle is also witnessing an expansion of Asian-based hotel management companies. 31. favorable tax regime. In addition. representing the highest price paid for a single hotel property in the US and the largest acquisition 30 of a US property by a Chinese company. accessed 30 October 2014. 30.and five-star hotels to reflag under its luxury hotel brand and three-star hotels to convert to its newly formed lifestyle 34 hotel news-releases/wanda-acquires-jewel-project-in-australias-gold-coast-271068181. www.forbes. which is entering its third year in the cycle. accessed 30 October 2014. Moreover. While SOEs and developers will continue to acquire and develop significant assets in major gateway cities. The China Insurance Regulatory Commission first allowed insurance companies to invest abroad in 2012 and increased the maximum allocation in real estate (both domestic and foreign) from 20% to 32 30% of total assets in February 2014. 33.” Forbes. such as Sydney.

a country that is a leader in the sector’s M&A activity.” hotelmanagement. Consolidation in the industry has become an effective way to grow and diversify portfolios by providing opportunities for geographic expansion and to rapidly . 35. March 2014. with the top 15 each managing a portfolio in excess of 37 8. Hotel Investments Handbook. acquiring proven management companies that can expand is attractive because they can achieve relatively higher returns given the prevailing low cost of capital on a risk-return spectrum. Transactions in the US have included some of the country’s largest third-party operators. experiencing significant growth in the creation of thirdparty management while brands continue to develop and become fully integrated into the market. but on a smaller scale. For investors.000 rooms. Global hospitality insights 12 By providing a value-add strategy for companies to leverage scale and rapidly achieve growth initiatives. 22 January 2014. Europe and Latin America are estimated to be 5 to 10 years behind the US in terms of transaction activity in the sector but are.Seeking operational excellence: consolidation of third-party management companies Prominent in North American lodging markets. third-party management platforms have driven M&A within the hospitality industry in recent years. HVS. 36 which has surged in the past five years. while marketing the hotel brand through 35 a franchise agreement. the presence of third-party operators is limited and transaction activity is minimal as investors favor the franchise Third-party management companies are far more mature in the US. “2014 Hotel Management Survey. however. Chapters 19 to 21. Improving hotel fundamentals globally and increased access to capital have led investors to seek out this operational expertise to maximize investment on both newly acquired and existing hotel assets. “Third Party Management Companies: Key Trends and Issues. 36. foreign buyers and existing management companies are all looking to capitalize on expected industry growth — and they are increasingly investing in these in-demand third-party management companies. The same trend is making its way throughout the world. 37. 2008. In the Middle East and Asia. and manage properties themselves. 18 management companies each operated a portfolio of 50 or more hotels.” Hotel Analyst. As of year-end 2013 in the US. third-party management companies provide daily property and operational management services as well as year-round financial and accounting support for hotel owners. Investment funds.

therefore. sales and revenue management. The US is expected to remain the leader in M&A activity as the third-party operator model continues to mature throughout other parts of the world. 40. which can bring them access to new deals and lucrative operating platforms. Key drivers in recent transactions have illustrated that investors particularly value operationally sound third-party management companies with established infrastructure. www. which will lead to an active trading environment in the sector in 2015 and likely beyond. “Third Party Management Continues Consolidation. it allows the business to separate itself from owning the bricks and mortar of real estate while providing the brand the ability to capitalize on its 40 operating strengths. By constructing a hotel business with an asset-light structure. oftentimes with local management expertise.” HVS. 38. as well as buying power for various operating systems to better 38 compete in the market. August 2014. procurement. which also can provide access to prospective transactions and significantly increase deal flow. investment firms are specifically targeting companies with strong relationships and experience within the real estate and hospitality industries. Market indicators point to robust transaction activity in the sector through 2015 and onward. Consolidation provides opportunities for management companies to form new relationships and create synergies in infrastructure. the increasingly competitive environment in the sector has made management companies more inclined to offer key money 39 or sliver equity in order to secure new 39. Management companies are also using outside investment as an alternative means to finance strategic growth initiatives. Third-party management consolidation also continues to support the hospitality industry’s strategy toward an asset-light model. which can significantly improve market share and economies of scale. Investors are finding opportunities to enhance bottom-line performance by gaining expanded market penetration and operational strength. In addition. In addition. “Interstate Maintains Strong Growth Here and Abroad.” Hotel Analyst. Top thoughts for 2015 13 . Capital partnerships often provide opportunities to leverage resources that would not otherwise be at the company’s disposal. 30 July 2014. With equity participation anticipated to continue in coming years. and other technology systems.hotelmanagement. The asset-light strategy allows management companies to enter and exit markets with less risk and more flexibility and to achieve increasing returns with each new contract due to economies of scale. accessed 13 October 2014. the demand for capital partnerships is expected to continue to grow. “Hotel Management Companies and Equity Contributions: Benefits and Risks. particularly in emerging markets.” Hotel Management. Investors and third-party managers have significant opportunities to fuel growth through consolidation.penetrate markets that align with strategic initiatives. gain quicker access across borders. Investors. reservations.

To meet these changing demand preferences. and they include boutique hotel components that leverage the club’s . More similar to a traditional day club than a hotel. daily housekeeping to hotel rooms but not to hostel rooms. Europe and Asia is lifestyle membership clubs. millennials and millennial-minded travelers. is more cost-conscious and experience-focused than ever before. pools. lifestyle budget hotel and hostel/hotel combination concepts are now becoming viable in major US and Asian markets. Substantially aligned with the desires of millennials and millennial-minded travelers. Several of these products initially emerged in Europe and Asia. as well as markets such as Detroit. less stringent lodging standards and cultural preferences fostered innovation in lodging concepts. Los Angeles. Global hospitality insights 14 Historically. whether traveling for business or leisure. It replaced them with more practical alternatives. nightclubs. while their concepts and designs focus on attracting local demand. such as New York. Now. Today’s emerging traveler. room service and daily housekeeping. such as large guestrooms with full furniture sets. these products are able to decrease costs by removing unnecessary and high-cost elements. affordability and a focus on social experiences were maintained. full-service restaurants. hoteliers are seeking innovative alternatives to traditional lodging products. these concepts are becoming increasingly attractive to hoteliers and investors seeking to capitalize on this changing demand base while increasing investment returns. free Wi-Fi and iPad usage and pay-as-you-go amenities such as air conditioning. such as meeting and event spaces. As these new products and experiences began to evolve over the last several years. these low-cost. towels. Communal spaces are often intended to be inviting to guests by seamlessly blending with the lobby. free bicycles.Lifestyle lodging products Over the past several years. a specialized lodging concept that has gained popularity over the last several years in the US. New Orleans. toiletries and highquality in-room coffee machines. grab-and-go food and beverage outlets. Nashville and Portland. the millennial generation has increasingly impacted the lodging industry. in the US. As the demand for experience-based lodging has increased. where unique atmospheres. in turn maximizing revenue per occupied room (RevPOR) spent. These new products and concepts often emphasize common areas. With a focus on limited service with added conveniences. food and beverage outlets. as highly fragmented markets. and spas. Miami. architecture and cultural elements draw greater demand. Singapore and Tokyo. calling into question products and offerings that have for decades been industry mainstays. amenity-rich hostel. where traditional hotel rates are prohibitively expensive. these concepts offer members-only facilities. lounges and bars as the focal point of the property and invite guests to spend more time congregating in revenue-generating areas of the hotel. such as smaller rooms. offering no-frills accommodations and communal spaces that provided cost savings and enhanced social atmospheres. the European alternative lodging industry has largely catered to students and backpackers.

