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Global hospitality insights

Top thoughts for 2015

Contents
03

Foreword

04

Appetite for investment: the current capital
climate

08

Active global M&A in the hospitality
industry

10

Outbound investment from Asia

12

Seeking operational excellence: consolidation
of third-party management companies

14

Lifestyle lodging products

16

Critical success factors for new lodging
brands

18

Condominium hotels — lessons learned

20

Emerging submarkets within mature lodging
markets

22

Hotel technology 2.0

24

Investment promotion agencies — catalysts
for tourism investment

26

Mutual learning opportunities: the sharing
economy and the lodging industry

30

Global tax considerations

32

Changes in financial reporting: the new
revenue recognition standard

Foreword
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
1
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
3

” Jones Lang LaSalle. 6.” Real Capital Analytics. accessed November 2014. currently face economic challenges. showing that the industry continues to gain momentum even in the face of accelerating geopolitical instability. Cross-border investment into the US increased approximately 137% from 2013 to 2014. Houston and Orlando. “Fed’s Dudley: expectations for mid-2015 rate lift-off reasonable. capitalization rates in the US are anticipated to trend lower.5 billion compared to US$52 billion in 2013. These issues. despite the boost from the 7.6% over the previous year. Investors from Canada. potential speculation about a bubble is countered by the fact that risk has been priced into the deals seen 8 throughout 2014.Appetite for investment: the current capital climate Real estate fundamentals continue to improve. In Latin America. www. such as Phoenix. . The low rates are highly influenced by the country’s low interest rates.” Jones Lang LaSalle. third quarter 2014. many countries. A wave of new hotels will open in 2015. Global hotel investment continues to steadily increase. “US Capital Trends – Hotels. Greater competition among these investors and subsequently lenders is allowing for more aggressive loan-to-value ratios. averaging 73% through Q3 2014. As a result of strong fundamentals and an increasing array of capital sources. Nevertheless. Global hospitality and leisure transactions increased 8% year-over-year through Q3 2014. and debt and equity capital are abundant. “New Hotel Construction Pipeline in Global Shift. Hotel occupancy in Central and South America through July was down approximately 1. worsening unemployment and currency devaluation. with foreign buyers continuing to look beyond traditional gateway markets to secondary markets. 4. averaging 5. compared to 6. www. Global hospitality insights 4 Throughout the Americas. Malaysia. 8. “US Capital Trends – Hotels. with the rates in six major metropolitan markets. 3.jll. Specifically in the US. and a robust global development pipeline of approximately 1.9% in 2013. including New York City. China. Argentina and Venezuela.com/gmp/market-perspective/hotels.com/article. August 2014.aspx. including Brazil. translated into weaker fundamentals in the first half of 2014.” Real Capital Analytics. Atlanta. www. 2. Singapore and the Middle East have chosen to deploy a large amount of capital in US 5 hotels.” Reuters.3 million 3 guestrooms is in place. “US Capital Trends – Hotels. San Francisco and Boston. coupled with their political instability.” Real Capital Analytics. health 2 and terrorism concerns. “Hotel Investor Sentiment Survey.reuters.com/article/2014/11/13/ususa-fed-dudley-idUSKCN0IX0ZS20141113. providing a solid foundation for an uptick in transaction volume and overall competition. compared to 66% in 2013.5%. Investment in the US hotel sector was expected to continue accelerating throughout the end of 2014. with 2014’s totals expected to exceed US$54. such as high inflation rates. June 2014. aspx?articleid=32644. 5. Japan.hotelinteractive. and hotel performance has followed suit amid a rise in business and leisure travel. which are anticipated to 7 rise in 2015. www.com/hotels/EN-GB/Pages/HISS-June-2014Americas. economic and employment numbers have grown increasingly positive. “Global Market Perspective Q4 2014: Hotel investment maintains momentum despite downside risks. with real estate transaction volumes in some markets 4 reaching pre-recession peaks.joneslanglasalle. 13 November 2014.” Hotel Interactive. with both the full-service and limited-service sectors demonstrating large pipelines of 6 deals under contract. strong performance continued in 2014. 17 April 2014. third quarter 2014. with current capitalization rates close to the previous market lows of 2007.

