The number of hotel owners using third-party operators to run their properties looks set to increase across Europe, reflecting the desire for flexibility as well as a number of other benefits, according to our latest report, The Rise of Third-Party Hotel Operators in Europe.
The trend for third-party operators (TPOs) has emerged from the USA, where the concept has become commonplace, with most franchised hotels from midscale upwards now being run by TPOs. These operators are not affiliated with the owner or the franchise brand and as such can be more aligned with owner objectives, often driving higher profits as a result. RBH Hospitality Management is a good example of a TPO in the UK that has been a key partner for brands such as Accor, IHG, Marriott and Hilton.
In Europe, the use of TPOs is more common among small and mid-sized hotels, particularly limited service or extended stay properties. As the concept has matured, however, more experienced TPOs are being sought for large corporate and luxury hotels, some in addition to operating under a licensing agreement with a hotel brand.
In a sample of major European hotel operators that we compiled for our report, the number of hotels in the sample operated by TPOs has grown by around 40%. This percentage is expected to grow a further 5% by 2025.
‘The rise in TPOs has arguably been prompted by an increase in franchising as branded operators move from the operational management of hotels to focus more on brand development and distribution,’ commented report co-author Nikola Miljković, a senior associate at HVS London.
Our report outlines the often more favourable terms obtainable from TPOs including shorter contracts than usual brand management arrangements, sometimes just 12 months compared with 20-30 years. Termination rights can also be more owner-friendly and less expensive, improving the liquidity of the asset and, with a more direct involvement in operations, TPOs can usually boost performance and be more accurate with financial projections.
‘Whilst the use of a TPO often implies fees in addition to franchise costs, larger TPOs benefit from operational advantages such as being less restrictive, being able to react more quickly to market changes to each individual property and improved buying power. Being more objective, they can also choose which brand programmes to participate in on a property-by-property basis,’ added Miljković.
‘The fundamental focus of brands remains the brand’s success and this can conflict with the interests of owners,’ concluded report co-author Jon Critchley, director at HVS Hodges Ward Elliott, the brokerage and investment services division of HVS London.
‘The popularity of third-party managers is partly due to the alignment of interests, particularly regarding asset value and profitability. We are likely to see their use across the UK and Europe grow moving forward as we see an increase in the number of credible and established TPOs.’