Market trends in hotel operation in Spain: A hectic path towards innovation and evolution

A lot has been written lately in the media about the growth of the Spanish hospitality sector. The figures for visitors and hotel investment are clear and demonstrate the strength of the country and the promising future of the hospitality sector as a national economic driver. The hospitality sector passed the tough test of COVID-19 with flying colors and has shown a pace of growth post-pandemic that perhaps few expected.

In recent years we've seen a shift in the paradigm of hotel management in Spain. This has been stressed by the entry of investors and hotel chains into the Spanish market, and encouraged by the enormous potential of the Spanish hospitality sector.

Accordingly, the focus on hotel operation has evolved from a more real estate-centric position (with a view on the use of the hotel asset) to the brand value as an essential element for the operator.

 

Moving away from traditional models

Setting aside the numerous small hoteliers who operate their own property, hotel chains (mostly national) in Spain had traditionally been using the lease for non-residential purposes model (arrendamiento para uso distinto del de vivienda) regulated under law 29/1994, of 24 November, of Urban Leases[1] to operate their hotels. Under this model, the focus is on the hotel asset (which isn't differentiated from other kinds of lettable assets for different uses). This means that the owner has little to no involvement in operating the hotel business (mainly restricted to the possibility of receiving variable rent based on the performance of the business). And the operator (as lessee) not only assumes the use and occupation of the asset (with the responsibility that it entails) but also fully assumes the vicissitudes of that operation in all aspects (including, as a relevant example, labor issues).

This traditional scheme was tested during the COVID-19 pandemic and didn't seem to work well for any of the parties involved: for the owners, because they found they couldn't terminate their contracts with the operators and regain possession of the properties; and for the operators, because they had to continue bearing huge operational and maintenance expenses for the properties during the (total or partial) lock down periods.

In this situation, the hotel management contract, which was already common practice in projects involving a foreign operator, gained some strength. Under this contract, the focus shifts away from the property and moves towards hotel operations.

The property owner abandons its passive role as rent collector and takes on a decision-making role in the hotel’s operations. And the operator has a very tempered managerial role. Its actions are understood to be carried out on behalf of the property owner, who therefore not only keeps control of the property but also assumes all the responsibility derived from the operation (consequently, the manager’s responsibility is limited to their contractual liability towards the owner). The manager’s liability will be limited and directly related to the performance of the hotel.

At this point, it's important to mention that Spain already had an intermediate figure between the non-residential lease and the hotel management models, in the form of the “industrial lease contract” (arrendamiento de industria). It's a relatively traditional figure where the object of the lease is not only the property (as in the non-residential lease) but the hotel business as a whole, including all the necessary elements for its operation. Although this figure is not at all unfamiliar within the historical operation models in Spain, it presents some issues for the parties involved in the hotel business. For the owner, it increases its involvement in making the hotel operation available while still losing control over the asset, whose use and operation remain in the hands of the lessee. The hotel operator, by leasing the hotel business, with all its different elements (including the property), maintains a high degree of responsibility.

 

The focus is moving to brand value

In recent years hotel management has increasingly shifted focus from operations to brand value. Many hotel brands (especially international ones) are relying more on the franchise model as their preferred method of expansion, as it reduces costs by requiring less support and infrastructure compared to the management model. This allows the hotel chains to concentrate on managing particular hotels and brands they find most suitable. Typically, hotel chains retain control over their luxury brands, flagship hotels and new ventures to protect their brand vision.

Under a franchise model, the property owner takes a further step in managing the property, now assuming full responsibility for the hotel as the brand company only licenses its brand and related intellectual property to maintain brand consistency. Owners who choose this model get greater control over their property while benefiting from global marketing and distribution systems in exchange for royalty fees.

This arrangement is attractive to independent hotel owners with management expertise and other types of professional investors (including investment funds and institutional investors) investing in this asset class and seeking to maximize returns. Non-operating owners require the services of independent and professional third-party operators whose intervention has given rise to more professionalized management models.

To be successful, franchise models need an efficient asset management and operation. Third-party operators play a key role in aligning the interests of franchisors and franchisees, ensuring that the hotel’s operations meet the brand standards. Reputable and experienced operators provide assurance that the brand reputation won't be adversely affected by non-conforming or poorly managed hotels. Many franchisors require the involvement of a well-known independent operator as a condition for franchising.

For owners, using third-party operators can help to realize the full potential of their property and prove a better option than entrusting the management of the hotel to a particular brand. Third-party operators have expert knowledge and connections in the local market. They also have extensive experience across several brands and can help owners negotiate more competitive franchise fees and ensure that the brand and chain are a good fit for the property. Third-party operators will conduct thorough property assessments to implement tailored and transparent management strategies that enhance the property value and revenue.

Third-party operators are loyal to the owner and offer flexible terms such as lower base fees in exchange for higher incentive fees and exit options adapted to the owner’s investment period.

As the franchise model gains acceptance, the use of third-party operators has levelled the power dynamics between brands and franchisees. We see an evolution from rigid brand-imposed structures towards more collaborative solutions where each stakeholder contributes to maximizing the value and the investment returns of the property. Soft-branded franchise models are emerging, allowing brands to adapt their offerings to local markets leading to diverse types of franchise agreements based on performance contributions from each party.

 

Hybrid models are gaining traction

As an alternative to having a franchise contract and a management contract with an independent third-party hotel operator, “manchise” agreements are also proving to be a way of creating a more efficient relationship between owners and brands, especially where experienced investors are ultimately interested in putting their management skills to play. In a manchise model the owner hires a hotel operator for an initial period of three to five years, after which the contract transitions to a franchise. This reduces the owner’s initial investment risk during the ramp-up period, where the hotel operator will manage the hotel while allowing the owner to take full control of the asset and the business under the franchise model once the operations stabilize. This hybrid model also combines the benefits of professional management with the advantages of a franchise, creating a more balanced relationship between the owner and the brand.

Other innovative arrangements have come to light seeking to find new ways to better understand the challenges of the parties involved in the hotel operation in a more complex market. An illustrative example of this trend are short-term lease agreements where the operator pays the rent through improvement works or flexible franchise or management contracts during property renovations, then followed by longer-term management or franchise agreements.

In recent years we've seen how hotel owners, operators and brands have increasingly collaborated to find suitable and bespoke solutions for various assets. Looking ahead, we anticipate that this collaborative trend will further evolve into more flexible and hybrid operating models. These innovative approaches will introduce new fee structures and customized solutions tailored to the capabilities and risk profiles of the parties and the unique characteristics and location of each property. Emphasizing the concept of partnership, these models will drive greater efficiency and value creation in the hotel industry, offering opportunities for those ready to embrace change and collaboration.