Despite their growing popularity. Although these club concepts initially originated in major cities with significant artistic influences. With a focus on providing social interaction and workspaces for like-minded individuals. hoteliers will need to balance satisfying this demand with investments in traditional products. Top thoughts for 2015 15 . these concepts can have lower development costs than traditional fullservice hotels. including Times Square in New York and South Beach in Miami. these concepts aim to produce a creative and local experience. Budapest. Nashville and Shanghai. such as New York and London. nontraditional spaces. including annuities from membership fees and guest fees. However. and have greater flexibility to use lower-cost. fixtures and equipment expenses are appropriately managed. as these products typically emphasize design as a component of the hotel’s experience. often in niche industries such as fashion. Additionally. Membership clubs often feature programs and events with culinary. smaller rooms and the ability to use nontraditional spaces. As development costs and land prices in metropolitan cities continue to soar. similar concepts have emerged in cities with expanding creative scenes. sometimes with locations across various venues throughout a city. lower operating costs and management terms that are both less expensive and more flexible than traditional chain management agreements. With multiple components. appealing to a broad array of non-member hotel guests. lifestyle membership clubs benefit from diversified revenue streams. hoteliers must ensure that soft costs and furniture. fitness. academic and wellness elements. many of these alternative lodging products have penetrated some of the most expensive and highly trafficked neighborhoods in the world. many investors and lenders consider alternative lodging products as appealing only to a specialized consumer whose preferences will ultimately change with trends. arts and cinema.membership base as a primary demand generator. these products can have higher operating margins than traditional full-service properties. through efficient uses of space. As a result. such as Berlin. alternative lodging concepts have presented developers with unique opportunities to reduce costs while maintaining the ability to generate strong demand. As demand for new lodging products and experiences continues to grow. With shorter development periods.

laying the groundwork for an emerging trend of launching new hotel brands worldwide. as Dubai’s government has waived the municipality fee on each room night for three. The competitive environment for new hotel brands may be better than ever thanks to technology integration within the industry. New brand development is prominent across all price tiers but is slightly more concentrated in the upper level. favoring hotels that feature smaller guestrooms emphasizing functional design. public spaces designed to stimulate social interaction.and four-star hotel developments. however. Global hospitality insights 16 Across the globe. Millennial travelers — those born roughly between 1980 and 2000 — and older affluent but young-minded travelers are the primary targets of today’s brand developers. Accordingly. newly launched brands are targeting market opportunities at different chain scales. You can see a similar trend toward the middle price tier in the Middle East. development of new brands has been most prominent in China. new contenders must understand the most important aspects for developing. As more lodging products are launched in today’s competitive global market. New entrants now coexist with long-established global players in an online world of transparent pricing. most are seeking to capture travelers at the middle to upper price tiers.Critical success factors for new lodging brands The global lodging industry has experienced strong growth over the past 12 months. successfully launching and positioning . social media marketing and digital reputations. Alongside this paradigm shift in technology. which has leveled the playing field. Luxury brands have traditionally dominated the hotel landscape in Dubai. the integration of local cultural elements into the guest experience. amenities and offerings that promote wholesome and healthy lifestyles. enhanced technology throughout properties. In North America and Europe. hoteliers are developing brands that cater to a new set of demographic and psychographic customer profiles. These travelers seek experiential products and brands that reflect their personal values. where they have the opportunity to build long-term brand equity in a market with little existing brand loyalty. market participants have now been incentivized to introduce brands within lower to middle price tiers and focus on developing lifestyle lodging offerings. Across Asia. and affordable luxury design and service levels. new brands from established or newly formed companies are departing from the “home away from home” philosophy of hospitality.

You can contrast the W and Waldorf-Astoria brands. Top thoughts for 2015 17 . Brands and organizations that have an aspirational and humanistic purpose in place internally and infused in all customer touch points enjoy the benefit of having all stakeholders — from sales representatives and IT staff to C-suite executives — galvanized around the same belief. To achieve a successful brand launch in today’s environment. With technology disseminating information faster than ever before. they buy a feeling and want to share your belief. customer preferences and insights need to be anticipated to evolve a brand ever more rapidly. a company can focus on greenfield to manage quality. JVs or ownership. geography and market positioning. New brands are establishing themselves in increasingly niche markets. It’s also important to identify the innovators and early adopters — your key target segments when launching a new brand or product. Successful brand developers consider their development business model. Allocating resources to understand and anticipate a target segment’s lifestyle and lodging preferences is crucial. For example. • Understand your target customer segments and stay relevant to them. but brownfield conversions — especially in Europe — will accelerate growth. brand developers need to keep pace with the trends and dynamics of the market. • Ensure that the foundation of your differentiating concept translates into unique guest experiences. • Lead with a purpose-driven brand and build a culture based on your purpose. Here are several critical success factors for growing and developing new hotel brands: • Analyze the market for opportunity gaps. Customers do not buy a “stay”. management contracts. • Plan the long-term execution of the brand appropriately. Successful brands infuse their values into each aspect of the guest stay to create a product that is perceived and valued as truly unique. identify unfulfilled demand needs by chain scale. When developing a brand. • Identify whether the best route to address your target customer segment is through developing a new brand or extending an existing brand. The successful lodging brands of tomorrow will invest to understand key differentiating market and customer insights and move forward with concept and experience development today in order to stay relevant in the long term. A focused brand promise is key to delivering a signature guest experience. which are excellent examples of how both these routes can be used. Leveraging existing brands to address a customer niche can work to accelerate growth but is not always the appropriate choice.themselves for growth. including greenfield versus brownfield as well as franchising.

