Investor interest in European hotels is mounting, particularly for resorts and serviced-apartments, as countries gradually get to grips with the COVID-19 pandemic, according to recent figures released by adviser Cushman & Wakefield.
Plenty of money is waiting in the wings, which will have to be invested soon to gain real value out of the upswing. However, so far only a handful of notable deals have taken place, with buyer and seller expectations still not matching.
C&W's research was based on a survey of more than 50 senior representatives from major private equity firms, funds, REITs and other institutional investors active in the European hotel real estate market. These firms had collectively invested more than €26bn in the hotel sector over the past five years, amounting to about a quarter of total European hotel transaction volume.
More than a third of those surveyed plan to buy more hotels across Europe, while only 21% said they would be buying less, and 10% have put their hotel activities on hold.
The so-called MICE hotels - those focused on hosting meetings, incentives, conferences and events, and those dependent on airport traffic - have fallen the most in favour, as COVID plays havoc with working patterns, and trade fairs and conferences have yet to get back into their stride.
In terms of geographic popularity, the UK, Germany, Spain and Portugal remain top of investors' wish-lists. Barcelona heads the list of the C&W investors' favoured cities, followed by London, Paris, Amsterdam and Munich.
But investors don't seem any longer to be expecting assets to appear on the market at dumping prices, or even heavy discounts on 2019 prices. The majority of C&W's surveyed investors (59%) would consider opportunities with only a moderate discount of 15% or less, relative to 2019 levels, while 12% would seek more distressed opportunities with at least a 25% price reduction. But this is theoretical, and is clearly not happening on the ground - yet.
Over at adviser CBRE, Owen Pritchard, executive director and COO, EMEA Hotels, would seem to confirm how prices so far are still holding up. Based on figures for CBRE's own sell-side deals in the first half of 2021 in Spain, Italy, France and the UK, it says that 50% achieved above guide price and 25% were sold at guide price. 'Discounts of 1-5% and 6-15% were seen in only 13% and 12% of these transactions respectively, illustrating that the level of discounts anticipated by some have not occurred,' he said.
Private equity firms accounted for 43% of the CBRE deals, followed by institutional investors at 28%, in a sign that confidence in the long-term strength of the hotel sector is still there, with the gap in pricing expectations continuing to narrow.
Berlin-headquartered pan-European hotel consultancy mrp hotels has just released its own study on transactions in the hotel segment, showing just how few deals have actually taken place in the DACH region since the onset of the pandemic. In fact, only two are noteworthy: One was the sale of the “Turm am Mailänder Platz” project in Stuttgart, which is operated by Adina Hotels and Premier Inn, for about €137 million, the other involving Villa Kennedy in Frankfurt, operated by Rocco Forte, which changed hands for an amount in the upper double-digit millions.
Martin Schaffer, managing director and partner of mrp hotels, is not as bullish as others in the industry that we're going to see a wave of transactions as COVID recedes. “Unlike many international experts, we take a differentiated view of the situation. We are not convinced that the second half-year will see a quick surge in transactions or portfolio optimisations,” he said, pointing to the large amounts of government aid still being ploughed into the sector with little clarity as to how this will be repaid.
Transparency is another big issue, he said, with many operators remaining "an absolute ‘black box’ due to the lack of insight and of well-informed metrics". It is often extremely unclear what plans a hotel might have for a new, more flexible, maybe hybrid future and how these are covered by existing contractual arrangements.
The survey highlights how the traditional concept of a market dominated by institutional investors is also being challenged, as operators are no longer prepared to shoulder the entire risk within the framework of classic fixed lease agreements. The new type of management contracts, which redistributes the operational risk among owner and operator, has more in common with the threat analysis used by private equity funds than with the relatively rigid structural requirements spelled out by institutional investors. That being said, say the authors, fixed lease agreements will continue to have their place in the DACH region, even as fresh opportunities are opening up for private equity funds.
Schaffer says that on the financing side, particularly for new projects, there is still big uncertainty. “Financing arrangements are bearing the full brunt of the crisis. The difficulty in making any kind of prediction regarding the recovery period and the unavailable or limited criteria for assessing the recoverability of leasehold agreements often make it impossible for banks to underwrite development projects.”
Rob Seabrook, head of hotel transactions for EMEA at C&W, addresses the same point: "On the owner side, while leisure travel is recovering, government support for the hospitality sector is fading away, with moratoriums being lifted. Therefore, inevitably banks and landlords will soon expect tenants to repay deferred loan payments and owed rent. This might put pressure on some owners, but the trends highlighted in this survey are reassuring and should narrow the gap between seller and buyer expectations, helping to kickstart transaction activity."
Despite the caution, some German companies are expressing optimism in their own ability to re-invent themselves. One such company is Primestar, whose CEO Andreas Erben has just completed a management buyout with capital from Swiss financier Rausch Partners, giving him 81.3% of the new restructured business.
Primestar, an operator rather than an owner, plans to expand from its current nine to 40 hotels over the next three years, mainly in Germany but also in Austria, the Netherlands and the UK:
Primestar's nine existing hotels, with 1,983 rooms in German A-cities, are operated under the brand names Super 8 by Wyndham, Hampton by Hilton, and Holiday Inn. Its expansion plans, under the name Primestar Operator, will target the three-star market and include longstay concepts and co-working lounges, taking over existing hotels. Of primary interest are hotels with 120 to 350 rooms in central urban locations, with the goal being to grow to about 8,000 rooms. The company could consider taking over ownership of up to a fifth of its hotels, it said, and has the backing of partners such as InterContinental Hotels and Hilton.