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Executive ReportSolving the Russian riddleRussia’s tourism potential

Why China is hoping hotel figures add upThe benefits of the Olympic Games to host cities – what can China expect?

Tough times ahead – are you ready to respond?A clear strategy should help hotel businesses face current market uncertainties

The magazine for the Tourism, Hospitality and Leisure industry

Summer/Autumn 2008

Managing editor:Alex Kyriakidis

Editorial board:Ali Agmen-SmithPhilippa GravesHelen Stevenson

Contributing authors:Nigel BlandLisanne FitzgeraldAllan GassonSimon HarrisonGrace HuangJessica JahnsAlex KyriakidisGraham PoveyMarvin RustAdam Weissenberg

For further information about thisreport, please contact:Helen StevensonTel: +44 20 7303 5018Email: [email protected]

Issue 11Summer/Autumn 2008

Contents

To find out more about our services, visit ourwebsites at: www.deloitte.co.uk/tourismhospitalityleisurewww.deloitte.co.uk/sportsbusinessgroup

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1 Welcome

2 Why China is hoping hotel figures add up

5 Tough times ahead – are you ready to respond?A clear strategy should help hotel businesses face current market uncertainties

10 Solving the Russian riddle

15 The changing landscape of US business travel

17 Caravan holidays are back in vogue

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Executive Report – Summer/Autumn 2008

Since our last Executive Report was published at the start of the year, I have travelled acrossthe globe working with Deloitte clients and have attended conferences on four continents.With alarming frequency I am hearing people say: “…we’ve seen it all before.”

But actually, we haven’t. At no time in the history of tourism, hospitality and leisure have wefaced such a deadly cocktail of spiralling global inflation, a self-inflicted credit crunch that isundermining new supply and M&A, rising food and utility costs, escalating oil prices and aresultant loss of consumer confidence. Undoubtedly, we are well into uncharted territory,and there is no ‘quick fix’.

Most analysts expect the rough ride to continue into 2009 and there have been warnings of worse to come. Airlines, inexorably linked to the well being of our industry, are undersevere pressure, and we have already seen the first batch of casualties in Europe.

So what’s the best plan of action? First, it’s worth reminding ourselves that, in this situation,every member of the team can make a difference to the survival of the business. This is thetime to innovate in generating top line revenue while at the same time focusing on thelifeblood of the organisation – cash. Whether into high or low leverage, everyone mustfocus on turning revenue into cash as quickly as possible and challenging the status quo ofspending. Unless spend is directly or indirectly generating value for the customer, it shouldbe questioned and perhaps eliminated.

In this edition, we present an analysis of hotel performance during economic recession andshare lessons learnt in responding to this environment. We also take a look at Russia andChina, two of the major emerging markets, offering fresh opportunities for tourism,hospitality and leisure.

As ever, we value your feedback.

Best regards

Alex KyriakidisGlobal Managing PartnerTourism, Hospitality and Leisure [email protected]

WelcomeEconomic cocktail makes cash focus imperative

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Why China is hopinghotel figures add up The numbers are impressive – and they’re growing. Global tourism will generate some US$8 trillionthis year and is expected to increase to around US$15 trillion over the next ten, according to theWorld Travel and Tourism Council (WTTC).

Meanwhile, global tourist arrivals, just shortof 900 million last year, based on WorldTourism Organisation (UNWTO) reports, areexpected to rise by around 4% in 2008.

Fastest growth to date is across Africa, AsiaPacific and the Middle East, which is a trendwe expect to continue as emerging marketsrival traditional destinations in the Americasand Europe. India and China, for instance,have expanding middle classes with moredisposable income than ever, who are alleager to travel, while the Middle Eastcontinues to attract more corporatetravellers as well as millions looking for year-round sun and shopping.

Figure 1. Global hotel performance for year to May 2008 v. year to May 2007

Occupancy Change Average room Change revPAR Change% % rate US$ % US$ %

Asia Pacific 68.9 -2.2 148 17.0 102 14.5

Central & South America 67.6 2.7 130 18.2 88 21.4

Europe 64.8 -0.2 171 17.0 111 16.7

Middle East 76.5 6.0 183 14.1 140 21.0

US 60.1 -2.2 108 4.5 65 2.2

Source: STR Global HotelBenchmarkTM

Survey

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So far, so goodGlobally, hotel businesses have been singingthe same tune. As shown in the table,information supplied by the STR GlobalHotelBenchmark™ Survey reveals double-digitrevenue per available room (revPAR) growthacross all world regions – apart from the US –for the first five months of 2008. This is beingdriven by average room rates all well up on theyear before, again, apart from the US.

The Central and South America region is on top, with revPAR up 21.4% to US$88.The region is benefiting from the weak USdollar, which is keeping US travellers – keento find good value for money – closer tohome. In second place is the Middle East,witnessing the fifth year of double-digitrevPAR growth and achieving the highestabsolute revPAR in the world. This is someUS$29 higher than the next best performing region, Europe. In fourth place isAsia Pacific, achieving revPAR growth of14.5%. The US, with growth of just 2.2%,is at the bottom. It should be noted thoughthat the weakness of the US dollar isinflating revPAR gains elsewhere, particularlyin Europe.

With the WTTC and UNWTO sharing the sameoptimistic outlook, hotel operators can expecta solid performance for the rest of the year.

The power of sportWorld-class sport is always a powerfulmagnet and brings in thousands ofspectators, while giving the host country anopportunity to showcase its attractions. This year sees several high profile fixtures onthe calendar. In June, the European FootballChampionships were hosted by Austria andSwitzerland, and in September, Singaporewelcomes the Formula 1 Grand Prix, which isAsia’s first street race and the first night-timeevent in the history of Formula 1. However,the main sporting spectacle of 2008 is theOlympic and Paralympic Games in Beijing.

Tourism transformationSince July 2001, when the InternationalOlympic Committee named Beijing as hostfor the Games, the city has undergone a rapid and far reaching transformation.More than US$40 billion has been ploughedinto China’s capital, expanding andenhancing the tourism infrastructure,including hotels, sporting venues and specialinterest sites.

The public transport network has beenupgraded to move visitors and athletesaround the city easily, with a new expresstrain connecting downtown Beijing to theOlympic site. A light rail line has also beenbuilt to link Beijing Capital InternationalAirport to Dongzhimen station in the centreof the city.

A massive amount of hotel developmentand refurbishment has been completed toaccommodate the 600,000 internationaland 2.5 million domestic tourists expectedin Beijing during the Games. According toLodging Econometrics, Beijing currently has71 hotels (18,458 rooms) in the pipeline,with 51 of these (12,326 rooms) due toopen during 2008.

Many of the world’s major hotel brands arestrengthening their presence here. HyattCorporation is due to open the Park HyattBeijing in July, down the road from its sisterhotel, the Grand Hyatt Beijing. The hotel willoccupy the top floors of a 66 storey tower inthe mixed-use development of the BeijingYintai Centre. Millennium and CopthorneHotels plc opened its fourth hotel in China,the 520 room Grand Millennium Beijing, inApril 2008. This is in the Beijing FortunePlaza mixed-use development, in the heartof the new Beijing Central Business District.

