Speaking during last week’s Hotel Investment Conference Europe at the Park Plaza Riverbank London, panelists were vociferous about the interest in European hotels.
“There’s a lot of equity, there’s a lot of money out there,” said Ramsey Mankarious, chief executive of Cedar Capital Partners. “The challenge is finding debt.”
“You’re going to continue to see a lot of tire kicking until something frees up,” added Cliff Risman, partner, Gardere Wynne Sewell LLP.
Piers Talalla, founder and chief executive of investment bank Avington, said investors from Asia and the Middle East are paying particular attention to Europe. “Asians are a little more cautious, though,” he said.
Arthur de Haast, chairman of Jones Lang LaSalle Hotels, agreed. He said Asian investors tend to look for more upper-end, full-service properties in gateway cities, and they aren’t satisfied with pricing levels for those assets.
There are a couple of portfolios—“one in France from Groupe du Louvre and one in the U.K. for (the Royal Bank of Scotland)”—that are grabbing a lot of interest from potential investors, according to de Haast. While not providing any further details because of confidentiality issues, he hinted the U.K. portfolio of 42 Marriott-branded hotels could be in the final stages of finding a buyer.
Risman said the deals that have been completed are getting done by acquirers that have cash.
“People will come in and acquire on all equity on the theory that after you close you can layer in debt once the asset is stabilized,” he said.
“If can buy at all cash you can buy things at a much better value,” Mankarious said. “Every single box (on the debt application) has to be ticked to get financing.”
Jeremy Hill, director, head of hotels for Christie + Co, said a lot of the inactivity boils down to differences in pricing.
“There’s still denial from sellers where the real pricing is,” he said.
Mankarious said the pricing doesn’t always reflect the type of hotels that are on the market. It’s a stereotype that the only hotels on the market are distressed.
“At times like these, the best, good hotels are not cheap, they just become available,” he said.
JLLH’s de Haast echoed that thought and said a good example of that is prime assets in gateway cities.
“We’re beyond the bottom (of the cycle),” he said. “The value for good quality assets in good locations … we’re very much back to where we were before (the recession). There’s a lot of things out there that haven’t found buyers because it’s not appropriately priced yet. For quality buyers to find good assets, it’s getting harder.”
Risman doesn’t expect the pace of transactions in Europe to move past the pace in the United States any time soon.
In fact, a report earlier this month from HVS found that European hotel investment has dropped by 16% during 2012, primarily because of a lack of available debt.
“Banks (in the U.S.) have forced the issue,” he said. “In Europe the lenders have been much more patient.”
Signs of movement
U.K, banks are showing signs of at least putting things in order for an eventual sell-off of the assets they control, the panelists said.
“We’ve got domestic players who want to buy hotels in the U.K. … the banks are pushing people to pull their debt down to levels that are more controllable,” Hill said.
Added de Haast: “A lot of the deals coming to the market there are inducements by the bank one way or the other. Not everything is a distressed asset. Recycling capital is an option.”
Talalla said distressed comes in two forms for European hotels: “acquisitions that were bad acquisitions; and others are just burning with debt issues,” he said. “Those will come to market.”
He said there will be movement sooner than later with banks shedding assets in Europe, especially ones involving complicated corporate deals.
“You’re going to need fresh capital, expertise and lots of support from the banks,” Talalla said. “You definitely need local expertise to drive value. The difficult assets have yet to come to market, and when they do, they’ll have a lot (of capital expenditures) to catch up on.”
New capital providers, such as insurance companies and debt funds, have arrived in Europe, de Haast said, but their full participation is hindered by the aforementioned pricing gap.
The panelists addressed a number of other issues, including some questions from the audience of 250 attendees:
U.K. real-estate investment trusts
“The problem with the U.K. REITs is the way the legislation has been set up,” de Haast said when asked why there weren’t more of them. “You’ve got a lot more flexibility in the U.S. Here it has to be a genuine lease.”
He said there are at least a dozen REITs in the U.S., while very few in Europe and none in the U.K. The Baird/STR Hotel Stock Index lists 11 REITs in the U.S.
The European Central Bank pressuring regional banks
“It’s inevitable,” Risman said. “They have to or the problem is going to drag on and on.”
What’s the ‘new normal?’
“We’re at conservative levels now, which is very sustainable,” Mankarious said. “Normal to me for a hotel loan is 65%, maybe 70% (equity). It can’t get much worse than low 50s.”
“Fifty percent is the new norm,” Mankarious said. “I do get a sense a few more banks are waking up, but it’s still going to be slow.”
“It’s not (loan-to-value) banks are looking for; its cash flow and yield,” Talalla said.
The sale of branded hotels
“In certain circumstances, a brand clearly does add value,” de Haast said. “There are also plenty of strategic buyers who either own their own brand or like independents. … Generally, unencumbered hotels (are better) because (being unencumbered) opens up the market to a broader audience. Inevitably you have better options to get a deal done, and ultimately you get a better price.”