who. This latter model became popular during the last real estate upcycle in the 2000s. . who owns the building’s public spaces and ancillary revenue-generating facilities. Condominium hotels vary in structure and operation throughout the globe. While in most locations they physically resemble a condominium development. however. in a 1973 release (SEC Release 335347) and in subsequent no-action letters. and international buyers. restructuring or bankruptcy. faced additional complexity and risk. in other locations the asset resembles a typical transient lodging operation.” In brief. the SEC’s guidance prohibits (a) the pooling of income. The US Securities and Exchange Commission (SEC). familiar with the concept back home. Regardless of the physical appearance or operating structure. share in the revenues and expenses associated with the rental of their units as transient lodging accommodations. In markets where traditional construction lending was limited. income allocation and securities issues. particularly in gateway and primary resort destinations. and individual unit owners. amenities and level of finishes consistent with a hotel operated by the affiliated brand. offering large units with kitchen facilities and little public space beyond a reception area. lodging operators and unit owners alike. the ownership structure is divided between a hotel lot owner. Lodging operators benefited Global hospitality insights 18 from new inventory under management and potentially earning a licensing fee on the sale of the units. mostly due to issues surrounding control. if participating in an available rental program. have faced litigation. who. With the global economic decline. particularly in the US. (b) emphasis of the investment aspects of the condominium and (c) restrictions on use of the condominium (such as a mandatory rental program). In this model. has addressed the issue of when the sale of condominium units constitutes the sale of a “security. This kind of condominium hotel features the public space. Unit owners often purchased units assuming that values would continue to appreciate and that the income generated from their revenue split would cover their costs of ownership. combined with an updated regulatory framework is causing a resurgence of interest in condominium hotels. the presale of units had allowed developers to obtain construction financing. aligning themselves with a hotel operator to gain pricing premiums on unit sales. a major source of global investment in second-home real estate. At the core of the complexity has been the applicability of securities laws to the offering of condominium hotel units. condominium hotels are often considered attractive to developers. many condominium hotels. This issue affected projects targeting both US buyers. particularly those located in the US.Condominium hotels — lessons learned Improvement in the global secondhome and overall lodging markets.

They offered optional rental programs. If a condominium hotel is under the new rule. Further. not having been provided forward-looking income estimates. the Jumpstart Our Business Startups (JOBS) Act contained provisions that are being applied to condominium hotels and serve to bring the structure more closely aligned with other global markets. owners frequently rented their units outside the hotel operator’s voluntary program. also were required to address frequent unit owner calls for explanations. mandate participation in a rental pool and provide greater information that may emphasize economic benefits. Unit owners blamed the hotel brands and the developer for lack of financial returns despite often being in markets in which hotel performance may not have been feasible given the prices paid per unit. disclosed and documented. In the right markets. for example). Buyers. combined with a complex set of agreements that often were unclear or inconsistent with the structure. In the JOBS Act. who ended up sometimes facing higher than anticipated maintenance fees and capital expenditure requirements with lower than expected revenue. Recently. Top thoughts for 2015 19 . And the global economic downturn exacerbated the situation. with the unit guest unable to access the hotel operator’s services and amenities. by splitting revenue. While many questions remain regarding compliance with rules concerning securities sales. the revenue that a given unit could produce often calculated negative returns. For example. the hotel operation often struggled. Operators. These issues. and a resurgent global economy and real estate market. the new Rule 506(c) allows for greater general solicitation and advertising as long as buyers are accredited investors. condominium hotels can be mutually beneficial for all parties when interests are aligned and the details are carefully thought through. struggling with managing inventory around owner usage and varying rental program participation. This complexity was further exacerbated by the deal being put together prior to unit owners being involved. often overestimated occupancy and rate assumptions. the unit purchaser. who were except from such regulations. avoided sharing or discussing any information related to the economics and separated the rental program and purchasing decisions. revenue and expense allocations may have made sense to the operator and developer but often did not sit well with unit owners. led some projects to fail. This. Income and expenses were individually allocated to unit owners whose unit participated in the rental program. may give new hope to branded condominium hotels. a developer could then pool revenues and expenses. Given that the rental program participation could not be mandated. accounting for each unit’s income and expenses separately. and carefully balancing rotation of units among developer and unit owner inventory. Given the high prices paid for highly amenitized units during this era. in the US. These new provisions serve to provide more information to the buyer. or targeted non-US buyers. many globally recognized lodging operators are weighing the pros and cons of managing condominium hotels and/or have developed procedures to control risk (requiring a certain percentage of units to be dedicated hotel inventory. The impact of avoiding SEC registration produced relatively uninformed purchase decisions by the primary contributor of capital to the project.Most developers sought to avoid the costly and impractical registration process and set up procedures to avoid having to register.

“Downtown Brooklyn. beverage and retail offerings. These once untouched and undesirable submarkets across the world are now attracting stakeholder attention. the number of apartment units has tripled. accessed November 2014. with new properties primarily consisting of midscale to upper-upscale and independent properties. authentic food. Lodging investors and brands have the opportunity to pioneer a neighborhood by entering the market in the early stages of development. residential and commercial development in the borough. Brooklyn immediately experienced a significant increase in development.378 Services/Location_Services/Downtown_Brooklyn/CBD_1Q11_ DB. representing an 11.” New York City Economic Development Corporation. Since 2007.pdf. to support and encourage the revitalization of Brooklyn. this. Typical characteristics of these submarkets include easy accessibility to the urban core. As a result. investors and residents began to seek out more affordable opportunities in nearby Brooklyn. “Downtown B’klyn Seen as ‘Shining Example. Brooklyn’s hotel inventory has doubled.Emerging submarkets within mature lodging markets In recent years. has created higher barriers to entry and lower yields for investors.6% increase in rooms from the prior year and proving that investor 41. introducing brands that complement the area and create social spaces that welcome both local residents and visitors. In 2004. art and music scene often attracts visitors seeking a more authentic and unique experience. the thriving food. the local government rezoned several neighborhoods and invested US$400 million to promote retail. in turn. However. 42. as real estate prices in Manhattan continued to increase. One example of a submarket that has benefited from expansion and urban renewal is REAL_ESTATE/140719927/downtown-bklyn-seen-as-shiningexample. Tourists are initially attracted to these submarkets by the lower price of lodgings. Since then. 15 July 2014. www.’” Crain’s New York Business. limited development opportunities and more aggressive competition. as these areas become more established. In the early 2000s. www. Global hospitality insights 20 . as evidenced by the significant public and private investment taking place in these areas.crainsnewyork. with 17. and lower levels of congestion. the number of affordable apartments has increased from zero to 41 over 400 and downtown Brooklyn is now the third-largest office district in New York City.3 million square feet of 42 office space.nycedc. The expansion of major urban centers has resulted in higher market rents. urban revitalization and population growth in outlying areas surrounding major cities have created a wealth of opportunities outside mature lodging markets. New York. the Brooklyn pipeline has 27 projects totaling 2. As of October 2014. residents and developers are being priced out of the urban cores and they have been forced to look for more desirable opportunities in peripheral areas.