Other global brands moving in includeFairmont Hotels & Resorts, Starwood Hotels& Resorts Worldwide Inc, with the aloftBeijing, plus Hilton Hotels Corporation’sHilton Beijing Wangfujing.

Before – and afterEven with the mixed publicity in the run-upto the games, Beijing tourism officialsestimate that 4.5 million international

tourists will visit the city this year – before,during and after the Games – generatingmore than US$4.8 billion in revenue.Domestic visitors will bring in an additionalUS$20 billion, as 102 million Chinesetourists are expected to visit their capital.1

With high demand for rooms expectedthroughout the rest of 2008, hotelprofitability should be good, but – as otherOlympic host cities have discovered – thereis usually a lull just before and immediatelyafter the competition. This could be becausepeople are avoiding the anticipated crowds,as well as the perceived hikes in airfares andaccommodation costs.

This trend has already been picked up in the year to May 2008 results from theSTR Global HotelBenchmark™ Survey, whichshows occupancy down 7.5% to 63.2%.However, average room rates are up 17.3% to US$138, leading overall to revPAR of US$87.

Extra rooms usually flood the host cityahead of the Olympics, as happened inBarcelona and Sydney, where supply rose byaround 30%. Both cities suffered a crash inoccupancy after the Olympic Games, anexperience avoided by Athens, where thelack of building sites and high land priceskept new build to a minimum.

As a result, Athens enjoyed high occupancyand soaring average room rates during thecompetition schedule, when revPAR rocketed551% to US$406. In Sydney, revPARincreases were nowhere near as impressive,up just 80% to US$148 – possibly due to theover-supply of rooms. Beijing will thereforebe hoping its hotel business will emulateAthens, rather than Sydney. Sydney also hit apost Olympics gloom after the 2000 event,not just because of its extra hotel numbers,but through a combination of the aftermathof 9/11 and weakening economies. Barcelona felt the pain too, mainly becauseof the massive increase in supply bothbefore and after the Games.

Both cities gradually recovered though,primarily by promoting themselves as worldclass venues for Meetings, Incentives,Conference and Exhibitions business, which isnow thriving in both destinations. They alsoincreased their appeal to leisure travellersthrough imaginative marketing campaigns.

Long-term legacyAt this stage, one can only guess whetherthe US$40 billion invested in Beijing’stourism infrastructure will have a long-termlegacy and whether a more open China, asseen during the unprecedented TV coveragefollowing the devastating earthquakes inMay, will lead to a sustainable increase invisitors.

China clearly wants the Olympic torch tolight up Beijing and tourism officials will behoping the accompanying internationalinterest will put the country on the frontpages for all the right reasons during thesummer months.x•Marvin RustPartner, Deloitte UKTel: +44 20 7007 2125 Email: [email protected]

Jessica JahnsManager, Deloitte UKTel: +44 20 7007 0967Email: [email protected]

1. Mintel Report, 2008

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Can the lodging sector maintain its recentstrong performance and remain optimistic inthe light of falling consumer and businessconfidence? What historical evidence isthere to indicate that lodging performancesuffers in a recession? And mostimportantly, how can hoteliers protectthemselves from feeling the full impact ofan economic slowdown if it does hit?

In this article, we consider the likely effect ofthe economic turbulence on the hotel sectoracross Europe and the US, and put forwarda checklist of immediate actions thatoperators and owners could take in order tolessen the financial impact of a slowdown indemand.

Measuring consumer confidenceWhile opinion remains divided as towhether the US is heading for a recession,two key barometers of US consumer viewsreveal that confidence has alreadyplummeted.

In April this year, the Index of ConsumerSentiment, compiled by the University ofMichigan Surveys of Consumers, and theIndex of Consumer Expectations (ICE),supplied by The Conference Board, bothrecorded falls in excess of 20 points sinceApril 2007. Both are more than 30 pointsoff their January 2007 peaks.

Interestingly, the ICE has actually fallen 39%since that early 2007 figure, compared tofalls of 24% and 30% ahead of the 1990and 2001 recessions.

The ICE is also a principal component of theoverarching Consumer Confidence Index(Figure 1) which has shown a steady declineof over 40 basis points since April last year.

The European viewThe US credit crunch has also bitten inEurope with a number of deals failing tocomplete in the last twelve months – forexample, Mitchells & Butler/Punch andSainsburys/Delta Two. We have seen a vastreduction in the availability of cheap debt,volatile share prices, and the first run on aBritish bank in 140 years.

The Business Climate Indicator for the euroarea continues a downward trend thatbegan in mid 2007, but it has not yetreached the troughs of the recessions of theearly 90s and the beginning of this decade.

Meanwhile, the Economic Sentiment Indicatoris also declining, and was below its long-termaverage at the end of April this year, weakenedby falling business and consumer confidence,especially in the services and retail sectors.

Amongst the larger EU member states, theUK is experiencing the worst decline with adrop of more than eight basis points in asingle month, compared with falls ofbetween one and four basis points in otherkey EU countries.

Tough times ahead – areyou ready to respond?As the slowing global economy continues to make the headlines and remains high on the agenda for governments and business leaders, we examine the implications for thehotel industry.

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Figure 1. Consumer Confidence Index

Source: The Conference Board, April 2008

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Figure 2. Correlation between US revPAR and US consumer confidence

Consumer confidence index

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US conference board consumer confidence index

(1) Year to March 2008Source: US Conference Board and STR Global HotelBenchmark™ survey – strictly illustrative

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Lessons from the pastHistorical data reveals there is a degree ofcorrelation between confidence indices andchanges in Revenue Per Available Room(revPAR). This was clearly seen during theaftermath of 9/11 and at the start of theIraq war in 2003, in both the US and inEurope (Figures 2 and 3). As confidencefalters in 2008, should hotel operators andowners be concerned that revPAR will besimilarly affected, even though recessionmay be a distant or remote prospect?

In the UK, revPAR indeed suffered in the lastdownturn as well as in the early 90s recession.London felt the most pain, a logicalconsequence of being a key economic hub,reliant on international business and leisuretravellers. However, the regional revPAR ratesheld up somewhat better in the early part ofthis decade when London was experiencing a34% drop in revPAR due to 9/11 and the Iraqcrisis (Figure 4).

When we look at other hotel keyperformance indicators over the last tenyears, such as Average Room Rate (ARR)and occupancy rates, it can be seen that thelast recession was characterised by an initialdecline in occupancy rates, followed by adecline in room rates, as seen in the analysisin Figure 5 of the segmented EU hotelmarket between 1999 and 2006.

However, it is also clear that occupancy ratesare the lead indicator of market recovery.

Whether the current trends shown in theconfidence indices imply that we areheading for a full global recession or just an economic slowdown, the questionremains… what is likely to happen to hotelindustry performance in the comingmonths?