an 15 increase of 139 hotels since December 2013. “STR Global: MEA pipeline for July. 16. totaling 65. www. the development pipeline continues to grow and now includes 637 hotels.worldpropertyjournal.hotelnewsresource. investors have looked toward secondary markets. totaling 49. as well as steady increases in its hotel operating 10 metrics.” Hotel News Now. “Latin American Hotels Have a Supply and Demand Problem. 13. 16 July 2014. Ibid. hospitality investment in Germany rose to US$1. Top thoughts for 2015 5 . In the Middle East and Africa. Despite rising construction investment and growing occupancy rates among African hotels. While security and health concerns have not yet deterred investment. such as Munich.479 rooms.” Hotel News Resource. www. While hotels in primary markets. which was declared free of the virus in October 2014.” World Property Journal. Lagos’ revenue per available room (RevPAR) declined significantly year-over-year. 26 September 2014. midyear review 2014. representing a 100% increase in transaction volume as compared to July 2013 figures. development and acquisition activity has been prevalent.hotelnewsnow. www.” Real Capital Analytics. Europe has witnessed a rejuvenated hospitality market.html.hotelnewsnow. Countries such as Nigeria. which through H1 2014 climbed 70% from a year-ago. 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.4hoteliers. Investors have displayed great confidence in the continuing strength of London as the pre-eminent European hospitality center. In Europe. 14.205 rooms. are given the highest valuations across Germany. 9.com/news/story/13221. 15 January 2014. In Nigeria.com/2014/09/26/latinamerican-hotels-have-a-supply-and-demand-problem. all except for Moscow are expected to show 12 strong trading performance over the next six months. the Middle East and Africa (EMEA). with 151.com/latin-america-vacation-news/new-hotels-in-latin-str-global-june-2014str-global-construction-pipeline-report-luxury-hotels-in-brazil-new-hotels-in-mexico-new-hotels-incolombia-8362. 10 June 2014. Germany’s low interest rates and high levels of debt liquidity have 13 fueled high levels of investment.” Skift. “Central And South America Hotel Development Pipeline For December 2013 Increases to 305 Hotels. primarily caused by a drop in 16 average daily rate (ADR) from US$279 to US$248 (down 11%). www. of which 40. 12. creating demand from institutional investors as well as major hotel brands that see expansion into the region as a source of future growth. 11. By comparison. www.054 rooms.com/Article/14329/ STR-Global-MEA-pipeline-for-July. 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.” 4 Hoteliers.com/ Article/13850/Global-hotel-pulse-Middle-EastAfrica-news.php.com/article75877. 10.” Hotel News Now. travelers do appear to be exercising caution. Of the 31 major hospitality destinations in the region. which continues to attract large inflows of foreign capital. 15. skift. Even so. “Global hotel pulse: Middle East/Africa news. 2 October 2014. South Africa and Egypt have experienced continued economic growth. In addition. investor sentiment is high regarding future growth and transaction volumes. “Global Capital Trends. mirroring the wider commercial real estate market. 28 August 2014.World Cup in Brazil. the region had 305 hotels in development 11 in December 2013. “Latin America Hotel Market Has 400 Properties Under Development.000 are in Brazil thanks to its surge in corporate and leisure travel.9 billion through July 2014. “Germany still the darling of the hotel investment sector with transaction levels heading for €2bn. Casablanca and Munich. Despite concerns over slow economic growth. such as Frankfurt and Dusseldorf. 14 for higher-yielding opportunities. including Barcelona.

these upward trends may be deterred if political instability and Ebola outbreaks continue.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. private equity funds and REITs are anticipated to remain motivated buyers. accessed November 2014. and Asian investors.8 billion represents a 37% increase year-over-year. “Global Capital Trends. Global hospitality insights 6 . with North Asian and Southeast Asian investors completing 58% and 38%. with noticeable volume gains recorded in the first two quarters as tourism continues to drive economic growth. But Asian investors dominated hotel transaction activity in the first six months of 2014. However. Australia’s strong fundamentals. India’s half-year total of US$1. 18. maturity and transparency have led to steady buying activity from Asian investors. who see potential yields in the 18 booming market.4 billion in the first half of 2013 to US$3. 17. Certain key themes seen globally are anticipated to continue into 2015. of all deals in Asia. Barring any of these shocks to the system. The rising availability of hotel development financing in mature markets will allow for more robust pipelines. assets in secondary markets will attract further interest from hotel developers. the climate for hospitality capital markets activity should remain favorable. respectively.” Real Capital Analytics. “Asia Pacific Hotels MarketView (H1 2014). Much like India.Investment volume in the Asia-Pacific region decreased from US$6. which is largely a result of a number of institutional players re-entering the market.” CBRE. Capital flows into India climbed. Hotel sales in Japan accounted for 47% of transaction volume across the region. midyear review 2014.

Top thoughts for 2015 7 .

