BERLIN — Despite much talk at the International Hotel Investment Forum being of cost pressures eroding profitability, bricks-and-mortar investors continue to be upbeat about the hotel industry, especially when comparing it to other real estate classes.
Optimism, though, will come up against a higher cost of financing.
Hoteliers will largely have the ability to drive revenue in line with or above inflation and to control both the whole life cycle of an investment and its daily operational aspects.
Laura Brinkmann, senior vice president at KSL Capital, said the recovery is real across her firm’s entire European portfolio.
“[It] shines without any Chinese travel input, which fascinates me. We are doing very well in top line and, through initiatives and costs savings, the bottom line. [Gross operating profit] has not been affected for us. We also hedged against the energy crisis,” she said.
Success has also been apparent on a market level, she said.
In the United Kingdom, KSL Capital acquired the eight-hotel chain Pig Hotels in April 2022.
“Pig Hotels has seen phenomenal growth, with almost exclusively British demand. Yes, our target market is squeezed [by the cost-of-living crisis] but not to the extent they are cutting back on travel,” Brinkmann said.
She added demand for hotel rooms from business groups is hazier in general.
One thing panelists agreed on is that much of the transaction volume in the next 12 to 24 months will be single-asset deals.
Financing for large deals will pose a challenge, they said.
Michael Swank, senior managing director at Blackstone, said high-end hotels are doing particularly well across the continent.
“Performance in Spain is well above what we budgeted, and we are seeing good things in extended stay,” he said.
Panelists said there remains a champagne effect for hotels, a combination of the trend of revenge travel and the increased spending among those in higher economic income brackets.
Matteo Milan, managing director at Cain International, said lenders are optimistic that current economic perils will end with a soft landing, not a hard crash.
“We’re happy to lend against the hospitality industry, one of the few cases where we have seen a little movement up in cap rates,” he said, adding higher cap rates expose hoteliers to more risk but also more return.
Milan said fundamentals will be more favorable for investors whose exposure is long-term and in luxury and upper-upscale hotels.
“Inflation has helped the top line. That favors the luxury end as it is less sensitive to changes in costs,” he said.
He added that flight fares are going up significantly, but that also seems not to worry the high end of the market.
A Gap To Fill
Brinkmann said with some traditional banks being wary of lending, there has been an enormous number of specialized investors that have come into the market.
“There is so much dedicated dry capital out there, and we have evidenced that long-term, inflationary hedged investment shows real returns,” she added.
Swank said the recent increase in activity of institutional investors will continue.
“Hotels will be a huge beneficiary of investors wishing to balance their portfolios … reducing their exposure to retail and, especially, office.
“Capital markets are challenging. [Milan] is lending, but he did not mention at what rates,” he added.
He said the buyer-seller divide evident in the past two years has slowed transaction volumes in all asset classes.
“We might never go back to that frothy market where capital was available at good rates. If you go to your investment committee, which you probably do not do so much at the moment, and interest rates move by 25 basis points, then you will look pretty stupid,” he said.
“You might have the best operating hotel around, but if interest rates go up and then up again, no degree of excellent management will stop you having to put in more equity,” he said.
Brinkmann said a 5% gap between the two sides can be filled by innovative hotel-keeping, but those deals might be hard to find.
“[The gap] feels now significantly larger. The ways our funds are deployed, we have no urgency. We are definitely still out there looking to restructure deals with our investment partners, but for deals slightly less exposed to current market dynamics,” she said.
Brinkmann added three things of much value have not changed before, during or after the pandemic: a proven management team, good liquidity and excellent relationships with lenders.
She anticipates most deals going forward will transpire as off-market deals.
Milan agreed.
“A lot is off-market, from those who do not want to tell a lot of investors who are still having their troubles with the banks,” he said.
Milan added his debt profile favors deals of approximately 50 million euros ($54 million) in Southern Europe resorts and where there is a repositioning story.
He said capital also is coming into the industry from the tech sector.
“They make their money in tech and hopefully don’t lose it in hotels,” quipped Julian Allen, head of investment banking at CBRE and the panel’s moderator.
Milan said everyone is competing for, or at least analyzing, the same prospects.
“There is not much good stuff around,” he said.
Milan said one of the biggest issues is interest coverage ratio.
“Lenders want to see a healthy buffer, and the ICR will be where it will be. You need to buy into the story of the income growth, so largely [hotel deals are] on a case-by-case basis,” he added.