— The travel and tourism industry contributes 9.5% of gross domestic product (GDP) globally
— An increase in global capital will lead to new and innovative property developments
— “Less is more” for growing bands of millennial and millennial-minded travelers
NEW YORK, Jan. 27, 2015 — The global hospitality sector – riding a broad wave of growth, innovation and demand – is in a strong position to make further gains during 2015 as fresh capital from new locales increases the number of industry participants and creates an attractive atmosphere for acquisitions, according to EY’s Global hospitality insights: Top thoughts for 2015.
The impact of hospitality on our global economy is growing. Across the world, today’s travel and tourism industry represents 266 million jobs, and contributes 9.5% of GDP globally. With growth in the travel and tourism industry expected to increase by 3.9% in 2015, the sector will be increasingly recognized as a key driver of economic growth at the local, regional and global level. But, as global travel increases across all segments – leisure, corporate and group travel – destinations must effectively implement and invest in their tourism strategy to differentiate themselves.
Both business and leisure travel have steadily improved in recent years, rebounding from the global slowdown immediately following the 2008-2009 financial collapse. The infusion of fresh cross-border capital and innovation in both properties and concepts will be the key drivers of growth in 2015.
Michael Fishbin, EY’s Global Hospitality & Leisure Leader, says:
“We expect the hospitality industry to experience significant growth, development and brand expansion in the coming year. Despite some significant headwinds – such as geopolitical instability, new health concerns and inconsistent economic growth – the global industry is thriving and optimism prevails.”
A wave of new hotels will open in 2015 and new ownership of attractive existing properties will continue as well. Overall, the industry now has a robust pipeline of approximately 1.3 million new guestrooms in place.
While the global hospitality industry has largely been dominated by a few key cities or destinations considered most desirable for global travel (e.g., New York, Paris and London), global travellers have started to head to new destinations. This has led investors to identify numerous opportunities in secondary markets, reflecting a broader search for higher-yield investments.
Cameron Cartmell, EY’s Hospitality & Leisure Leader for Europe, the Middle East, India and Africa (EMEIA), says: “When we look at the industry globally, we are seeing expansion across the board – both in traditional areas of high demand and, now, in many secondary markets. From Europe and the Middle East to the Americas and Africa, we expect to see impressive pockets of new growth and development in 2015.”
As far as growth in the United States is concerned, cross-border investment rose about 137% from 2013 to 2014, with foreign buyers continuing to look beyond traditional gateway markets to secondary markets, such as Phoenix, Atlanta, Houston and Orlando. This trend is estimated to continue in 2015 as many foreign investors from a number of countries including Canada, China, Malaysia, Japan, Singapore and the Middle East have chosen to deploy a large amount of capital in US hotels.
M&A trending higher
In recent years, merger and acquisition (M&A) activity in the hospitality sector has resulted in solid year-on-year growth. Global hospitality and leisure transactions increased 8%, year-on-year, through to Q3 2014.
In the future M&A activity will be driven by a desire for incremental growth among the businesses involved, the strategic merit of transactions and the availability of debt and equity on favorable terms. The higher volume of global capital chasing real estate opportunities will also be a net positive for deal-making.
Cross-border capital is increasingly dominating the M&A picture, accounting for 41.2% of global hotel investments between January 2014 and October 2014, compared to 34.7% in 2013. Asian investors – primarily dominated by China, Hong Kong, Japan and Singapore – represented 43.2% of these transactions, and the flow of money from Asia into North America, Europe and Australia is anticipated to keep rising.
Fishbin says: “Currently, the top three global hotel markets for Asian investment are Manhattan, Hawaii and London, representing 48.5% of total Asian hotel investment globally through October 2014.”
While the current market will continue to present favorable opportunities for growth through acquisitions, investors in this hypercompetitive environment should be aware of the additional risks and complexities, according to the report. Investors will have to be increasingly diligent in vetting opportunities.
New concepts, new demands
While travel is growing in most of the major markets around the globe, travel preferences and lodging demands from those who are staying in hotels are also evolving. In 2015, the millennial generation will continue to wield profound influence on how the industry looks and what services hoteliers are developing for guests.
Mark Lunt, EY’s US Southeast, Latin America and Caribbean Hospitality Leader, says: “Today’s emerging traveler – millennials and millennial-minded guests – is not looking for their parents’ hotels and experiences and they are more cost-conscious and experience-focused than ever before, whether traveling for business or leisure.”
To meet changing demands, hoteliers are seeking innovative alternatives to traditional lodging products. Several of these products initially emerged in Europe and Asia but have found their way to the US and other markets.
Changing rules and regulations
As lodging players look to 2015, certain tax issues must be carefully evaluated as an integral part of a company’s overall investment strategy.
This year, the issues that industry participants will have to consider include the continuing growth and sophistication of cross-border investments, the acceleration of the use of opco/propco structures and spin-offs, escalating tax enforcement initiatives and an increasing number of indirect taxes.
John Cullins, EY’s Americas Real Estate, Hospitality & Construction Tax Leader, says: “The entire hospitality industry must carefully consider the tax consequences of where capital originates, where investment vehicles are located and where capital is deployed. Given the heightened tax scrutiny that investor groups are subject to, they also must properly manage cross-border tax implications that could adversely affect profitability.”
Please visit www.ey.com/hospitality to download the report.