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

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

Currently. Ibid.9% in 2012 and only 25. which is 198. Ibid. versus the year-ago period.2% of the cross-border hotel transactions during the 12 months ending October 2014.” Real Capital Analytics.3% greater than sites in San Francisco. During the past year. investing 27. the top three global hotel markets for Asian investment are Manhattan. Hawaii and London. Toronto and London last year. Singapore (17. “Cross-Border Capital Tracker: October 2014. 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.Outbound investment from Asia Overseas capital accounted for 41. Most notably.” Real Capital Analytics. followed by Japan (21. .” Real Capital Analytics. Over the prior 12 months. 24. compared to 34. One such company is a Shanghai-based state-owned Global Fortune 500 company. Additionally. 28.4% of the total outbound capital from Asia.5% and development site transactions increasing 180.2% greater than sites in Manhattan and 645. 3 November 2014. 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.9%). followed by North American and Middle 23 Eastern investors. Europe and Australia is anticipated to keep rising. “Cross-Border Capital Tracker: October 2014. 29. In 2014. Hong Kong. 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. Ibid. with six properties located throughout Hawaii 27 and San Francisco. many of these international buyers are also encouraged to invest abroad due to the geopolitics in their home countries.4 billion entitylevel buyout of a luxury hotel portfolio. Japan and Singapore) represented 43.7% in 2013. with hotel transactions increasing 8. 23. “Trends & Trades: October 2014. Downtown Los Angeles has been a target for ground-up hotel mixed-use development. Asian organizations invested approximately US$844 million in development sites in Los Angeles. 29. For these investors.6%). who are intent on investing overseas as a way to diversify their portfolio and build their international brand. Asian investors (primarily dominated by China. some of the most active investors from Asia have been stateowned enterprises (SOEs) and large-scale developers.5%) and Malaysia 25 (9. Japan’s acquisition activity was predominately related to a Japanese company’s US$1.” Real Capital Analytics. Over the prior 12 months.5% of total Asian hotel investment globally during the 12 months ending 24 October 2014. 27. in 2014. 3 November 2014.9% in 22 2011. Ibid.7 billion during the 12 months ending October 26 2014. 29 October 2014.4 million in 2011 to US$2. representing 48.5% during the 12 months ending 29 October 2014. China has been one of most active hotel buyers. China’s cross-border hotel investment volume has increased from just US$107. “Trends & Trades: Third Quarter 2014. 22.5%). While these Western countries “pull” international buyers to transparent markets for capital preservation and more stable property yields. 3 November 2014. Representing the largest increase in investment dollars. 26. Hong Kong (12. Australia was a target market for overseas Asian buyers. 25.2% of 2014’s global hotel investments through October. Global hospitality insights 10 A number of “push” and “pull” factors drove the year-over-year increase in cross-border activity. and the flow of money from Asia into the mature markets of North America.

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

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. 35. the presence of third-party operators is limited and transaction activity is minimal as investors favor the franchise model. with the top 15 each managing a portfolio in excess of 37 8.com. “Third Party Management Companies: Key Trends and Issues. Consolidation in the industry has become an effective way to grow and diversify portfolios by providing opportunities for geographic expansion and to rapidly . “2014 Hotel Management Survey. and manage properties themselves. 36. 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. Global hospitality insights 12 By providing a value-add strategy for companies to leverage scale and rapidly achieve growth initiatives. however. Chapters 19 to 21. while brands continue to develop and become fully integrated into the market. 18 management companies each operated a portfolio of 50 or more hotels. 37. Transactions in the US have included some of the country’s largest third-party operators. third-party management companies provide daily property and operational management services as well as year-round financial and accounting support for hotel owners. 36 which has surged in the past five years. The same trend is making its way throughout the world.000 rooms. Third-party management companies are far more mature in the US. but on a smaller scale. third-party management platforms have driven M&A within the hospitality industry in recent years. 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. HVS. In the Middle East and Asia. a country that is a leader in the sector’s M&A activity. For investors.” hotelmanagement. 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.Seeking operational excellence: consolidation of third-party management companies Prominent in North American lodging markets. 22 January 2014. Hotel Investments Handbook.” Hotel Analyst.net. 2008. March 2014. experiencing significant growth in the creation of thirdparty management companies. As of year-end 2013 in the US. while marketing the hotel brand through 35 a franchise agreement. Investment funds.