Figure 3. Correlation between European revPAR and euro area consumer confidence

Business climate index

revPAR % change

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Euro area business climate index

(1) Year to March 2008Source: US Conference Board and STR Global HotelBenchmark™ survey – strictly illustrative

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Figure 4. revPAR trends – UK example

Real revPAR (1980-20081)

London

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Note: All data rounded to calendar years. 2008 Data for February 2008 only and may not be fully representative for outcome of full year 2008 due to seasonality of revPARSource: PKFA Annual UK Trends; National Statistics; Deloitte Analysis

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Repeating the patternAnalysis of the US, UK and European hotelmarkets from 2003 to the end of May 2008(Figures 6 to 8) shows that occupancy ratesare declining ahead of room rates,apparently following patterns seen in thelast recession. This is particularly clear in theUS graphs.

Whilst difficult to predict with any greataccuracy, current market performance,driven by the general economic climate,suggests that the hotel industry will indeedbe in for a tough time as occupancy levelsbegin to show decline again.

During the first five months of 2008,occupancy has fallen year-on-year in Europeand the US, and across all segments, apartfrom the European midscale sector. Growthcontinues in room rates, albeit more slowlythan we have seen in the past few years.

As confidence continues to wane,consumers are likely to tighten their pursestrings and curtail their discretionaryspending, with an expected impact onleisure travel and weekend business formany hotels.

History tells us that reductions in occupancylevels may eventually lead to reductions inARR as hotels discount their ‘rack rates’ toentice these customers back.

The strength of the pound and the euroagainst the dollar is good news for the UShotel market, as Europeans are opting forUS vacations and US families are choosingto holiday closer to home. However, thesebenefits are most likely to be felt in themajor cities, rather than across the USleisure market as a whole.

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Figure 5. Lead indicators of change (% change)

KPIs, EU Upscale (1999-06) KPIs, EU Midscale (1999-06) KPIs, EU Economy (1999-06)

Occupancy % change ARR% change revPAR % change

Source: MKG Consulting; Deloitte Research & Analysis

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KPIs, US Upscale (2003-08) KPIs, US Midscale (2003-08) KPIs, US Economy (2003-08)


Note: 2008 shows data for period to May 2008 only

Source: Smith Travel Research Inc

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KPIs, UK Upscale (2003-08) KPIs, UK Midscale (2003-08) KPIs, UK Economy (2003-08)



Source: STR Global HotelBenchmark™ survey

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Impact on the upscale marketWhile there is no evidence that occupancyrates are declining more quickly in theupscale market, we may in the longer termsee consumer spending redirected towardsthe mid market and budget sectors.

In the event of a sustained economicslowdown, companies will be forced to cutcosts in order to enhance their competitiveedge. Reduced spend on meetings,entertaining, training and business travel willhave an impact on room, conference andbanqueting revenue for hotels operating atthe top end of the market.

And, as shown in Figure 9, the greater thedegree of ownership (whether owned orleased) and the more up-scale the marketsegment, the more sensitive the asset will beto market forces during tough tradingconditions. This is driven by customerstrading down, plus the burden ofdepreciation and interest payments on eachroom, driving down profit before tax perroom.

However, whilst this type of property feelsany downturn more acutely, it alsoexperiences the strongest recovery asconditions improve, particularly those inprimary or airport locations.

It is critical, then, for this hotel segment toact swiftly before the downturn really bites,not only to lessen the initial negative impactbut also to ensure the business is well placedto benefit from future market recovery.

Pipeline threatenedWhile the credit crunch threatens to damagehotel performance by underminingconsumer confidence in the US and Europe,we should also consider its possible impacton future hotel developments.

Hotel sites scheduled to open in the next 18 months are too far down thedevelopment path to be seriously affectedbut the consequences of the credit squeezemay well be felt in 2009 and beyond.

As the supply of debt dries up and the costof financing rises, profitability will besqueezed – particularly in marginaldevelopments – and we may see fewer newhotels and major refurbishment projects.Falling consumer demand would alsoundermine the feasibility of developmentprojects and impact on planned pipeline.

For the time being, major hotel brandsremain optimistic and have a strong,growing pipeline of new openings, much

of which is new construction. However,given the potential for downturn, we expectto see this pipeline tail off as developers seekto protect their margins and the supply ofstandard lodging accommodation begins tooutstrip demand.

Figure 9. Recession impact by segment and ownership profile

NB these illustrative examples do not include the real estate ‘churn’ profits associated with the owned/leased estate, but relate to the operations of the hotel only.

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Source: Company Accounts

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Source: STR Global HotelBenchmark™ survey

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Time to actGiven that consumer confidence indicesindicate tough times ahead and that historicaldata suggests hotel industry performancesuffers during times of economic slowdown,particularly in the upscale segment of themarket, how can hoteliers respond to thesepotential challenges?

Smart hoteliers will undoubtedly have theirown checklists of actions to take to stayprofitable during uncertain times, and thatlist may include:

• Closely monitoring occupancy rates –critical in the coming months to identifywhether a knock-on impact on revenuesand profits may be imminent as theslowdown starts to bite.

• Developing cost saving plans early –particularly important for the upscalemarket, where quality and care is criticalto customer satisfaction.

• Reviewing capital expenditure plans –delaying refurbishments to retain cash inthe business where possible, as long asthis does not damage the brand and thehotel’s reputation. Capital expenditureplans that are well above target IRR(internal rate of return) prior to anydownturn are still likely to make economicsense. It is those plans that are marginalthat should be critically reviewed and reevaluated.

• Reviewing non-operational head count andreducing non-essential expenditure such as

marketing, corporate overheads, travel,mystery guest programmes and innovationprojects – costs in this area tend to risemore quickly in an upturn than direct costsof running hotel operations and there maybe potential to reduce such expenditureduring any downturn without impactingthe service offering.

• Deferring some operational costs such asnon-essential maintenance or seasonalcleaning to improve cashflow, as long as this does not harm the customerexperience.

• Maximising revenue generatingopportunities – ensure marketingcampaigns are accurately targeted anddistribution channels are effectivelymanaged.

• Pursuing new opportunities – is there scopeto acquire distressed assets to reachpreviously untapped sectors of the market?

• Offering new packages to stimulatedemand – the inclination in tough times isto respond by cutting prices. However,once rack rates fall, it becomes anincreasingly difficult task to move themback to the levels a hotelier would like tosee once the market has recovered.Consider whether a free night offer or arestaurant deal is more effective in the longterm when trying to boost occupancy.

Monitoring trendsIndustry analysts will be watching the occupancy trends seen so far this year

very closely, and checking to see whetherthis drop in demand leads to reduced room rates during the second half of 2008.

Optimists, however, will point to the factthat, globally, the number of internationaltourist arrivals is expected to increase by around 4% in 2008, up from the 900 million visitors who travelled the worldin 2007.1

As we point out elsewhere in this report,there is a shared view that revenue fromtourism is still on an upward path, and inthe short term at least, there are no signsthat people’s enthusiasm for travel iswaning. While some markets are facing aneconomic squeeze, other destinations areexpanding at a rapid pace.