45.” SocialistWorker. diverse tourist and cultural attractions.” SFGATE. this per-capita rate is more than 29 times Brooklyn represents one of the nation’s most underserved metropolitan areas for lodging. In the 1990s. According to Visit Oakland. including urban renewal. Given its location north of Silicon Valley. the lodging need within these submarkets. the city has been recognized as a highly desirable travel destination by well-known publications 45 throughout the 47. 44. its status as a major hub for technology and biotech employment and that it is a gateway market to Asia. 48. Oakland benefits from its proximity to a major urban city. boutique properties.000 residents. Brooklyn’s hotels exhibit strong operating performance. lodging offerings in Oakland are limited. investors are looking to peripheral areas. Other neighborhoods in cities across the world. with occupancy and an 43 average daily rate (ADR) well above national averages. it launched the “10K Two Plan” to attract an additional 10. which is about 20 miles away. showing that Brooklyn needs more hotels to meet demand. as well as its authentic restaurant and bar scene. including East London. Ibid. http://socialistworker.000 new residents. “Project Gentrify in Oakland. an increase in newer lodging brands.” VisitOakland. “Oakland primed to seize on demand for hotels. 4 September 2014. San Francisco. attributable to Oakland’s cultural diversity. Despite this. 46. 2 October 2014. 2 October 2014. Recently. Oakland attracted more than 2. Customers. Oakland experienced significant development over the past decade. Oakland is experiencing revenue per available room (RevPAR) 48 growth of approximately 13%. Trastevere in Rome and Revolucni in Prague. which now attracts millions of visitors annually.confidence in Brooklyn’s lodging market remains high.” which was intended to attract 10. for additional opportunities. http://visitoakland. In 2013. proximity to urban cores and increased public and private Companies. Top thoughts for 2015 21 . “Visit Oakland 2014/15 Strategic Plan. occupancy rates in Oakland are higher than in most other California submarkets due to the extremely limited supply and high demand. It is now popular with for leisure and business travelers seeking a more authentic and local experience. in uploads/2014/02/VO14008_strategic-plan_web. http://abc7news. professional crowd. as Alternative to Manhattan. 26 May 2013. Kreuzberg in Berlin. have exhibited similar qualities to Brooklyn and Oakland. as well as favorable tax incentives. The area has only one hotel room for every 589 residents. is anticipated to expand. However. Oakland has also focused on increasing public areas. Real Estate. “Brooklyn Lures Hotel Investors. Oakland’s mayor introduced the “10K Plan. accessed November 2014. “Oakland Turning Into Hot Market for Business.” Hotel Management . are choosing Oakland due to the value proposition: large and more affordable office space. particularly start-ups. San Francisco has become one of the world’s most sought after markets for real estate investment. www. totaling more than 7. well above the US national average. such as Lathan Square.500 units.pdf.hotelmanagement. More recently.5 46 million visitors. Similar to Brooklyn. As such. as prices in San Francisco continue to rise. It is doing this through 15 major housing 44 development projects. to support additional development and enhance the community. The residential population has shifted to a younger. 43. As visitors continue to choose to stay in these peripheral areas. Lodging development in Brooklyn offers developers more affordable land prices. However. particularly Oakland. with just 94 hotels (only 14 of which are branded properties). over the past decade. and the emergence of new submarkets across the globe.” ABC7 News San Francisco. while San Francisco has 47 more than 200. development and urban renewal have surged in Oakland. has also become a tourist destination in its own right. California.

a guest may call the front desk to request a forgotten toiletry. 87% of travelers use a smartphone and 44% use a tablet while traveling. http://mobile. 49. According to a 2014 US survey by USamp and Smith Micro Software.smartbrief. From an ownership standpoint. lobbies and front desks.Hotel technology Trends_2013. which delivers the item 52 directly to the room. accessed October 2014. allowing hotel employees to interact more with guests.mobilemarketer.” TechCrunch.S. accessed October 2014. www. For example. hotel companies are turning to products and applications that empower guests to browse inventory. one international hotel brand has taken a more proactive approach by partnering with a leading engineering and technology university to redesign the future hotel experience and find innovative ways of making public areas more exciting. Travelers. As such. Other mobile innovations include mobile starwood-introduces-robotic-butlers-at-aloft-hotel-in-palo-alto. today’s hotel guest is pushing hotels for improved products and services in their travel experience. 51. Userfriendly and powerful smartphones and tablets are changing travelers’ online preferences and releasedetail. user-friendly and relevant to the technology 51 needs of today’s traveler. with a focus on accommodating these devices in guestrooms. recent advances in wearable technology. such as smart watches and glasses. one major brand recently launched a robot butler equipped with a tablet to facilitate interaction between guests and staff. As such. For instance.smithmicro. In Silicon Valley.” Smith Micro. http://ir. “Starwood Introduces Robotic Butlers At Aloft Hotel In Cupertino. check-in kiosks and mobile-enabled property management systems. For example. www. According to a 2013 global survey by TripAdvisor.cfm?releaseid=808058. accessed October 2014. social media and advanced analytics continues to from booking to 49 checkout.pdf. accessed October 2014. “10 Hospitality Technology Trends You Need To Know About. meeting 50 spaces. Moreover. book amenities. 52. http:// etc-digital. com/company/news-room/press-releases/2014/06/23/majorityof-consumers-prefer-to-purchase-and-reserve-hotel-services-usingmobile-devices. 50. are expected to revolutionize the way customers access the web and contribute personal content.html. and as online distribution channels become more accessible. “Social regional-overview/north-america/. accessed August cms/news/database-crm/18296. http://techcrunch. hotel reviews that feature video instead of just text will place even more emphasis on hotel reputation and performance.” MIT Mobile Experience Laboratory. “Conrad Hotels empowers travelers with end-to-end mobile customer experience. more than 60% of travelers prefer to purchase and reserve hotel guest services using mobile devices 53 rather than face-to-face with hotel staff.tripadvisor. the hotel staff then inputs the guest’s room number into the robot’s tablet interface and places the toiletry on the robot.” European Travel Commission. plan and book a www2. accessed October 2014. Global hospitality insights 22 We’ll begin with today’s traveler.” Mobile Marketer. 53. 54. complete reservations and purchase a variety of services (such as room service) via mobile devices to drive engagement and increase revenue-generating 54 opportunities. accessed October 2014. . Empowered with more knowledge and social media. Smartphones & Tablets Now Essential Travel Tools for U.” Smart Brief.0 New advances in technology continue to alter the relationship between hotels and guests. advances in data analytics are transforming the hospitality industry with the potential to enhance a hotel’s financial performance and offer detailed insight into customer preferences. technology has created new opportunities for hotels to drive operating efficiencies and engage with guests. “The Future Hotel Experience. As the use of mobile devices. redefining how they research. “Mobile/Smartphones. hotels are rethinking all aspects of the hotel experience.” TripAdvisor. “Majority of Consumers Prefer to Purchase and Reserve Hotel Services Using Mobile Devices.