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.net/operator-owner/interstate-maintains-strong-growth-here-andabroad-29159. Investors.” Hotel Analyst. which also can provide access to prospective transactions and significantly increase deal flow. gain quicker access across borders. 30 July 2014. reservations. as well as buying power for various operating systems to better 38 compete in the market.” Hotel Management. In addition. procurement. 39. In addition. accessed 13 October 2014. www.” HVS. 40. 38. 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. Top thoughts for 2015 13 . oftentimes with local management expertise. By constructing a hotel business with an asset-light structure. 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. the demand for capital partnerships is expected to continue to grow. Investors are finding opportunities to enhance bottom-line performance by gaining expanded market penetration and operational strength. therefore. “Interstate Maintains Strong Growth Here and Abroad. “Hotel Management Companies and Equity Contributions: Benefits and Risks. Consolidation provides opportunities for management companies to form new relationships and create synergies in infrastructure. which can bring them access to new deals and lucrative operating platforms. Third-party management consolidation also continues to support the hospitality industry’s strategy toward an asset-light model. and other technology systems.penetrate markets that align with strategic initiatives. With equity participation anticipated to continue in coming years. “Third Party Management Continues Consolidation. which can significantly improve market share and economies of scale. Investors and third-party managers have significant opportunities to fuel growth through consolidation. sales and revenue management. particularly in emerging markets. Capital partnerships often provide opportunities to leverage resources that would not otherwise be at the company’s disposal. 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 contracts. 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. which will lead to an active trading environment in the sector in 2015 and likely beyond.hotelmanagement. August 2014. Key drivers in recent transactions have illustrated that investors particularly value operationally sound third-party management companies with established infrastructure. Management companies are also using outside investment as an alternative means to finance strategic growth initiatives.

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

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

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

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

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

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

and lower levels of congestion. Typical characteristics of these submarkets include easy accessibility to the urban core. accessed November 2014. As of October 2014. with 17. One example of a submarket that has benefited from expansion and urban renewal is Brooklyn. this. In 2004. 42. the local government rezoned several neighborhoods and invested US$400 million to promote retail. www. representing an 11. Lodging investors and brands have the opportunity to pioneer a neighborhood by entering the market in the early stages of development. to support and encourage the revitalization of Brooklyn. limited development opportunities and more aggressive competition. in turn. as these areas become more established. as real estate prices in Manhattan continued to increase.pdf.Emerging submarkets within mature lodging markets In recent years. urban revitalization and population growth in outlying areas surrounding major cities have created a wealth of opportunities outside mature lodging markets.com/article/20140715/ REAL_ESTATE/140719927/downtown-bklyn-seen-as-shiningexample. “Downtown B’klyn Seen as ‘Shining Example. authentic food. introducing brands that complement the area and create social spaces that welcome both local residents and visitors. 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. the Brooklyn pipeline has 27 projects totaling 2. As a result. with new properties primarily consisting of midscale to upper-upscale and independent properties. 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. However. the number of apartment units has tripled. Tourists are initially attracted to these submarkets by the lower price of lodgings. Since 2007. as evidenced by the significant public and private investment taking place in these areas. the thriving food. The expansion of major urban centers has resulted in higher market rents. beverage and retail offerings.” New York City Economic Development Corporation. Since then. These once untouched and undesirable submarkets across the world are now attracting stakeholder attention. In the early 2000s. Global hospitality insights 20 . “Downtown Brooklyn.3 million square feet of 42 office space. Brooklyn’s hotel inventory has doubled.nycedc. has created higher barriers to entry and lower yields for investors.6% increase in rooms from the prior year and proving that investor 41.crainsnewyork.’” Crain’s New York Business. New York.378 rooms. investors and residents began to seek out more affordable opportunities in nearby Brooklyn.com/sites/default/files/filemanager/ Services/Location_Services/Downtown_Brooklyn/CBD_1Q11_ DB. art and music scene often attracts visitors seeking a more authentic and unique experience. residential and commercial development in the borough. www. Brooklyn immediately experienced a significant increase in development. 15 July 2014.

