Executives at Luxembourg’s IREMIS fund, which in part is targeting hotel investments in secondary German cities, said that today's challenging macroeconomic environment requires firms to have expertise and a strong track record of investments across different asset classes.
IREMIS — or Innovative Real Estate Management & Investment Solutions — was founded by Jochen Schaefer-Suren and London-based partner Jos Short, the founder and former executive chairman of Internos Global Investors, a firm Schaefer-Suren spent 11 years at as a partner and head of hotels and leisure.
Among challenges, geopolitical tensions such as the Russian-Ukraine war and long-term tensions with China have brought both instantaneous and longer-term strategic disruptions of supply chains, said Schaefer-Suren, IREMIS’ co-chairman and co-founder.
He said such developments have forced investment firms to rethink their supply chains.
Compared to the deflationary effect of off-shoring business over the past few decades, future on-shoring trends will also result in increased costs, which could have additional, long-term inflationary effects, he said.
“Higher inflation than we have seen over the last decade will remain and may not drop to below 2% anytime soon. Hence, we will keep interest rates higher than the market currently expects,” Schaefer-Suren said.
In addition, environment and climate-change issues will affect trading, operations and strategies due to related impacts on travel patterns, regulations and capital expenditure, he said.
“This will affect all investments and capital markets, as well as, of course, all real estate sectors and in particular trading assets such as hotels, leisure or retail real estate,” he said.
Schaefer-Suren said these factors could spell an end to the current slowdown in transactions. Economic uncertainty, refinancing and redemption requests from open-fund investors could lead to more distress and hence acquisition opportunities.
“In particular when refinancings come up and banks are not willing to refinance, or only at much increased margins, in addition to the increase in the underling swap rates, stress will occur and transactions will happen,” he said. “I recently read a report stating that €43 billion ($55 billion) in hotel debt is maturing. Clearly this will lead to stress, as interest rates have risen three- or fourfold since 2019. In addition, open-ended real estate funds face more redemption requests from retail investors since money market funds now offer them higher returns than do these real estate funds. Hence, the managers of these real estate funds must sell assets to create liquidity.
“We expect turbulence and opportunities in the real estate markets in the coming 12 to 24 months, and we and others will offer solutions, even if we do not know yet the exact timing and contours of these opportunities,” he said.
In respect to new investment products, Peter Lenhardt, IREMIS' co-founder, director and head of hotel and leisure, said IREMIS recently closed its first hotel real estate fund, the €100 million IREMIS Hotel Immobilienfonds I, with German institutional investors.
For this fund, IREMIS has joined forces with alternative investment fund manager INTREAL Luxembourg, which is licensed to be a regulated investment product under Luxembourg law.
The fund is a reserved alternative investment fund, which in Luxembourg may also be structured as a Société d’Investissement à Capital Variable — an investment company with variable capital organized under any available corporate structure.
The regulated institutional fund is also designed for German-speaking investors, particularly pension funds and insurance companies.
Schaefer-Suren, who described himself as primarily a hotel real estate investment manager, said he and Short bring five decades of real estate investment management experience across asset classes.
Before setting up the firm, Schaefer-Suren's roles included time as CEO of Principal Real Estate’s hotel and leisure divisions, a similar position at Invesco Real Estate and, earlier in his career, senior positions at Lazard and hotel brands Hilton and Le Meridien.
Different Era
A lot has changed in the investment world, Schaefer-Suren said.
“After 15 years of monetary easing, with a substantial increase in monetary supply and negative interest rates, the market has changed,” he said. “When capital was readily available, we saw passive investment management, a lot of liquidity and asset values going up across the board.
“Now it is exactly the opposite. Today it is about long-term experience, expertise and track record in specific asset classes. Investors ask, 'Do you really know what you are doing both in terms of strategy design and execution?'” he said.
Schaefer-Suren said hotel owners need to show that they can close hotel real estate deals and funds in an environment where it is difficult to raise capital.
“Before the current crisis, there has been a lot of poor understanding and analysis and hence mispricing,” he said.
Schaefer-Suren added the dominant trend now is that instead of investing in real estate, many institutional investors prefer investing in loans and bonds because of the existence of much higher interest rates.”
He added part of IREMIS’ strategy is to access more attractive pricing by selecting properties in dynamic markets that provide good growth potential, while having a balanced of business and leisure demand.
Such elements might also apply to secondary and tertiary cities, he said, which have a lot less capital chasing individual assets, although that does not imply lower real-estate quality.
“On one hand, the fund will invest with a core and core-plus strategy, but at the same time it is set up to consider higher-risk opportunities, which may be the result of economic changes and opportunistic environment,” he said.
Due to its regulated nature, the fund requires leases, not an unexpected development in that part of Europe.
“Leases, yes, but we do not always require the fixed German lease model. We prefer to participate in the trading result of the hotel asset, so we invest with hybrid leases,” Schaefer-Suren said.
“Clearly in terms of operators, working with the listed hotel firms is therefore more difficult. But we can accommodate franchises with local white-label operators and tenants — that is, if they provide a good covenant,” Lenhardt said.
Schaefer-Suren said IREMIS will look at value drivers beyond branding and distribution.
“The marketing story of the major hotel groups overemphasizes branding and distribution. I do not deny the importance of these, but location, real estate and building quality, fixtures, furniture and equipment, décor and the right operating concept, as well as service quality, are all just as important to drive results,” he said.
IREMIS also is willing to invest its own balance sheet in joint ventures with private-equity firms.
Other asset classes will also be explored.
“Retail has been under stress even longer than hotel due to the threat to it from online. Office currently is one of the most interesting asset classes,” he added.