” Hotel News Now.dotrising. “Duetto Raises $21M Led By Accel To Equip Hotels With Big Data Surge Pricing. Other innovative online reservation platforms can also provide hotels with a source of additional revenue by allowing non-hotel guests to book meeting space on an 59 hourly basis. www. by the Hour.” . online travel agents (OTAs) are providing additional services to encourage hoteliers to 57 distribute rooms on their article/14016/5-tech-trends-that-will-shape-hospitality. as travelers are increasingly looking online to book hotel rooms and customer acquisition costs continue to rise. better understand guest preferences and build stronger 60 customer relationships. 58.100% by deploying a new online advertising platform. 60. 61. www. new technology has also impacted how guests are acquired in the discovery and booking phases. hotel brands seek to drive bookings to their own proprietary websites by leveraging the power of loyalty programs and streamlining the booking experience. a major international hotel company stated that it booked over 50% of its reservations through its direct central reservations system due 58 to its strong rewards program. “Internet Travel Hotel Booking Statistics.Rising. 57% of all travel reservations are taking place online. “Evolution in Electronic Distribution: Effects on Hotels and abstract-13606. “Office Space.html. accessed October 2014. At the same time. news/154000320/4066627. accessed October hotels-carve-out-work-spaces-rented-hourly.hotelschool. According to 2014 research by eTrack. one international hotel company reported an impressive ROAS increase of approximately 2.hotelnewsnow. 55. 62 including the hotel’s website activity or weather conditions. www.” The New York Times.cornell. Through acquisitions of property management and digital marketing platforms. www. In 2014. improve the return on advertising spend (ROAS).” an ownership standpoint. Leading hotel companies are also leveraging advances in data analytics and artificial intelligence (AI) technologies to increase online reservations. accessed October 2014. mobile and analytics to drive business improvements.” Statistic Brain. amadeus. Top thoughts for 2015 23 .” Cornell University School of Hotel Administration.hospitalitynet. 59. while internet travel booking 55 revenue has grown by more than 73% over the past five eMarketer and Alexa.html. In 2014. 56. “Hospitality Asset Managers Association (HAMA) Study Documents Growing Revenue Acquisition Costs Outpacing Hotel Revenue Growth. On the other hand. Hotels must holistically embrace social. “Major global study reveals how big data will transform the hospitality industry. www. Other big data and AI applications focus on enhancing a hotel’s revenue management system by dynamically changing room rates based on a number of changing variables. “5 Tech Trends That Will Shape Hospitality.” Amadeus. com/2014/01/13/hotel-chain-utilises-new-digital-advertising-platform-to-great-success. A hotelier’s ability to keep up with rapid technology changes and embrace the latest technology tools will differentiate successful hotel organizations going forward. AI technologies utilize powerful algorithms to determine the most appropriate media to focus advertising spend. accessed October 2014. enhance hotel guests’ experiences and deliver results. accessed October 2014. accessed October 2014. accessed October 2014. the competition to gain control of the distribution 56 channel has intensified.” HospitalityNet. “Hotel chain utilizes new digital advertising platform to great success. which combined data 61 analytics with AI technologies. www. accessed October 2014. 62. 57.

often as a division within the tourism or economic development ministry or department.Investment promotion agencies — catalysts for tourism investment Over the last decade. promoting income growth and job creation in local economic%20impact%20research/regional%20reports/world2014. For investors unfamiliar with specific destinations. The investment division of the DMO. such as chief investment officers and investment managers. ashx.3% by 2024. where growth has shifted away from goods and products toward services. with tourism and hospitality accounting for a significant portion. Recently. “Tourism highlights: 2014 edition.” UN World Tourism Organization. which is producing the most effective results. www. Whether a hotel development. the IPA. Effective DMOs often include leadership. while creating a competitive and transparent investment process. This structure also enhances their ability to attract and retain highly qualified real estate and hospitality professionals with track records in billion. The most effective IPAs act as an “investment concierge” – entities that help foreign investors navigate local rules and regulations. efficiencies and flexibility to dealmaking. while reducing political whims in the process. accessed November 2014. there is tremendous future potential: international tourist arrivals worldwide are projected to increase about 70% between 2013 and 2030. 63.5% of the worldwide GDP and is projected to 64 increase to 10. in addition to identifying potential investment trends and tourism investment opportunities. golf course or tourism infrastructure. “Travel & Tourism Economic Impact 2014: World. a more public-private trend has emerged — yielding more nimble organizations that use a business model similar to that of a private business. both supported by teams of analysts. these teams create the foundation for the rest of the DMO to promote and market the destination. spurred by foreign direct investment. IPAs effectively reduce due diligence costs. or enhanced existing. has evolved into a key economic driver for many destinations. and consequently spurring investment and development. destination management organizations (DMOs) to include investment promotion agencies (IPAs) or divisions. which broaden the pool of potential investors.wttc. DMOs and IPAs are generally organized as public entities. reaching 63 1. is responsible for developing and maintaining strong working relationships with current and prospective capital partners. including in emerging economies. 64. Global hospitality insights 24 Competitive destinations across the globe have recognized the value in tourism and developed new. This is a strategic shift that aims to drive local and foreign investment into the destination to improve both the product offering and visitor experience. By reducing uncertainty. Additional responsibilities . development and acquisitions. The public-private structure has proven to add technical investment expertise. the IPA takes a multi-dimensional view on the best channels for increasing tourism — matching the most suitable investors with tourism needs. While global tourism has grown rapidly.unwto. access market data and research and assist with investment opportunity identification. The hospitality and tourism sectors have emerged as key value drivers and differentiators in a competitive economy. accessed November 2014. Tourism currently accounts for nearly 9. tourism. http://mkt. however. traverse bureaucracy.” World Travel & Tourism Council.