Whether or not we are in for tough timesahead, smart hotel operators should takethis opportunity to ensure they are in goodfinancial shape and have a clear strategy inplace in the event of continuing economicslowdown.x•Allan GassonPartner, Deloitte UKTel: +44 20 7007 9121 Email: [email protected]

Lisanne FitzgeraldSenior Manager, Deloitte UKTel: +44 20 7007 0187Email: [email protected]

1. World Tourism Organisation (UNWTO)

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Solving the Russian riddle“A riddle, wrapped in a mystery, inside an enigma.” Winston Churchill’s famous description ofRussia still captures its exotic and elusive appeal. The country has long held a fascination fortravellers, not least because of its immense size, turbulent history and rich cultural heritage.

Modern Russia is the largest country in theworld, covering more than one eighth of theEarth’s land mass, crossing 11 time zonesand home to 160 different nationalities,straddling European and Asiatic cultures.

Despite its vast geographic presence andsignificance as a major player on the globalstage, the country remains a great secret formany tourists, shrouded in mystery by decadesof concealment behind the Iron Curtain.

Since the end of the Soviet Union, foreigndirect investment in Russia has gatheredpace rapidly, rising to $US 8 billion by 2003,then surging to an estimated $US 55 billionin 2007 as overseas companies increasinglyidentify opportunities in the region.1

Strong baseLike other Russian industries, tourism hasonly begun to develop commercially in thepast 15 years but, with over 20 millionannual visitors in 2007, Russia is alreadyamongst the top ten most visited countriesin the world.

Despite this strong base Russian tourism has vast scope for future value growth. The World Travel & Tourism Council (WTTC)ranks the Russian tourism economy 12thglobally in absolute terms, but only 128th interms of its relative contribution to its ownnational economy.2

International tourism receipts have morethan doubled since the start of the currentdecade, although at around US$7.6 billionin 2006, they remain relatively lowcompared to other destinations withcomparable visitor volume. Germany andTurkey, for example, also have inboundtourism levels around the 20 million mark,but receipts of US$32.8 billion and US$16.9 billion respectively in 2006.3

Key source marketsPart of the explanation for this discrepancylies in the composition of Russian inboundtourism. Almost two thirds of the country’svisitors originate from the countries of theformer Soviet Union, with a largecomponent of Visiting Family and Relations

travel as well as migrant workers. Further afield the key source markets areGermany, Finland, the US, the UK, Italy,France and Japan, with inbound visitorfigures gradually increasing in recent years.

Attracting more of these high spendingleisure and business travellers from theWest, and diversifying into the fast growingAsian Pacific source markets to the East, willbe vital if Russia is to realise its hugeinternational tourism potential.

No room at the inn Russian tourism has taken significant stridessince the collapse of Communism, but fastergrowth remains hampered by a number ofobstacles. The European Champions LeagueFinal in Moscow in May 2008 provided atelling illustration of these difficulties, with50,000 English football fans struggling toobtain entry visas and desperately trying tolocate available hotels in the capital.The authorities subsequently agreed toestablish a one-off non-visa regime for theFinal. However, whilst the overall system has

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been simplified for business travellers, visa requirements remain a significantdeterrent for most leisure tourists. This placesRussia at a disadvantage compared to manyof its competitors in Eastern Europe andSouth East Asia who have abolished suchrestrictions. Perhaps the biggest boost fortourism to Russia would be to build on thesuccess of the non-visa regime for the footballfinal by allowing for unlimited one week visitsto the Moscow-St. Petersburg corridor eitherwith no visa or one issued at the airport.

Infrastructure challengeEntry requirements aside, the coreunderlying challenge for Russia is to improvethe availability of high quality tourisminfrastructure, particularly in the hotel sector.The legacy of the Soviet era still casts a darkshadow over the calibre of accommodationon offer in many cities and resorts, especiallyoutside Moscow and St. Petersburg.

Moscow is emerging as a major globalcommercial and tourist centre attractingover 4 million overseas visitors in 2007,

projected to rise to 5 million by 2009. Risingdemand is far outstripping the current hotelsupply of 6,428 daily available rooms.

Scarcity in the capital has driven growth inaverage room rates from US$136 in 2001 toUS$403 as at March 2008, and 27% year-on-year growth in revPar to reach $US238 in the first quarter of this year.4 If anything,these averages understate the real cost ofgood quality tourist and businessaccommodation.

However, these high lodging costs discouragevisitors from staying longer. According to the2007 Mercer Cost of Living Survey, an annualranking of expatriate costs in 143 citiesworldwide, Moscow was the world’s mostexpensive city for the second consecutiveyear.

Leisure assetSt. Petersburg, with its proximity to Europeand rich cultural heritage, is Russia’s greatestleisure tourist asset, attracting over 4.5 millionvisitors, almost half of whom are from

overseas. Whilst these visitor numbers arecomparable with many other European touristmagnets, the city currently has only 3,479daily available rooms, significantly less thanmost major European urban centres.4

The dearth of high quality, independentlyowned accommodation in all cities offers amajor opportunity for global hotel brands withthe power to attract both international visitorsand the growing Russian middle class.

Hotel groups with an already establishedpresence in the Russian market includeInterContinental Hotels Group PLC (IHG),Marriott International Inc, Hyatt Corporation,Radisson Hotels & Resorts, and Best WesternInternational, with the majority ofdevelopment targeted at upscale business and leisure guests. Budget/mid-marketdevelopment so far remains relatively low but some interesting trends are emerging. For example, St Petersburg already has anoticeable presence of small, privately ownedand medium priced hotels and guesthouses,whereas they remain rare in Moscow.

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In the pipelineCurrent hotel development in the country isfocused heavily around these two majorcities, with Moscow and St. Petersburgtogether accounting for almost 70% ofRussia’s total current development pipelineof 10,807 rooms.5

IHG’s recently announced new-build HolidayInn project in Moscow, with local investmentpartner Silkton Ltd, will be the group’s 16th hotel in the country. IHG will have ninehotels in the capital, three are underconstruction in St. Petersburg, and furtherhotels are in the pipeline for the cities ofSamara, Rostov, Chelyabinsk & Novosibirsk.

The opening of the Hilton MoscowLeningradskaya in May 2008 marked HiltonHotels Corporation’s first foray into the Russianmarket. The group plans to launch 25 newhotels under selected Hilton brands over thenext ten years in partnership with a localsubsidiary of London & Regional Properties.

Low cost airliftIn terms of transport, Russia is served byaround 70 international airports, with airtraffic dominated by the three Moscow hubs.Passenger growth here is meteoric, rising from19 million in 2002 to 33 million in 2006.Expansion plans are expected to increasecapacity to over 85 million by 2012.6

A refurbished Domodedovo airport hasemerged as the winner over the Soviet styleSheremetevo, with many internationalcarriers defecting to the more comfortableand service oriented alternative provided bythe former. The emergence of Vnukovoairport as a new alternative will also providemuch needed competition.

Air traffic is dominated by the major scheduledcarriers, including the Russian market leaderAeroflot, now part of the SkyTeam alliance,which is anticipating a 16% increase involume to 9.4 million passengers in 2008.7

However, inbound tourism is currently held back by a lack of low cost carriersflying into Russia. A number of centralEuropean players are beginning to offerservices to Russia, including germanwingsand Clickair, but neither of the two UKgiants, Ryanair and easyJet, currently fly intothe region. The fast growing city breakmarket into St. Petersburg is likely to remainthe most attractive and accessible route forthe budget carriers.

