BERLIN — A strong operating environment is keeping most hotels across Europe out of what investors would traditionally define as distress, but financing and capital structure issues are putting enough stress on them to spur deals.
During a panel discussion at the 2023 International Hospitality Investment Forum, Pinebridge Benson Elliot Managing Director Kristen Kozlowski said the general environment does lend itself to some investment opportunities.
"I'm defining distress as someone who is compelled to take action," she said. "There is someone or something that's pressing down on them, and they're going to need to find a solution. It's not optional anymore. I would say this already exists in the market, and it will come more and more. But it's not down to operational distress."
She pointed to growing debt maturities across European real estate investment trusts as a catalyst.
"This is coming at a time where we know valuations have declined," she said.
Laura Wild, partner and global co-leader of hotels and hospitality for Bryan Cave Leighton Paisner LLP, agreed: "I think at the moment, we're not seeing distress. We're seeing stress."
She said more investors will be compelled to move on from assets because "patience is waning" from lenders.
"A lot of lenders really are getting a little fed up now," Wild said.
She said the opportunities for investment will come in more challenged sectors. Hotels in segments that continue to outperform, particularly luxury hotels, are less likely to hit the market.
"That mid-market segment where people ... are facing the squeeze will be trading down into the budget sector," she said.
Christophe Beauvilain, managing partner for Pygmalion Capital, said opportunities won't just come down to segment but geography.
He said hotels in what might technically count as distress in some southern European countries still aren't likely to trade due to banking regulations in individual countries.
"In some countries in southern Europe, for instance, it's difficult for banks to take action because the bankruptcy frameworks are relatively inefficient and vary heavily in favor of the borrower," he said. "There are situations where you could spend 10 or 12 years defining yourself as the borrower and you don't need to service your debts."
Beauvilain said in some cases it can be more efficient to purchase the debt than the equity of a property.
"Conceptually, it's a very good idea to be able to do both," he said. "But I think if you go and raise capital, you have to have a very clear message in terms of what your fund's actually aiming at."
Benjamin Habbel, CEO of Limestone Capital, said there are lots of opportunities for investors who are willing to look at assets a bit more creatively and have a vision for what niche they will serve.
He said because so many properties are family-owned across Europe, situations where owners are facing more personal issues are a potential source for nontraditional distress.
"Nineteen out of 20 times when we look at it, it's a family that has a whole range of issues to deal with, and financing might be one," he said. "But it could be inheritance. It could be divorce. It could be over-leveraging on another asset or other more complex issues. I think that's what the market is right now."