http://abc7news. Given its location north of Silicon Valley.” VisitOakland. is anticipated to expand. accessed November 2014.500 units.net/investment/brooklyn-lures-hotel-investors-customers-as-alternative-tomanhattan-29057. More recently. According to Visit Oakland. Brooklyn represents one of the nation’s most underserved metropolitan areas for lodging. development and urban renewal have surged in Oakland. http://visitoakland. Top thoughts for 2015 21 .com/archive/9116764. as prices in San Francisco continue to rise. 2 October 2014. in Manhattan. “Project Gentrify in Oakland. Customers.confidence in Brooklyn’s lodging market remains high. are choosing Oakland due to the value proposition: large and more affordable office space. for additional opportunities. which now attracts millions of visitors annually. Brooklyn’s hotels exhibit strong operating performance.org. the lodging need within these submarkets. Other neighborhoods in cities across the world. lodging offerings in Oakland are limited. well above the US national average. Oakland’s mayor introduced the “10K Plan.” SFGATE. its status as a major hub for technology and biotech employment and that it is a gateway market to Asia. However. as Alternative to Manhattan. 4 September 2014.” Hotel Management . with occupancy and an 43 average daily rate (ADR) well above national averages. San Francisco has become one of the world’s most sought after markets for real estate investment. such as Lathan Square. the city has been recognized as a highly desirable travel destination by well-known publications 45 throughout the US. Similar to Brooklyn. diverse tourist and cultural attractions.5 46 million visitors. Lodging development in Brooklyn offers developers more affordable land prices. As visitors continue to choose to stay in these peripheral areas. particularly start-ups.” ABC7 News San Francisco.hotelmanagement. However. Oakland benefits from its proximity to a major urban city.000 new residents. have exhibited similar qualities to Brooklyn and Oakland. Ibid. including urban renewal. In 2013. www. occupancy rates in Oakland are higher than in most other California submarkets due to the extremely limited supply and high demand. professional crowd. Trastevere in Rome and Revolucni in Prague. an increase in newer lodging brands. It is now popular with for leisure and business travelers seeking a more authentic and local experience.org/2014/10/02/projectgentrify-in-oakland. 47. showing that Brooklyn needs more hotels to meet demand. “Oakland Turning Into Hot Market for Business. Real Estate. 44. 45. “Visit Oakland 2014/15 Strategic Plan.000 residents. with just 94 hotels (only 14 of which are branded properties).org/wp-content/ uploads/2014/02/VO14008_strategic-plan_web. while San Francisco has 47 more than 200. California. 46. which is about 20 miles away. 48. as well as favorable tax incentives. Oakland has also focused on increasing public areas. “Brooklyn Lures Hotel Investors. it launched the “10K Two Plan” to attract an additional 10. The residential population has shifted to a younger. Companies. Oakland experienced significant development over the past decade.org. 2 October 2014. as well as its authentic restaurant and bar scene. Oakland attracted more than 2. attributable to Oakland’s cultural diversity. Oakland is experiencing revenue per available room (RevPAR) 48 growth of approximately 13%. and the emergence of new submarkets across the globe. including East London. 43. It is doing this through 15 major housing 44 development projects.” SocialistWorker. totaling more than 7. http://socialistworker. The area has only one hotel room for every 589 residents.pdf. “Oakland primed to seize on demand for hotels. has also become a tourist destination in its own right. Kreuzberg in Berlin. investors are looking to peripheral areas. particularly Oakland. proximity to urban cores and increased public and private investment. San Francisco. Brooklyn. Recently. to support additional development and enhance the community. Despite this. As such. boutique properties. 26 May 2013. this per-capita rate is more than 29 times higher.” which was intended to attract 10. In the 1990s. over the past decade.

