Kew Green Hotels, a third-party management company based in Richmond, Surrey, started expanding into Southeast Asia in 2020 through a partnership with Siamese Asset Company. With nine hotels in Bangkok, one is the first ever franchised Crowne Plaza in Asia.
Justin Lanzkron, director of business development at Kew Green Hotels, said it is surprising that franchising and third-party management are only beginning to gain traction now in cities like Dubai and Bangkok, whilst they are commonplace elsewhere in the world, especially in the Americas.
He commented: “I think the brands are just accepting that [brand management] is not their strength anymore. It's too time consuming, takes up too much [resource], and franchising is obviously a much quicker way for them to grow.”
Two decades ago, hotel owners in Asia and the Middle East were less informed about third-party management, relying heavily on brands. However, with increased education and experience, owners are now recognising the potential cost savings and greater flexibility offered by third-party managers, reckoned Lanzkron.
Key money
For the most part, Choice Hotels International expands its portfolio through franchising. Tobias Reinecke, director investments & strategic partnerships EMEA, Choice Hotels, said that to support franchisees, especially newer or smaller operators, Choice Hotels offers various financial guarantees.
These include key money, corporate or bank guarantees to back up lease agreements, or direct cash injections, which Choice might choose to recover through operational cash flow over the first few years. This approach ensures that franchisees can invest in necessary fixtures, furniture, equipment (FFE), and other operational supplies.
Whilst there has been an overall trend towards franchising, Marriott and Hilton still directly manage around 35 to 40 percent of their hotels to ensure brand consistency and control, particularly at upper-scale and luxury properties.
Other global brands have smaller shares of directly managed hotels in their portfolios: Accor 25-30 percent; IHG 20-25 percent; Wyndham 15 percent.
From an owner’s perspective, one advantage of a brand management agreement is that there is only one relationship to manage, and you are not paying separate fees to a brand and a management company, noted Thomas Page, partner, global head of hotels & leisure, CMS.
Do owners and developers prefer unbranded or branded management agreements? Devin Grosse, CEO of Focus Hotels, another third-party manager, said he always pursues the branded route first because the cost of the fees is compensated for by the OTA discounts and uplift in revenue that global brands deliver: “It’s that big marketing machine that you want behind you.”
With a considerable amount of flexibility within operating agreements, Page said: “There's a very wide variety of models – including manchises and man leases - and some of them are on a spectrum. With leases, you can have a everything from a Premier Inn-style fixed rent lease at one end, through to a management lease at the other end, which is fully profit based.”
Lease structures
Although not in the Middle East and Asia yet, Dalata is a fast-growing listed hotel group with global ambitions. It has chosen to create its own brands (Clayton and Maldron) and either owns or leases the majority of its 55 hotels.
Niall Macklin, head of acquisitions at Dalata, said: “Many of our landlords are institutional investors. Essentially, they are investing in the income generated by our PLC covenant.”
Dalata’s fixed income investors and landlords include Deka Immobilien (6 hotels); Aviva (3 hotels); abrdn (2 hotels); Union Investment, Art Invest, M&G Investments, and CBRE Investment Management (one hotel each).
As Dalata expands into Europe, with new hotels in Amsterdam and Düsseldorf, Macklin is having to get used to the ‘shell and core’ lease structure in which the landlord retains some responsibility for structural repairs and maintenance, unlike the FRI leases commonly used in the UK and Ireland.
He said: “It's a learning experience because generally, we're hotel owners and operators, and if something's broken, we want to get it fixed. We want to make money and operate so we are finding that challenging. You find yourself waiting months, and sometimes you just end up getting it done yourself.”
All quotes from the panel ‘Partnering for Success Defining the Right Operating Agreements for all Stakeholders’ at the Annual Hospitality Conference 2024 in Manchester.
By Ben Walker