13


High spending RussiansRussia’s emerging middle class also offers hugepotential for domestic holidays and shortleisure breaks. However, many are similarlydeterred by the under-supply of affordable bedstock and lack of cheap air travel. In a countryof 17 million square km, long distance rail androad travel is less of an option than in othercountries, in spite of an efficient rail network.

Faced with these problems a growingnumber of affluent Russians are opting toholiday abroad. In the first half of 2007,13.7 million travellers left the country to goon holiday, 14% more than in 2006.According to Euromonitor, Russians are theeighth largest overseas tourism spendersworldwide, and they are even moresignificant in some of their preferreddestinations such as Turkey and Egypt.

Domestic boostDomestic air traffic has plummeted fromover 130 million passengers at the end ofthe Soviet era to less than 20 million in2007, prompted by high prices and safetyconcerns.8 However, the launch of internalairline Sky Express in January 2007inaugurated Russia’s first ever low costcarrier. Further entrants are expected tofollow in a trend which is likely to provide amuch needed boost for domestic tourism.

Investment in road and rail infrastructure isalso increasing, with Government plans tobuild 640,000 km of new road networklinking Russia’s major towns and cities.Meanwhile the Finnish-Russian rail jointventure Oy Karelian Trains Ltd plans to opena high speed service in 2010 on the 450 kmtrack between Helsinki and St. Petersburg.

Know your onionsIn future years Moscow and St. Petersburgwill inevitably remain at the core of Russia’sinternational tourist appeal. These two majorcities boast world renowned cultural andhistorical attractions, such as Red Square andSt. Basil’s Cathedral in the capital and theState Hermitage Museum and Peter and PaulCathedral in Russia’s major Baltic centre.

Beyond these two major gateway cities, onlythe ‘Golden Ring’ is well known to internationalvisitors. This is a picturesque circuit of historictowns to the north east of Moscow, withdistinctive architecture dating from the 12th century, and renowned for the famousonion domes of the Russian Orthodox Church.Domestic leisure travellers are most likely to

be drawn to the southern region ofKrasnodar which attracts around 15 millionRussians each summer to its Black Sea coastalresorts.9 The city of Sochi has been chosen tohost the Winter Olympics in 2014 and thisevent will offer significant opportunities toshowcase the Black Sea region to bothinternational and domestic markets and open a gateway for winter sports in Russia.

Niche opportunitiesA key future challenge for Russian inboundtourism is to diversify beyond its currentheartlands. This could embrace secondarycities with rich cultural traditions such asKalingrad, Novgorod, Kirov and Kazan.

Other major growth opportunities for Russiainclude some of the world’s fastest growingniche travel markets.

Adventure travel and wellness tourismpossibilities exist in the volcanic landscapesand hot springs of the Kamchatka andKurile Islands in the far east, in the largelyundiscovered ‘Golden Mountains’ of Russia'sAltai region and in the Caucasus region.

Potential for ‘slow travel’ is offered bycruises along Russia’s main artery, the 3,700 km long river Volga and by iconic rail expeditions such as the Trans-Siberianrailroad from Moscow to Vladivostok andthe Trans-Mongolian line to Beijing.

Key question markWhilst Russia undoubtedly has the raw materialfor success, a key question mark remains overthe State’s commitment to tourism.

The World Economic Forum in Davos recentlyranked the country as one of the top 35tourist destinations worldwide, in terms of its natural resources and cultural treasures.However, in terms of Government tourismpolicy, Russia ranked only 125 out of a total of130 countries. Security concerns relating tocrime and to traffic accidents were highlightedat Davos as significant problems alongsidethe infrastructural deficiencies in transportand accommodation discussed earlier.

Despite the huge economic benefits to begained from encouraging inbound tourism,the overarching political context alsocontinues to cast clouds of uncertainty.International relations between Russia andmany of its key source markets are strained,and it is not clear how the ramifications ofpower following the recent presidentialhandover will affect these relations.

Strategic approachNevertheless, whilst far from being a majorpolitical priority, there are signs that theRussian authorities are beginning to adopt amore strategic approach to harnessing thecountry’s tourism potential.

The Government has created a number ofspecial tourism economic zones to mobiliseinvestment and attract domestic and foreignvisitors. Companies operating in such zoneswill enjoy a number of benefits, includinglower taxes.

Planned projects in one such zone includehotel construction and a water tourism centreand mineral spa in the Siberian city of UlanUde on the shores of Lake Baikal, the world’soldest, deepest and largest fresh waterreservoir. Federal investment in the project isexpected to exceed US$390 million.10

Brand RussiaA key challenge in future years will be thedevelopment of an attractive and cohesive‘Russian brand’, and the sustained deploymentof marketing resources to sell Russia overseas.This will be vital to counter popular negativeperceptions and to generate a sustained buzzaround Russia as a high quality, welcoming,safe and ‘must see’ destination.

Today’s international tourists are continuallypushing their personal travel boundaries andare hungry to explore new destinations.Decades of secrecy and inaccessibility havehelped to intensify the air of mystery andexoticism surrounding Russia in theimagination of many of these travellers.

If these challenges are met – liberalisingbureaucratic restrictions, improvinginfrastructure, and refining and marketingthe Russian brand – the country will be wellplaced to start releasing this pent-updemand. Like its famous wooden dolls,Russia will then begin to yield up its secretsto the gaze of international tourism.x•Graham PoveyPartner, Deloitte RussiaTel: +7 495 787 0600Email: [email protected]

1. Economist Intelligence Unit 20082. World Travel & Tourism Council3. World Tourism Organisation, January 20084. STR Global HotelBenchmark Survey, March 2008 5. Hotel Times/Lodging Econometrics, March 20086. Economist Intelligence Unit, March 20087. Economist Intelligence Unit8. EBRD – European Bank for Reconstruction and Development.9. Regnum News Agency, October 200710. Russian Financial Control Monitor, July 2007

14


As reports of economic slowdown and record oil prices continue to flood the media, we take a closerlook at the likely impact on US business travellers and consider how the hospitality and leisureindustry can most effectively navigate the emerging corporate travel landscape.

The changing landscapeof US business travel

15


In a sustained slowdown, many companieswill seek to cut discretionary costs whereverpossible in order to insulate themselves in a tough marketplace. Leaner operatingmodels will impact on areas such asconference sponsorship and attendance,client entertainment, employee training and, inevitably, business travel.

Goldman Sachs analyst Steven E. Kentbelieves that the US corporate travel market could see overall slowdown.1

This is borne out by a recent Global Deloitte CFO Survey in which 65% of CFOs said they were likely to cut discretionaryspending such as business travel andentertainment.