From an ownership standpoint.org/digital-trends/mobile-devices/mobile-smartphones/ regional-overview/north-america/. com/company/news-room/press-releases/2014/06/23/majorityof-consumers-prefer-to-purchase-and-reserve-hotel-services-usingmobile-devices.mit. Moreover. “The Future Hotel Experience. accessed October 2014. For example. According to a 2014 US survey by USamp and Smith Micro Software.” Smart Brief. Empowered with more knowledge and social media.com/hosted/ad2187/Hospitality_ Trends_2013. 54. hotel companies are turning to products and applications that empower guests to browse inventory. 52. www. As such.” Mobile Marketer. with a focus on accommodating these devices in guestrooms. In Silicon Valley.” European Travel Commission. and as online distribution channels become more accessible. http://ir. accessed October 2014. 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. 51. hotels are rethinking all aspects of the hotel experience.” MIT Mobile Experience Laboratory. For instance. book amenities. As the use of mobile devices. “Conrad Hotels empowers travelers with end-to-end mobile customer experience.tripadvisor.” TechCrunch. meeting 50 spaces.com/ cms/news/database-crm/18296.html. accessed October 2014. one major brand recently launched a robot butler equipped with a tablet to facilitate interaction between guests and staff. a guest may call the front desk to request a forgotten toiletry. social media and advanced analytics continues to proliferate.cfm?releaseid=808058. http:// etc-digital. “Social Media. http://mobile. accessed August 2014. 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. 50. Smartphones & Tablets Now Essential Travel Tools for U. “Majority of Consumers Prefer to Purchase and Reserve Hotel Services Using Mobile Devices. “Starwood Introduces Robotic Butlers At Aloft Hotel In Cupertino. . accessed October 2014.smithmicro. such as smart watches and glasses. the hotel staff then inputs the guest’s room number into the robot’s tablet interface and places the toiletry on the robot.Hotel technology 2. technology has created new opportunities for hotels to drive operating efficiencies and engage with guests. Global hospitality insights 22 We’ll begin with today’s traveler. user-friendly and relevant to the technology 51 needs of today’s traveler.0 New advances in technology continue to alter the relationship between hotels and guests. check-in kiosks and mobile-enabled property management systems. 87% of travelers use a smartphone and 44% use a tablet while traveling. hotel reviews that feature video instead of just text will place even more emphasis on hotel reputation and performance. Userfriendly and powerful smartphones and tablets are changing travelers’ online preferences and habits. 49.” Smith Micro. For example.pdf. accessed October 2014. from booking to 49 checkout.S. www. Travelers. 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. 53. http://techcrunch. As such. “10 Hospitality Technology Trends You Need To Know About. lobbies and front desks.com/2014/08/13/ starwood-introduces-robotic-butlers-at-aloft-hotel-in-palo-alto. According to a 2013 global survey by TripAdvisor. plan and book a trip. allowing hotel employees to interact more with guests.mobilemarketer. which delivers the item 52 directly to the room. recent advances in wearable technology. “Mobile/Smartphones.smartbrief. accessed October 2014. today’s hotel guest is pushing hotels for improved products and services in their travel experience. Other mobile innovations include mobile keys.com/ releasedetail. www2. are expected to revolutionize the way customers access the web and contribute personal content. complete reservations and purchase a variety of services (such as room service) via mobile devices to drive engagement and increase revenue-generating 54 opportunities.edu/projects/the-future-hotelexperience. redefining how they research.

better understand guest preferences and build stronger 60 customer relationships. “Evolution in Electronic Distribution: Effects on Hotels and Intermediaries. accessed October 2014.hotelschool. www. as travelers are increasingly looking online to book hotel rooms and customer acquisition costs continue to rise.” Statistic Brain.nytimes. one international hotel company reported an impressive ROAS increase of approximately 2. 59. com/2014/01/13/hotel-chain-utilises-new-digital-advertising-platform-to-great-success.com/hotels/newsrepository/articles/major-global-study-reveals-how-big-data-will-transformhospitality-industry. 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. Leading hotel companies are also leveraging advances in data analytics and artificial intelligence (AI) technologies to increase online reservations.cornell. “Hotel chain utilizes new digital advertising platform to great success. www. accessed October 2014. www. hotel brands seek to drive bookings to their own proprietary websites by leveraging the power of loyalty programs and streamlining the booking experience.” Cornell University School of Hotel Administration.” HospitalityNet.html. accessed October 2014. eMarketer and Alexa.hospitalitynet. Through acquisitions of property management and digital marketing platforms. www.” . According to 2014 research by eTrack. www. accessed October 2014.com/2014/07/09/duetto. “Major global study reveals how big data will transform the hospitality industry.” TechCrunch.statisticbrain.com/internet-travelhotel-booking-statistics.hotelnewsnow. “5 Tech Trends That Will Shape Hospitality.” Amadeus. http://techcrunch. “Office Space. www. accessed October 2014. A hotelier’s ability to keep up with rapid technology changes and embrace the latest technology tools will differentiate successful hotel organizations going forward. 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. by the Hour. 58.html. www. 55. 56. 62.edu/research/chr/pubs/reports/ abstract-13606. 60. amadeus. the competition to gain control of the distribution 56 channel has intensified. 57% of all travel reservations are taking place online.” Hotel News Now. 57. “Internet Travel Hotel Booking Statistics. In 2014.” The New York Times. 62 including the hotel’s website activity or weather conditions. 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.From an ownership standpoint. while internet travel booking 55 revenue has grown by more than 73% over the past five years. online travel agents (OTAs) are providing additional services to encourage hoteliers to 57 distribute rooms on their sites.100% by deploying a new online advertising platform. On the other hand. enhance hotel guests’ experiences and deliver results. improve the return on advertising spend (ROAS).html.com/ article/14016/5-tech-trends-that-will-shape-hospitality. 61.dotrising. AI technologies utilize powerful algorithms to determine the most appropriate media to focus advertising spend. which combined data 61 analytics with AI technologies. Hotels must holistically embrace social. In 2014.Rising. accessed October 2014. accessed October 2014. “Duetto Raises $21M Led By Accel To Equip Hotels With Big Data Surge Pricing. “Hospitality Asset Managers Association (HAMA) Study Documents Growing Revenue Acquisition Costs Outpacing Hotel Revenue Growth. At the same time. mobile and analytics to drive business improvements. Top thoughts for 2015 23 . accessed October 2014.com/2013/02/19/business/ hotels-carve-out-work-spaces-rented-hourly. new technology has also impacted how guests are acquired in the discovery and booking phases.org/ news/154000320/4066627.com.