well-structured IPAs have proven to be crucial. much-needed development is taking place on new hotels and mixed-use resort projects in the Caribbean using commercial immigration to attract investors. with responsive IPA staff filling requests for it as needed. The data should be accessible and accurate to provide real added value for investors.g. including international and domestic visitation. IPAs have the ability to incentivize investors through a variety of channels. IPAs measure their performance by assessing the changes in three key metrics. Key performance indicators are essential for IPA teams tracking the effectiveness and success of the investment plan. Government involvement — via debt. With the cooperation and support of public offices. IPAs can benchmark their progress in other areas by setting strategic goals such as the amount of capital funds raised. For a destination. coordinating with government entities to increase access to investment opportunities within the destination and developing and implementing the overall investment strategy to increase the attractiveness of the destination from an investment and tourism perspective. it is not enough to just show promise — to capitalize on the global expansion of hospitality and tourism markets and attract investors. Top thoughts for 2015 25 . they have reduced hesitation in the capital markets and shown that tourism is an important economic differentiator. while reducing investor risk. Moreover. tourism expenditure and tourism sentiment over time. are prime examples of aligned public and private interest with positive economic benefit. Leading IPAs work with governments to draft incentive and concession legislation to induce capital investment. Profit repatriation benefits and residence work permits for key investors and development staff are among some of the incentives used. Governments with investment arms that can provide transparency and one-stop facilitation and that can deploy public capital have increased confidence among private investors. Thanks to their transparency and responsiveness. construction costs.. the US EB-5 program). which in turn leads to economic development and job opportunities. The role of government as a partner is critical to the success of an IPA. investor sentiment. The most effective IPAs have the proper systems and people in place to collect qualitative and quantitative data needed for foreign direct investment. equity contributions or guarantees — serves as an indication of confidence in local investments and its commitment to the success of the tourism value chain. such as commercial immigration (e. room supply pipeline. zoning and permitting information and an overview of available investment opportunities. macroeconomic data. marketing promotions and tourism job creation.include evaluating risk and return metrics for competing investment opportunities. government-sponsored investment programs. IPAs have recognized that reliable business intelligence and local data are crucial for attracting foreign investors. This data includes hotel performance metrics by chain segment. Currently.

The leading companies in this new sharing economy market have initially been focused on the transportation sector.nytimes. on the other hand. In a year. helps set expectations for the product and services 65. http://dealbook. attracting other specific segments of the market can be a challenge. Uber. which can vary widely in physical attributes. they have also made inroads into the hospitality space by. but their growth is as well. to name a few.” Forbes. This enhanced trust in both the product and brand enables a faster selection process for the customer. business travelers seek certainty. as some have reached valuations on par with well-established. As shared economy concepts continue to grow their footprint in the hospitality and leisure sector. Airbnb. connecting travelers with home or apartment owners and matching part-time cooks with adventurous eaters. quality and level of service. changing consumer preferences. Global hospitality insights 26 while increasing overall confidence in the experience. only in its sixth year of operation. The rise of many of these businesses has been impressive. In from a consumer’s perspective. lodging platforms under the sharing economy model typically provide non-standardized products. this requires more initial research by the customer before making a buying decision. both the traditional lodging industry and the new-age sharing economy companies can learn from one another. Some examples include segmenting customers. “Airbnb: The Hotel Disruptor Unconstrained by Real Estate. “A Disruptive Cab Ride to Riches: The Uber Payoff. design. enabling consumers to make their lodging choices faster and with a greater degree of confidence.Mutual learning opportunities: the sharing economy and the lodging industry The sharing economy has cast consumers as service providers. have segmented their products based on different consumer preferences into various brands. For example. . While the numerous types of accommodations in a sharing company can be an advantage for travelers seeking a airbnb-the-hotel-disruptor-unconstrained-by-real-estateg34TH4zdTiiQgq1z~WLt~A. “Airbnb Weighs Employee Stock Sale at $13 Billion Valuation. which. www. accessed 18 August 2014. In comparison. enabling underutilized assets to be operated for financial gain. 67. which connect passengers with private drivers. including well-known ridesharing companies Uber and Lyft. reliability and ease when making lodging decisions. Not only are their valuations making headlines. added more listings to its existing inventory than the largest hotel companies introduced as 67 new units combined over the same period.” Bloomberg TV. each associated with a differentiated product for example. 66. Most established lodging brands are intentionally standardized. www. 23 October 2014. price point and facility and amenity package.” The New York Times Dealbook. creating customer loyalty and managing feedback.html. Hotel companies. already controls about 17% of the US$100 billion global taxi/limousine 66 market. lesstraditional experience. com/2014/04/21/morning-agenda-airbnbs-10-billion-valuation. 65 publicly traded companies. accessed 16 October 2014. a company that enables people to rent out lodging.

Loyalty programs are one significant driver of bookings for traditional hotels. number of reviews. Top thoughts for 2015 27 . The lodging and travel sector.” Forbes. For new and existing lodging projects to succeed. However. including room style. While some companies in the sharing economy have started to adopt similar strategies. have long seen pricing as a key success factor and developed sophisticated pricing models and revenue management tools. property type. Given the success of these programs for established hospitality companies. Airbnb.forbes. customers are able to have a differentiated experience by. One of the key challenges in the sharing economy is the lack of control over rameetchawla/2014/11/07/fueled-fix-how-airbnb-should-unleash-market-pricing. www. The predictive pricing algorithm provides hosts with a recommended price for their listing depending on many factors. but it also allows the consumer to make a quicker buying decision. as we are seeing a shift toward adding lifestyle brands. seasonality. Part of the appeal of the shared economy concepts has been their ability to cater to those specific needs. which offer home-cooked tasting menus that could change daily in the intimate setting of the chef’s home. location. hotel and airline demand. Traditional lodging companies control their inventory not only in terms of supply but also in terms of pricing and execution of the service. However. a lot can be learned from them. Customers are increasingly seeking unique. most programs are still in their infancy. accessed 7 November 2014. Currently. Business models in the sharing economy are commonly based on a third-party host setting the price and providing the service. which has adopted the use of brand categories with the introduction of uberX. These programs are an especially important contributor to business-travel demand. particularly airlines. Given the diversity of unit locations in any particular market that companies like Airbnb offer. pricing of other listings. These differentiated categories not only help segment the customers based on different product types and needs. capacity. has spent significant effort on developing a pricing model following feedback from users who faced difficulties setting the right price point for their listings. Other examples include Feastly or EatWith. This is due to the decentralized nature of most of the sharing economy models.Segmentation in the shared economy is possible. “Fueled Fix: How Airbnb Should Unleash Market Pricing. The introduction of reward programs appears to be a logical next step for many of the business models in the sharing economy in order to foster and strengthen loyalty among their users. it’s imperative for them to take this shift in guests’ preferences into account. Hotel companies pride themselves on the strength of their reward programs to create brand affinity and loyalty and ultimately to generate revenue. as seen by Uber. UberBLACK and uberXL. The traditional lodging industry has taken note. staying in local neighborhoods that do not feature traditional hotel accommodations and but offer unique amenities. Pricing may prove particularly challenging for hosts who lack the necessary experience to effectively assess the 68 market value of the service they are providing. these programs will likely be somewhat different from the existing hotel companies’ programs based on how customers can redeem points and how the ultimate service provider gets compensated. as they enable travelers to earn points on business trips that can then be redeemed for personal travel. the only major company in the sharing economy that has launched its own loyalty program is Uber. 68. and even temperature changes at the destination. which originally had left pricing at the discretion of its hosts. authentic experiences anchored in the destination they are visiting. allowing customization and incorporating authentic local offerings. it still allows the host to ultimately set the final price. for example.