Two key driversTravellers are traditionally divided into two categories, leisure and business, withthe latter group further segmented into‘managed’ and ‘unmanaged’ businesstravellers.2

Managed travellers are required orencouraged to use company designatedproviders, and are more likely to delegatetheir business travel arrangements to acorporate travel associate. Unmanagedtravellers may have to follow travel policiessuch as daily allowances but can usewhatever travel agency and supplier theywish, and are typically heavily dependent onthe Internet.3

Both of these groups are affected by therising cost of US business travel, for whichthere are currently two key drivers: risingcommodity prices and the state of the US economy.

Supply pessimismOil prices surged to an all-time high of $4.2 a gallon in May 2008, whilst USbenchmark crude broke records four days ina row, reaching $133.2 a barrel in theSpring.4 Rapid growth in emerging marketsand weak investment in new capacity arethe principal culprits behind the currentprice hikes.

The falling dollar may also be to blame. Oil is pegged against the dollar so as thecurrency gets weaker, dollar denominatedoil contracts become more attractive toforeign investors. These investors havepushed oil futures to new highs, and therest of the energy complex includinggasoline futures has followed suit, inflatingthe price of gasoline.5

The Paris-based International Energy Agency(IEA) has issued a pessimistic supply outlookwhich could further rattle the internationaloil market. The IEA is preparing for a sharpdownward revision of its oil supply forecast,a shift that reflects a mood of deepeninggloom.

Intense pressure As a direct result of soaring fuel prices,airlines have come under intense pressure to boost their revenues and cut costs. In Maythis year, jet fuel prices in New York were up64% from the previous year.6

Rocketing oil prices have shattered the coststructure of the airline industry. Just a fewyears ago refiners charged only $3 to $5 abarrel to turn crude oil into jet fuel – theynow charge up to $36.7 The cost ofpumping jet fuel into an aircraft is nowestimated at $160 a barrel, including taxes

and fees, with these higher costs inevitablypassed onto the traveller.

These problems are compounded bymounting economic uncertainty in the US In recent years, easy credit and prosperityinitially concealed some investment mistakesand inefficiencies. The contraction of easilyavailable credit, the drop in the value ofhome equity, and the resulting impact onconsumer wealth are all now contributing toeconomic slowdown.

Recession planningMost indicators suggest that the US hasentered or is entering a recession, definedby economists as a decline in the grossdomestic product for two or moreconsecutive quarters. Merrill Lynch analystsexpect this to become more apparent in thesecond half of 2008 but in the eyes of manybusiness leaders the US is already aneconomy in recession.8

Many US companies are struggling andsome have entered bankruptcy. Others aretaking a longer-term view and capitalisingon the opportunities inherent in times ofeconomic uncertainty.

When it comes to recession planning, it iswise for companies to consider putting inplace a range of actions consistent withtheir business strategies for both theduration and aftermath of the recession.One of these strategies is curtailing businesstravel expenses.

The tourism, hospitality and leisure industrycan expect to see a number of emergingtrends as businesses explore new ways tocut travel costs.

16


Scrutinising employeesCorporate travel policies are likely to moveaway from suggested and recommendedguidelines and towards mandated rules. In asoftening economy, many companies willseek to control costs and curtail expenses byscrutinising the travel behaviour of employeeson the road and enforcing greatercompliance with corporate travel policies.

Most mid to large sized companies are nowin the process of implementing a morestringent travel and expenses policy,including pre-travel and post-travel audits.We can also expect to see companies usingstronger language to give concise directionsabout what is and what is not permissiblewithin their policy. For example, companiesare now putting in specific dollar amountsfor approved spending on meals, ratherthan asking employees to limit spending toa ‘reasonable amount’.

Talking toughCompanies may also look to onlinetechnology to help manage both the risingeconomic costs and the environmentalimpact of business travel. Onlineconferencing is expected to be widespreadand available as a standard facility to 75%of corporate users by 2010.

As many US corporate meeting plannerscontend with tighter travel andentertainment budgets, operators canexpect to see tougher negotiations onpreferred vendor and other contracts overthe coming year. In a weakening economythis may mean more leverage for companymeeting planners, so understanding clientneeds and priorities is vital.

Seizing leadershipAs the world of corporate travel faces achallenging year ahead, US hospitalityproviders can seize a leadership position by adopting three long-term strategicapproaches: the green agenda, incentives,and cohesive branding. Each of theseelements can enhance a hotel’sattractiveness to business travellers.

Today’s travellers are going green. The eco-conscious consumer segment hasnow grown large enough to spawn its ownacronyms. SCUPPIES (Socially ConsciousUpwardly Mobile Persons) and LOHAS(Lifestyles of Health and Sustainability),demand environmentally-friendly behaviourfrom hotels when travelling on business.

In Deloitte’s recent survey of US businesstravellers, 60% said they were concernedabout global warming and 55% believedthey were more aware of the environmentthan a year ago. This awareness is helpingto raise the bar of what is expected fromthe hotel industry in terms of environmentalresponsibility.9

Green and smart The National Business Travel Association hasadded a new section on environmentalquestions to its standard request forproposal form (RFP). This is used bythousands of its members to select preferredproperties for the upcoming 2009 bidseason.

The addition of six green questions isdesigned to help corporate meeting plannersand hotels reach a common understandingof environmental policies. This is in responseto survey feedback from the corporate travelcommunity itself. Companies can expect tosee an increase in requests from corporatetravel programmes for ecological credentialsand green capabilities. Operators alsorecognise the compelling financial,regulatory, risk mitigation and broadermarketplace opportunities inherent inpromoting sustainability. For example, thereare significant financial benefits in changingover to light bulbs that use less energy orbathroom fixtures that limit water flow.Going green is smart business.

Offering incentivesThe values and behaviour of travellers oftenchange dramatically during an economicdownturn. Many customers will seek outsales and offers and one strategy open tocompanies is to offer cumulative incentives.This can be a particularly effective way toattract the unmanaged segment of businesstravellers who are booking their own traveland seeking deals online.

When oil prices spike, the impact on airlinesand hotels is immediate. Instead of slashingprices upfront, hotels can lure loyal businesstravellers by allowing them to earn incentivepoints. These points can then be redeemedfor a free ticket or room on future purchasesin better economic times.

Brand imageFinally, branding is a great differentiator intough times because a strong hotel brandimage can help to attract first time travellersas well as generate repeat business. Brand

recognition is extremely important inwinning and retaining customers in anincreasingly competitive and weakeningeconomic environment.

In today’s ‘experience economy’ brandedhotels can be promoted as part of a broaderlifestyle experience – one that combinesboth business and leisure. Companies canalso differentiate themselves by offeringadditional guest services such as child care,user rewards or different room features.

