Investors looking to invest capital in hotels across Europe are not leaving any stone unturned, but neither is the competition.
In a session during Alvarez & Marsal’s debut European Hospitality Investment Conference titled “Investors: Spotlight on the United Kingdom and Europe,” Ramsey Mankarious, CEO of Cedar Capital Partners, said he has been busy with multiple deals coming to fruition in 2022.
Of course, there are hurdles to negotiate, he said.
“The challenge is financing. Anyone can get a loan, but is it the right loan?” he said.
Coley Brenan, partner at KSL Capital Partners, spoke about his company's April 2022 acquisition of The Pig Hotels, a small chain of boutique country hotels in the United Kingdom.
Brenan said the deal is small for KSL in terms of its overall capital, with its hotels having on average 30 rooms and a total of 240, compared to approximately 850 rooms total across its competitive set.
“It is in England, with a large population, a drive-to market, and if you add up those all those trends and macro pieces and isolate its consumer profile, [The Pig] is massive,” he said.
Competition for hospitality investment is rampant, said J. Pedro Petiz, managing director of London-based Avington Financial. The resilience of the sector, especially compared to other real-estate asset classes, and the pricing strength of hotels have kept investor competition high.
“The bid-ask spread was the big issue two months ago, but things have changed in terms of monetary policy,” he said.
Timothy Abram, senior vice president of acquisitions at Starwood Capital Group, agreed that hotels pose less long-term risk than other asset classes.
“Hotels do provide a better value-add universe, with less volatility, and it remains in a more interesting space, even if there are challenges and changes,” Abram said. “There is a large spread between balance-sheet lenders and alternative lenders. If you can find the right balance-sheet lenders in different geographies, that can help, but it is difficult. We also have large debt funds, so we’re looking to place them on a risk-reward basis."
In December, private-equity firm Henderson Park acquired Scotland-based Klarent Hospitality. Klarent's non-executive chairman John Brennan said single hotel assets or portfolios on the market must have an “interesting underlying story, or a pricing point is at the right level for us to have confidence.”
But there are even more tailwinds on the immediate horizon, Brenan said. He estimated that in 2023 there will a 30% increase in debt maturation.
Mankarious agreed “the next two years are challenging.”
“There will be opportunities, and we are seeing some prices going down, such as in Paris,” he said. “There likely will be a typical inflation-linked recessionary slump. Interest rates are going up, so there will be better pricing.”
He added when he started in the hotel industry in the 1990s, interest rates in the U.S. were 10% to 12%.
“This is just another cycle we are in,” he said.
Petiz said he is more concerned about how fast interest rates have risen.
“It is not so much the rate, but the pace in which it has increased,” he said.
Good Twelve Months
The past year has been healthy in terms of hotel transactions and capital, panelists said.
According to business advisory Cushman & Wakefield, U.K. hotel transaction volume increased by 115% year over year for the first half of 2022. Across mainland Europe, hotel transaction volume rose by 154%. Institutional capital activity in that period increased by 51% to 61% of the pie, while private equity activity decreased by 17% to only a 34% share. Of the hotels transacted in the first half of the year, 71% were vacant at time of possession.
Petiz said every potential buyer is more capitalized, but lenders are well-positioned to negotiate.
“The question is when refinancing happens, how are businesses repositioned? Central banks do have ceilings,” he said.
Global funds are poised to capitalize on opportunities because of the flexible nature of their capital, Abram said.
Mai Kawashima, director of hotel capital markers at Savills, said in her estimation the transactions environment in the U.S. is approximately six months ahead of mainland Europe in volume and capital spending.
When considering the most attractive markets for investment, Mankarious said his company is interested in assets in the top markets at the right price.
“The big markets are what we’d prefer, but are we able to buy? That’s the question," Mankarious said.
Panelists said there's still plenty of investor buzz about the resort segment, but also a growing interest in extended-stay hotels.
Abram said the blurring of segments holds some potential for the industry, from “caravan businesses to lodging, creating a differentiated product where we can push pricing.”
Costs
The hotel industry globally is being challenged by rising costs across the board, but so far that has not been a major barrier to capital waiting to be invested, panelists said.
“We have four hotels under bid development right now, and costs have gone up. We’ve lost lead contractors, and the next one is always more expensive,” Mankarious said.
Inflation on the cost of materials similarly goes through cycles, Brenan said.
“Steel, concrete, glass, yes, they are more expensive, but in terms of the entire structure, not so much different,” Brenan said.
Abram said there is less available debt financing and capital expenditure funding.
“Lenders are worried about cost overruns and are looking for more protection, but how they view the industry has not really changed, even if consumers have come under a little more stress with energy and cost-of-living rises,” he said.
Consumer, lender and hotelier demand for increased environment, social and governance initiatives, cost measurement and regulatory compliance also is having a particular effect on the capital stack.
Mankarious said with new investments, introducing ESG does make it more challenging.
“A few years ago, you just needed to tick a box, but now not only do [lenders] want to know what we’re doing, but how we measure it now and in the future. This is good for everyone, but for us a deal is about can we make money, and then what is the ESG we can add,” he said.
Abram said funds with access to brands are in a good position to make ESG components work.