Global hospitality insights 28 . However. In addition. on the other hand. have found an arguably better solution. Looking ahead.” Companies in the sharing economy. Research has shown the correlation between the relative quality of reviews and the demand for a particular property or establishment. their process. both emerging and traditional hospitality platforms must adapt to changing customer preferences. This concept could offer traditional companies in the hospitality industry an alternative solution to the current approach of relying on thirdparty websites for publicly available customer feedback. companies have limited control over managing and influencing the actual content.These days. The reliance of consumers on third-party sites as part of their buying decision process appears to be continuously increasing. By hosting reviews on their own websites. Companies in both groups have the opportunity to learn from each other by studying each other’s best practices and strategies to enhance their own business models. various consumer segments and loyalty programs. the hospitality and leisure industry has become significantly focused on monitoring and managing reviews posted by travelers on third-party sites. as the reviews are submitted on external sites. which would also bring the process in-house. which will all drive future growth. they are able to better oversee and control content. the authenticity of the posted reviews is often put into question due to the use of “professional reviewers. In addition. which in most cases allows only one review per service experience. typically only by posting responses to the individual feedback submitted. provides full transparency to both users and hosts and better ensures the authenticity of the feedback.

Top thoughts for 2015 29 .

Instead. operating them or maximizing the values of brands and other . they must also properly manage cross-border tax implications that could adversely affect profitability. These models. As new markets gain momentum. tax advisors are now called on to develop robust tax models that project capital flows and the related tax consequences throughout the life of the investment. During 2015. The structure allows for organizations to identify and focus on one core business. as well as emerging ones. sometimes referred to as baby REITs. This year. The strategic use of REIT structures to hold lodging assets across the globe will continue to gain investor attention in 2015. advisors must carefully consider the tax consequences of where the capital originates. escalating tax enforcement initiatives and an increasing number of indirect taxes. several key tax considerations. which may own only a single property. Given the heightened tax scrutiny that investor groups are now subject to. As countries are regularly revising Global hospitality insights 30 and updating applicable tax laws to remain competitive in the global marketplace. with more than 30 countries having now enacted some version of REITlike structures.Global tax considerations As lodging players look to 2015. Another prominent trend that will remain important in the lodging sector in 2015 is the separation of operations and property ownership. certain tax issues must be carefully evaluated as an integral part of a company’s overall investment strategy. whether it be owning lodging facilities. where the investment vehicle is located and where the capital is deployed. whether through publicly held REITs traded on exchanges or through private REITs. Global REITs will gain even more traction. as structures that may have been optimal in the recent past may no longer be the most tax-efficient structure. including the continued growth and sophistication of cross-border hospitality investments. The deployment of capital by sovereign wealth funds and other global institutional investors will require careful consideration of tax regimes and withholding requirements in traditional markets. the wave of countries adopting REIT structures keeps growing. In response. fueling cross-border capital flows. significant cross-border capital flows will continue to draw focus from a tax standpoint. Opco/Propco structures involve the separation of the real estate into one company and operating assets into another company. As observed over the past year. the acceleration of the use of Opco/Propco structures and spin-offs. will remain top of mind for industry participants looking to invest in the hospitality sector globally. are ongoing management tools that allow “what if” scenarios at any point in the investment cycle. with new alliances and joint ventures formed. tax advisors must continually review the investment structures being utilized. commonly known as Opco/ Propco structures. tax advisors can no longer focus on one tax regime when structuring hospitality investments and operations. which incorporate multijurisdictional tax analysis.

Many Opco/Propco structures utilize REITs to serve as the Propco. are at “arm’s length” and compliant with the relevant tax regimes. similar to the Opco/Propco separation. Having gained considerable recognition in recent years. the Propco will then lease the property to the Opco. such as transfer and property taxes. property taxes and value-added taxes (VAT). While indirect taxes may not have been as much of a material burden for companies in the past. which operates the lodging asset. This segregation can be accomplished via a spin-off. The creation of an Opco/Propco structure is often accomplished through a spin-off of one company to the shareholders of the previously combined enterprise. as the Opcos and Propcos attract dedicated investors into one company or the other.intellectual properties. the lodging sector will continue to witness spin-offs among major industry players. lodging companies are now using spin-offs to strategically segregate their portfolios. In addition. will be increasing burdens for hospitality companies. Tax advisors have sometimes found that even intercompany transactions may generate unexpected tax liabilities. full-service properties. the overlapping ownership subsides. Before creating the Opco/Propco structure. a leading practice among successful hospitality companies is to maintain a realtime dashboard that monitors global tax filings and alerts them to upcoming filing deadlines and other critical tax milestones. many lodging companies have increased their focus on transfer pricing. indirect taxes. even if a tax-free spin-off is not a viable option. but to also proactively manage them. Finally. some hospitality players have segregated their limitedservice properties into a separate entity from their portfolio of larger. lodging REITs may still consider taxable spin-offs in an effort to segregate their property types and gain efficiencies. However. A thorough analysis of potential taxable gains. initially creating “brother-sister” companies. or whether the creation of the Opco/Propco structure qualifies as a taxable transaction for the company. it may be possible to execute a tax-free spin-off to separate the property classes. Top thoughts for 2015 31 . Global tax enforcement will go on evolving and expanding in 2015. advisors must evaluate if the spun-off entity qualifies for tax-free treatment. The lease structure of the Opco often includes both a fixed base component as well as a contingent or participating rent component based on the gross revenues of the Opco. is necessary to make an decision about whether to convert to an Opco/Propco structure. both globally and domestically. If properly structured. as well as analysis of indirect taxes. and new indirect “change of control” transfer taxes — triggered when subtle ownership changes are made at the parent company level — can be a burden. causing hospitality companies to prioritize the tracking and monitoring of global tax compliance issues and related tax controversy matters. and in turn. going forward indirect taxes will present a meaningful cost for the lodging sector. In addition to Opco/Propco separations. Over time. Companies must ensure that the “transfer pricing” of their intercompany transactions. For example. Thus. as well as cost allocations. For instance. as governments across the globe carry on with introducing and expanding indirect tax obligations to raise revenue. such as transfer taxes. Many companies are turning to electronic platforms to not only identify and monitor global tax risks. investors will want to review applicable indirect tax implications before initiating new structures or activities. the shareholders. in 2015.