As the landscape of business travel growsrockier and more challenging in the monthsahead, smart thinking hospitality and leisurecompanies will respond by devising andimplementing appropriate brand strategiesin order to defend their market share.x•Adam WeissenbergPartner, Deloitte USATel: +1 973 602 6789 Email: [email protected]

Grace HuangManager, Deloitte USATel: +1 212 436 7462Email: [email protected]

1. www.ehotelier.com, May 20082. Forrester Report, 20063. Forrester Report, 20064. www.WSJ.com, 2 May 2008 5. AP IMPACT: What makes up the price of gas?, May 20086. www.WSJ.com, May 20087. www.WSJ.com, May 20088. Channel News Asia, May 20089. Deloitte US Online Survey, April 2008

17


Caravan holidays are back in vogueThe caravan market is booming and its changing image is adding to the sector’s appeal

Choosing a caravan holiday, rather thanrenting a villa or staying in a hotel, was –until recently – seen as a cheap and cheerfuloption for families on low budgets, whilehaving one as a permanent or second homewas, typically, for the over-50s from the lowto middle income demographic groups.

But, rather like camping – or ‘glamping’ asit’s now being called – the image of caravanholidays and caravan parks in the UK ischanging and its appeal is moving up thedemographic scale.

Today, caravan parks cater for a wide rangeof consumers’ price points with staticcaravans from around £15,000 (US$30,000)upwards. At the top end, there are luxurystatic caravans and lodges with hot tubs, flatscreen TVs, wi-fi broadband, en suite facilitiesand even a boot room to dry out the wetsports gear. Some premium lodges are being sold for more than £300,000(US$600,000), while up to £500,000 (US$1 million) is being asked for mobilehomes in prime locations.

Even basic caravan parks have enjoyed a surgein demand, as people look for moreaffordable, eco-friendly second holidays.Caravan parks have also become moreattractive to different types of investors, for several reasons, and the UK caravanindustry, currently estimated to be worth more

than £3 billion (US$6 billion) a year1, looks setfor solid growth in the medium term.

Here, we consider the changing image ofcaravan parks and the many opportunitiesnow offered by this alternative sector of thetourism market.

Evolutionary enterprise There are more than 3,500 holiday parks2 inthe UK, offering anything from a stay on anisolated farm with a couple of washrooms

to multi-entertainment sites with over 1,000 pitches at major holiday resorts. Some of the largest, such as Trecco Bay near Tenby, South Wales have more than2,500 static caravans and a broad offeringof facilities such as indoor swimming pools,sports activities, restaurants, bars andentertainment venues.

Many parks have their roots in familyenterprises, and opened for business whenfarmers sought to diversify from traditional

Figure 1. Estimated market shares by number of pitches

BourneLeisure

ParkResorts

Parkdean ParkHolidays

Hoburne Haulfryn JohnFowler

SouthLakeland

Source: Company Information/British Holiday and Home Parks Association

0

1

2

3

4

5

6

7

8

9

109%

5%

3% 3%

1% 1% 1% 1%

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In the holiday lettings model, a fleet ofcaravans and/or holiday homes are letthroughout the season. Revenue isgenerated by tariff income plus secondaryspend in the central facilities. This tends totranslate to better profitability per pitch, buta lower earnings to cash flow conversion,because of the capital investment neededfor the hire fleet.

Many major operators use a combination ofboth models. This hybrid offers more flexibilityas operators can switch between owner-occupier and lettings, depending on demandand pricing, to optimise their financial returns.People who rent a caravan for a holidaygenerally demand higher quality centralfacilities, and making these available not onlyenables operators to charge higher pitch feesto owners, it increases sales of moreupmarket caravans – often to those whooriginally visited on holiday.

Increasingly, caravan owners are sub-letting,earning extra income that may encouragethem to buy a more expensive unit. Thisgenerates a higher margin for the parkoperator, who also gains extra income fromadditional lettings, without having to investin a larger fleet.

The table above summarises revenuestreams from the hybrid business, whichgives operators more options for enhancingincome.

Creating shareholder value As the sector is currently so fragmented,there is plenty of opportunity forconsolidation, and larger operators benefiting

from both cost and revenue synergies canadd significant value for shareholders.

Buy and build schemes are increasing,particularly by those operators backed byprivate equity. 2007 saw a steady stream ofsingle park acquisitions by Bourne Leisure,Park Resorts, Park Holidays and Haulfryn. A larger bolt-on acquisition involved ParkdeanHolidays acquiring Weststar Holidays – withsupport from Alchemy Partners – for £83 million, gaining four high-quality lettingsparks and the very strong Weststar brand.

One of the largest single consolidations todate was the acquisition and subsequentmerger of Park Resorts for £165 million andGB Holiday Parks for £105 million by ABNAMRO Capital in 2005. This transactioncreated the second largest player in thesector with 35 parks and approximately18,000 pitches. Following their integrationand a park investment programme, ABNAMRO sold Park Resorts to GI Partners for£440m in 2007. With many independentoperators still remaining, this value creationroute looks set to continue going forward.

Broadening investor appetite Private equity investors have been movinginto the sector over the past decade,funding operators such as Bourne Leisure,Park Resorts, GB Holiday Parks andParkdean Holidays, and are continuallylooking for fresh opportunities.

Meanwhile, interest is growing from othersources, including property investors, lookingfor better yields than they can find amongthe traditional asset classes, such as retail andcommercial property. Caravan parks offerfreehold sites in attractive rural locations, andas planning rules restrict new developmentsat a time of increasing demand, investmentsmake good business sense.

There is also scope for medium termresidential development potential and the‘yield-like’ earnings from the owner-occupiermodel, which all add to the sector’s appealfor these types of investors. Recently, SouthLakeland Parks was acquired for £125 millionby Mountain Capital and Rockspring Hanoverbought Lakeland Leisure for £40 million.Other transactions have involved Kenmore,and RREEF, Deutsche Bank’s property fundarm.

Figure 2. Business model characteristics

Source: Deloitte analysis

Caravan and lodge sales

Pitch fees

Central facilities spend

Sub-letting

Hire fleet tariffs

Retail

Retail

Leisure

Agency

Leisure

Revenue category

Owner Occupier

Customers

Holiday Lettings

Customers

agricultural backgrounds. This evolutionmeans many sites are still independentlyowned, keeping the sector very fragmented.Even though we have seen a tier of majoroperators emerging in the past few years,with portfolios of professionally managed,well-invested parks, the top eight operatorsstill only represent approximately 24% ofthe market.3

Naturally, these larger operators have accessto deeper capital resources enabling them toupgrade their offerings. Their extrapurchasing power also gives them greateroperational and marketing efficiency thanfamily owned concerns. As a result, there isa significant differentiation betweenprofessionally managed parks owned by amajor operator and many of the individuallyowned sites.

The best of both business models There are two main types of business models– owner-occupier and lettings.

With the former, operators sell caravans orlodges to customers who pay an annual pitchfee under a licence agreement. Caravan salesare driven by either ‘pitch churn’ or the sale ofnewly-developed pitches. ‘Pitch churn’ salescomprise those to new customers as existingowners leave or owners decide to part-exchange their current units for new ones.With well-managed parks consistently‘churning’ pitches every five to seven years onaverage, and pitch fees paid annually inadvance, the owner-occupier model hasstrong earnings visibility and very high rates ofearnings to cash conversion, in some cases ashigh as 90%.

