T

he Indonesian market will continue to see the entrance of a significant number of new hotels and resorts over the next five years. Many current hotel owners are expanding their portfolios, while new owners are planning to enter the hotel market to leverage the country's fast-developing tourist industry.

In Jakarta, we expect to see new brands entering the market such as a Park Hyatt, St Regis, W, Raffles, MGM and Indigo over the next few years. Equally keen in expanding their footprint are domestic hotel operators such as Aston, Santika, Swiss-Bel and Tauzia, who have also been aggressive in seeking a presence in the country's midscale and economy sectors throughout the Indonesian archipelago. According to recent data from the country's Tourism and Creative Economy Ministry, strong economic growth alongside the emergence of the middle-class have led to robust growth in domestic tourism.

It is important that the choice of an operator must add value to development and contribute to its success through its image, branding, reservation networks and global profile. The success of property is dependent on the ability of the operator to successfully market the brand name and at the same time ensure an optimal investment return to the property owner as well as the management company.

There is little doubt that some operators perform far better than others in various lodging segments. Also, some operators have a far better management track record than others in resort and urban locations.

Deciding on the right operator and negotiating a fitting hotel management agreement can have a significant long-term impact on the hotel's financing, profitability and asset value. This decision has become even more critical for a hotel that will be operating in a highly competitive environment with strong new supply, rising operating costs and a tight labor market.

So the selection process is not simply a question of picking a name out of a hat. How then does a savvy owner go about it?

Identifying the owner's goals

A careful evaluation of the owner's goals and resources is paramount. What are the owner's investment objectives and holding strategy with the property? How does this property fit into the owner's portfolio and overall development of the project? In Asia as well as in Indonesia, the hotel and the brand is often the jewel in the crown, enhancing the value of the other real estate that the owner holds. This is particularly so in many mixed developments. What, therefore, are the resources that the owner can dedicate to the project?

Hunting for a suitable operator

Every hotel project and site is unique. Every brand and operator have their own niche and strengths. However, not every brand or operator can be suitable. It is therefore crucial for an owner to find an operator that will be the right fit for the project.

Finding the right brand

Well-established brands bring the status of prestige to an asset. They serve as a source of strategic advantage and create financial value. Their ability to generate cash flows via relatively higher room rates and profit margins, their efficient and extensive sales network in key source markets, make them highly desirable and sought-after as partners.

However, in the last few years, the emergence and expansion of several new international and domestic brands have allowed hotel operators to aim for a wide range of guest
segments.

Hotel owners need to be convinced that the cost of the current and future brand-imposed standards and centralized services are worth the benefit and that they add to the value of the hotel for international brands.

Other important factors to consider when evaluating a brand should include the following:

Local market knowledge and adaptation, access to a corporate team, an ability to enhance design and efficiency of the hotel, the generation of business through all the important channels, the track record in running efficient operations, a highly productive workforce and delivering profitability above market averages.

Crafting an agreement

Hotel management agreements allocate risk between the owner and the operator. They tend to be long-term and cover important investment, operational and legal considerations. A clear understanding of the ownership holding strategy is crucial to choosing the right operator. Close attention should be paid to financing and termination-related rights as they can impact the exit strategy and asset value of the hotel.

A good relationship or a bitter parting

A bad parting of ways can be costly and detrimental to the success of the hotel. The hotel owners bear most of the risk of the hotel's success or failure.

Identifying and shortlisting suitable brands, soliciting Requests For Proposal, creating a competitive bidding environment, evaluating the proposals and negotiating a management agreement that aligns the interests of the two parties, can be a grueling exercise that requires an experienced team of consultants and legal advisors.

However, this elaborate selection process with plenty of due diligence before signing on the dotted line is the secret to a rewarding relationship.

Tasos Kousloglou is senior vice president of Strategic Advisory & Asset Management

Hotels & Hospitality (Tasos.Kousloglou@ap.jll.com). Corinna Toh is senior vice president of Strategic Advisory Hotels & Hospitality Asia and Indonesia (Corinna.toh@ap.jll.com).