Contracts with Customers. granting the right to use intellectual property and trademarks and performing marketing activities.. hospitality companies must use greater judgment and make more estimates than they currently do under today’s guidance. a hotel management company offers services to hoteliers governed by the stipulations of a hotel management contract. which allows for revenue recognition only when amounts are fixed and determinable. as a result. The FASB issued the new revenue standard in Accounting Standards Update 2014-09. Specific contractual obligations may include arranging services for hotel guests. Substantial judgment will be necessary to determine which of these stipulations individually.e. Variable consideration may include amounts that are earned based on the underlying performance of the property (e. managed and franchised properties. For example. employing hotel personnel. The model’s core principle is that an entity will recognize revenue at an amount that reflects the consideration to which it expects to be entitled in exchange for transferring goods or services to a customer. providing revenue management and accounting services. Under the new revenue recognition rule. represent performance obligations. making estimates of the amount of variable consideration to include in the transaction price and determining how the transaction price should be allocated to each performance obligation. or when bundled with other promises in the arrangement. Areas needing increased judgment may include identifying the performance obligations (i. the Boards).” which has the same meaning as “probable” in US GAAP. 70. .. Contracts with Customers. the management agreement must be analyzed to determine if the stipulations represent performance obligations.Changes in financial reporting: the new revenue recognition standard The way that hospitality companies recognize revenue will soon change after the long-awaited revenue recognition standard is issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) 69 (collectively. The standard refers to this threshold as a “constraint. The transaction price includes an entity’s estimates of variable consideration that it may be entitled to 70 from the arrangement when it is probable that a significant reversal of revenue will not occur in a future period. After performance obligations are identified in an arrangement. Revenue from Contracts with Customers. the transaction price is determined. The IASB standard uses “highly probable. hospitality companies around the globe will need to re-evaluate their policies and practices for recognizing revenue for arrangements associated with owned. promises to transfer distinct goods or services to a customer) in the contract. a percentage of hotel revenues) or incentives that are earned when certain performance thresholds are met. The guidance will be codified in Accounting Standards Codification 606.g. The IASB issued the new revenue standard in IFRS 15. When applying this model. The standard will supersede nearly all revenue recognition guidance in US generally accepted accounting principles (GAAP) and IFRS. Global hospitality insights 32 The standard uses a five-step model to outline the principles an entity must apply to measure and recognize revenue and related cash flows from contracts with customers.” This differs from current guidance. 69.

Under the new standard. use of brand names and trademarks) that differs from the general model described above. the restrictive recognition criteria that must be applied to real estate sale transactions often delays the recognition of a sale and/or results in a deferral of the associated gain on sale.Once the performance obligations are identified and the transaction price is determined. gain on sale) will be recognized sooner than it is under today’s accounting. or “modified retrospective” adoption. however. while nonpublic companies applying US GAAP may elect to adopt the standard at the same time as public companies.. and that revenue (i. Revenue for each performance obligation is then recognized when the performance obligation has been satisfied. when real estate is sold and a management or franchise agreement is retained. 71.g. variable consideration may be allocated to a distinct service in a series of distinct services (e. also may change in certain circumstances. it is more likely that the transaction will qualify for sale recognition. companies must allocate the transaction price to each performance obligation. including real estate properties. hospitality companies would not be required to include in the transaction price amounts expected to be received in exchange for distinct licenses of intellectual property until the subsequent sales occur. royalties from such arrangements are not recognized as revenue before the subsequent sales occur. The accounting for gains and losses on the sale of certain nonfinancial assets. Top thoughts for 2015 33 . Early adoption is allowed under IFRS. in certain circumstances.g. but other disclosures are required.. However. meaning it is applied only to the most current period presented in the financial statements. As a result. Accounting Standards Codification 360-20. meaning it is applied to all periods presented in the financial statements. public companies that report under US GAAP are not permitted to early adopt. the management services performed in the second month of a oneyear contract). under current 71 guidance.e. which is when the good or service has been transferred to the customer. Real Estate Sales. The standard generally requires that entities allocate the transaction price to the performance obligations in proportion to their stand-alone selling prices.. whether reimbursements received for payroll and other costs incurred should be presented on a gross or net basis. Most public entities will adopt the standard in 2017. Other considerations that hospitality entities will need to evaluate include how to recognize amounts paid to real estate owners to secure management or franchise contracts. Under this specific guidance. The standard allows for either “full retrospective” adoption. and the accounting for customer loyalty points programs. The new revenue recognition standard also provides specific guidance for recognizing revenue from sales-based royalties earned in exchange for granting distinct licenses of intellectual property (e. while most private entities will adopt it the following year. In comparison.

many companies will find implementation to be a significant undertaking. hospitality companies should monitor the discussions of the hospitality industry task force that was formed by the American Institute of Certified Public Accountants (AICPA) to discuss the standard’s application to common industry transactions.With over two years until the effective date. Early communication with key stakeholders (e. While some companies may be able to implement the standard with limited effort. audit committees. Global hospitality insights 34 . In addition to their internal preparations. An early assessment is vital to managing implementation.. In addition. Companies with more work in front of them will need to move at a faster pace and may need to consider adding resources. They also may want to monitor the discussions of the Joint Transition Resource Group for Revenue Recognition (TRG) established by the Boards to help them determine whether additional guidance or clarification is needed. it may appear that there is ample time to prepare for adoption of the new guidance. But companies should begin working with auditors and other advisors to evaluate their existing revenue arrangements and address interpretation and application issues.g. investors) will be important if a company anticipates significant changes in the timing and presentation of revenues. consideration should be given to whether any changes are needed in internal control over financial reporting.

Top thoughts for 2015 35 .

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