DMOs and IPAs are generally organized as public entities. has evolved into a key economic driver for many destinations. however.5% of the worldwide GDP and is projected to 64 increase to 10. including in emerging economies. “Travel & Tourism Economic Impact 2014: World. traverse bureaucracy. the IPA takes a multi-dimensional view on the best channels for increasing tourism — matching the most suitable investors with tourism needs. Whether a hotel development. destination management organizations (DMOs) to include investment promotion agencies (IPAs) or divisions. “Tourism highlights: 2014 edition. in addition to identifying potential investment trends and tourism investment opportunities. 63. golf course or tourism infrastructure. Recently. While global tourism has grown rapidly.Investment promotion agencies — catalysts for tourism investment Over the last decade.org/publication/unwto-tourismhighlights-2014-edition. where growth has shifted away from goods and products toward services. is responsible for developing and maintaining strong working relationships with current and prospective capital partners.wttc. 64. accessed November 2014. The public-private structure has proven to add technical investment expertise. the IPA. development and acquisitions. accessed November 2014. ashx. The most effective IPAs act as an “investment concierge” – entities that help foreign investors navigate local rules and regulations. 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.” UN World Tourism Organization. Tourism currently accounts for nearly 9.org/~/media/files/reports/ economic%20impact%20research/regional%20reports/world2014.8 billion. www. http://mkt. promoting income growth and job creation in local economies. often as a division within the tourism or economic development ministry or department. For investors unfamiliar with specific destinations. such as chief investment officers and investment managers. The hospitality and tourism sectors have emerged as key value drivers and differentiators in a competitive economy. IPAs effectively reduce due diligence costs. with tourism and hospitality accounting for a significant portion. Global hospitality insights 24 Competitive destinations across the globe have recognized the value in tourism and developed new. efficiencies and flexibility to dealmaking. This structure also enhances their ability to attract and retain highly qualified real estate and hospitality professionals with track records in finance.unwto. or enhanced existing. which broaden the pool of potential investors. tourism. these teams create the foundation for the rest of the DMO to promote and market the destination.” World Travel & Tourism Council. By reducing uncertainty. 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. while creating a competitive and transparent investment process. reaching 63 1. and consequently spurring investment and development. Effective DMOs often include leadership. Additional responsibilities .3% by 2024. while reducing political whims in the process. which is producing the most effective results. access market data and research and assist with investment opportunity identification. there is tremendous future potential: international tourist arrivals worldwide are projected to increase about 70% between 2013 and 2030. The investment division of the DMO. spurred by foreign direct investment.