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In the hotel industry, we have seen a growingtrend to divide asset ownership fromoperations, with opco/propco splits and saleand leaseback transactions. This could bereplicated in the caravan sector, and last year,the Park Resorts transaction represented thefirst opco/propco debt structure. This trend ofseparating the property component couldstrengthen, with the possible utilisation ofReal Estate Investment Trusts (REITs) alsobeing on the cards.

Despite volatile property prices in the UKand rising yields across most real estate sub-sectors, caravan parks should continue tooffer a healthy investment alternative forproperty investors in upcoming years.

Moving up-market In the UK at least, holiday parks and caravanshave been seen as good ‘value for money’options, appealing most to the popular endof the market. But as we mentioned at thestart of this article, this image is shifting, forseveral important reasons.

Although customers in their mid-50s fromthe low to middle income B/C1/C2demographic brackets remain the coremarket for caravan parks business, thesector is now successfully targeting the AB,upper professional, managerial groups.

One reason for this is the increasing demand for second homes. According toThe Centre for Future Studies, the numberof second home owners in the UK isexpected to rise by 25% from around325,000 to 405,000 during the nextdecade. Second homes, particularly in highlydesirable holiday destinations, can be hugelyexpensive and therefore a lodge or luxuriouscaravan is often a more affordablealternative.

This is certainly the case for the higherprofessional ABC1 customers, seeking aweekend or holiday retreat in a rural locationwithin easy reach of home. These spaciousunits are a different breed to the traditionalfamily caravan, in the same way that thedesigner tents now available at up-marketcampsites are much more comfortable thanthe traditional holiday under canvas.

Operators are successfully tapping into thismarket segment by developing luxurylodges and caravans on a highly selectivebasis, usually in up-market only parks orfully segregated areas of their existinghigher quality parks. In the right locations,operators can command premium pricing.For example, South Lakeland Parks offerslodges alongside Lake Windermere for over£300,000 (US$600,000), while a 42ft by20ft (13m by 6m) caravan on a beachsideplot at Haulfryn’s Warren holiday park nearAbersoch, North Wales, was offered lastyear at £500,000 (US$1 million).

Home from homeWith consumer confidence currently atlower levels in the UK, there is someconcern that demand among owneroccupiers could tail off in the short term.However, the typical owner tends to be inthe ‘grey’ market, and therefore havesizeable equity in their property with lessexposure to residential mortgage rates.

There is also a view that, due to the currentstate of the financial markets, the availabilityof debt finance that has supportedinvestment and rising valuations in caravanparks over the past couple of years, couldreduce. Although this may constrainvaluation multiples in the short term,interest from alternative institutions, such assovereign wealth funds, may compensate.

Generally though, the sector is wellpositioned to benefit from some key trendsduring the next few years.

Firstly, people in the UK, who tend to workthe longest hours in Europe, have graduallypushed holidays up their list of priorities.According to Mintel, 22% of consumersnow take three or more holidays each year,and with the euro strengthening against thepound, more people are likely to take thesebreaks at home. This extra demand for UKbased holidays will not only benefit thelettings business, but in the medium term itwill boost the owner-occupier market too,as customers who rent often return to buy.

Secondly, more people are opting forenvironmentally-friendly holidays, andgetting to a caravan park in the UK is a morecarbon-conscious choice than flying abroad.

And, thirdly, as caravan parks have alwaysattracted an older clientele, it makes sense forparks to broaden the range of services theyoffer to ageing customers, by providing similarfacilities to those in assisted care developments.This core market continues to expand andremains resilient to the overall economy.

It all adds up Thanks to a change of image, a growinginterest in eco-travel and a limited supply,the caravan parks market has never lookedso appealing. With an increasing number ofoperators seeking to build their portfolios,competition for parks has intensified andindustry analysts have seen a steady increasein pitch prices.

With a multitude of opportunities toenhance both earnings and capital returns,we expect to see more investors addingcaravan parks to their asset portfolios.x•Nigel BlandAssociate Partner, Deloitte UKTel: +44 20 7007 2761Email: [email protected]

Simon HarrisonDirector, Deloitte UKTel: +44 20 7007 2245Email: [email protected]

1. British Holiday and Home Parks Association (BH&HPA)2. BH&HPA3. BH&HPA

United States

United States LeaderAdam [email protected]

AtlantaDavid [email protected] [email protected]

ChicagoHoward [email protected] [email protected] [email protected]

Las VegasLarry [email protected] [email protected] [email protected]

Los AngelesJames [email protected] [email protected] [email protected]

MiamiJohn [email protected]

New YorkMichael [email protected] [email protected] [email protected]

PhoenixShaya [email protected]

Global Managing PartnerAlex Kyriakidis+ 44 20 7007 [email protected]

United KingdomLondonNigel Bland+44 20 7007 [email protected]

Robert Bryant+44 20 7007 [email protected]

Deborah Griffin+ 44 20 7007 [email protected]

Karen Potts+44 20 7007 [email protected]

Marvin Rust+44 20 7007 [email protected]

Nick van Marken+44 20 7007 [email protected]

Tim Steel+44 20 7007 [email protected]

GatwickGraham Pickett+44 1293 [email protected]

ManchesterDan Jones+44 161 455 [email protected]

Asia/Africa/Middle East/Pacific

Asia Pacific LeaderTony [email protected]

AustraliaParramattaPeter [email protected]

SydneyDavid [email protected]

20


GermanyMunichMichael [email protected]

GreeceAthensMichael [email protected]

ItalyRomeNadia [email protected]

MaltaNick [email protected]

NetherlandsAmsterdamPaul [email protected] [email protected]

PortugalLisbonJorge Sousa [email protected]

RussiaMoscowNatalia [email protected] [email protected]

SpainMadridJavier Jimenez [email protected]

TurkeyIstanbulAhmed Cangözacangö[email protected]

North AmericaCanadaTorontoRyan [email protected]

South AmericaBrazilRio de JaneiroJohn [email protected]

ContactsFor more information about the solutions offered by Deloitte, contact your nearest Tourism, Hospitality and Leisure expert.

ChinaHong KongMartin [email protected] [email protected]

ShanghaiRon [email protected]

IndiaDelhiAtul [email protected] R [email protected]

MumbaiMani [email protected]

JapanTokyoRyuji [email protected]

Middle EastRob O’[email protected] [email protected]

New ZealandAucklandAndrew [email protected] [email protected]

South AfricaCape TownWendy [email protected]

Continental EuropeAustriaViennaMichael [email protected]

DenmarkCopenhagenHelle [email protected]

FranceParisDavid [email protected] [email protected]

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Deloitte & Touche LLP is the United Kingdom member firm of DTT.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations;application of the principles set out will depend upon the particular circumstances involved and we recommend thatyou obtain professional advice before acting or refraining from acting on any of the contents of this publication.Deloitte & Touche LLP would be pleased to advise readers on how to apply the principles set out in this publication totheir specific circumstances. Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to anyperson acting or refraining from action as a result of any material in this publication.

© 2008 Deloitte & Touche LLP. All rights reserved.

Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered numberOC303675. A list of members’ names is available for inspection at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom, the firm’s principal place of business and registered office. Tel: +44 (0) 20 7936 3000. Fax: +44 (0) 20 7583 1198.

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