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

quality and level of service. accessed 16 October 2014. Some examples include segmenting customers.bloomberg. Uber. 23 October 2014. enabling underutilized assets to be operated for financial gain. design. Not only are their valuations making headlines. In a year. a company that enables people to rent out lodging. “Airbnb Weighs Employee Stock Sale at $13 Billion Valuation. http://dealbook. this requires more initial research by the customer before making a buying decision. which connect passengers with private drivers. 65 publicly traded companies. As shared economy concepts continue to grow their footprint in the hospitality and leisure sector. which. on the other hand. which can vary widely in physical attributes. business travelers seek certainty. from a consumer’s perspective. already controls about 17% of the US$100 billion global taxi/limousine 66 market.” Bloomberg TV. “Airbnb: The Hotel Disruptor Unconstrained by Real Estate.html. price point and facility and amenity package. The rise of many of these businesses has been impressive. creating customer loyalty and managing feedback. . For example. have segmented their products based on different consumer preferences into various brands.Mutual learning opportunities: the sharing economy and the lodging industry The sharing economy has cast consumers as service providers. changing consumer preferences. 66. added more listings to its existing inventory than the largest hotel companies introduced as 67 new units combined over the same period. connecting travelers with home or apartment owners and matching part-time cooks with adventurous eaters.com/video/ airbnb-the-hotel-disruptor-unconstrained-by-real-estateg34TH4zdTiiQgq1z~WLt~A. Most established lodging brands are intentionally standardized.” The New York Times Dealbook. “A Disruptive Cab Ride to Riches: The Uber Payoff. lesstraditional experience.com/sites/aswathdamodaran/2014/06/10/adisruptive-cab-ride-to-riches-the-uber-payoff. but their growth is as well. helps set expectations for the product and services 65. both the traditional lodging industry and the new-age sharing economy companies can learn from one another. attracting other specific segments of the market can be a challenge.forbes. they have also made inroads into the hospitality space by. Global hospitality insights 26 while increasing overall confidence in the experience.” Forbes. as some have reached valuations on par with well-established. 67. This enhanced trust in both the product and brand enables a faster selection process for the customer. accessed 18 August 2014. for example. lodging platforms under the sharing economy model typically provide non-standardized products. Airbnb. www. Hotel companies. enabling consumers to make their lodging choices faster and with a greater degree of confidence. com/2014/04/21/morning-agenda-airbnbs-10-billion-valuation. The leading companies in this new sharing economy market have initially been focused on the transportation sector. In comparison. each associated with a differentiated product type. In addition. including well-known ridesharing companies Uber and Lyft. While the numerous types of accommodations in a sharing company can be an advantage for travelers seeking a unique. to name a few.nytimes. www. only in its sixth year of operation. reliability and ease when making lodging decisions.

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

various consumer segments and loyalty programs. their process. they are able to better oversee and control content. Global hospitality insights 28 . However. In addition. which will all drive future growth. have found an arguably better solution. as the reviews are submitted on external sites. 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. Research has shown the correlation between the relative quality of reviews and the demand for a particular property or establishment. provides full transparency to both users and hosts and better ensures the authenticity of the feedback. In addition. both emerging and traditional hospitality platforms must adapt to changing customer preferences. 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. which in most cases allows only one review per service experience. 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. on the other hand. typically only by posting responses to the individual feedback submitted. Looking ahead. the hospitality and leisure industry has become significantly focused on monitoring and managing reviews posted by travelers on third-party sites. the authenticity of the posted reviews is often put into question due to the use of “professional reviewers. which would also bring the process in-house.” Companies in the sharing economy.These days.

Top thoughts for 2015 29 .

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

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

The IASB issued the new revenue standard in IFRS 15. a hotel management company offers services to hoteliers governed by the stipulations of a hotel management contract. 69. Specific contractual obligations may include arranging services for hotel guests. Areas needing increased judgment may include identifying the performance obligations (i. represent performance obligations. After performance obligations are identified in an arrangement. promises to transfer distinct goods or services to a customer) in the contract. Contracts with Customers. 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. 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. Variable consideration may include amounts that are earned based on the underlying performance of the property (e. 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. The IASB standard uses “highly probable.g. The standard will supersede nearly all revenue recognition guidance in US generally accepted accounting principles (GAAP) and IFRS.” which has the same meaning as “probable” in US GAAP. granting the right to use intellectual property and trademarks and performing marketing activities. When applying this model. The FASB issued the new revenue standard in Accounting Standards Update 2014-09. managed and franchised properties. which allows for revenue recognition only when amounts are fixed and determinable. . providing revenue management and accounting services.e. the transaction price is determined. the Boards).. Substantial judgment will be necessary to determine which of these stipulations individually. The standard refers to this threshold as a “constraint. Under the new revenue recognition rule. Contracts with Customers. For example. hospitality companies must use greater judgment and make more estimates than they currently do under today’s guidance. employing hotel personnel.” This differs from current guidance.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. hospitality companies around the globe will need to re-evaluate their policies and practices for recognizing revenue for arrangements associated with owned. 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. 70. Revenue from Contracts with Customers.. 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. as a result. the management agreement must be analyzed to determine if the stipulations represent performance obligations. or when bundled with other promises in the arrangement.

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

many companies will find implementation to be a significant undertaking. While some companies may be able to implement the standard with limited effort. Early communication with key stakeholders (e. Companies with more work in front of them will need to move at a faster pace and may need to consider adding resources. Global hospitality insights 34 . But companies should begin working with auditors and other advisors to evaluate their existing revenue arrangements and address interpretation and application issues. investors) will be important if a company anticipates significant changes in the timing and presentation of revenues.g. it may appear that there is ample time to prepare for adoption of the new guidance. In addition to their internal preparations. 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. An early assessment is vital to managing implementation. 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. audit committees. In addition. 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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