MADRID — Hotel investors in Europe are itching to deploy their capital after years of waiting during the pandemic years and through a period of high interest rates.
Now that economic conditions are improving and transactions are a bit easier to pencil, investors are considering the best type of deal to pursue: single-hotel transactions or portfolio acquisitions.
During a panel at the Atlantic Ocean Hotel Investors’ Summit, speakers weighed the pros and cons of chasing different deals.
Tina Yu, principal for Europe at KSL Capital Partners, said pursuing bigger deals can help large hotel ownership firms add scale quickly and add more value to their own portfolios. In the long run, acquiring a group of hotels with brands and management firms already in place saves time and gives the acquirer more leverage and flexibility to exit any of the hotels in the future.
Such a strategy, Yu said, “can help a fund such as ours deploy capital more efficiently. It also unlocks exits with different optionalities.”
But executing that theory is not straightforward, especially in a fragmented hospitality landscape in Europe.
Cristina Hoyo, director for Southern Europe at French real estate investment trust Covivio Hotels, said her firm is open to both buying the hotel or hotel company's operations or the real estate.
“For real estate, prices have increased. There are no discounts, so it is difficult to buy portfolios. So, we are now looking at single assets,” she said.
Sergio Carrascosa, co-founder and managing director of asset management at Hotel Investment Partners, said hotel ownership is still quite varied throughout Europe.
“Leisure in southern Europe is still very fragmented — [such as] family offices — and you really need to establish a rapport,” Carrascosa said.
Some European hotel markets that have opened up to different investment models are now moving into their next cycle, and Spain is one of those markets, panelists said.
But that creates even more competition for hotels and portfolios that are on the market. Plus, some investors have been sitting on funds since the pandemic waiting to deploy their capital.
Francisco Moser, hospitality CEO of Details Hospitality, Sports & Leisure, said his company likely won't add an international brand to its portfolio, which has increased from six hotels to 18 in the last two years, with an emphasis on Portuguese golf resorts.
He said that independence allows his firm to be more efficient.
“We put in the [capital expenditures], not partner with international franchises, as the value [in] two or three years will be higher,” he added.
Crossing borders
Certain hotel investment strategies need tweaking when an owner decides to move into new markets throughout Europe, Yu said. She added a firm undergoing such a move should do so with a smaller investment at first.
“That then allows other opportunities to be unlocked,” she said.
Moser said he saw efficiencies develop when a buyer has both momentum and scale.
Unencumbered hotels without a brand or management company attached are also attractive to buyers, but the involvement, growth and success of white-label management and third-party operating companies in most cases adds value to any portfolio on the sales block.
Hoyo said the critical factor is that Covivio expects "to buy at a reasonable price” and not at the price that “the seller … believes our renovation, repositioning, etc., will increase the value of the asset to.”
“Acquiring [an operating company] with no [property company], no, not for us,” she added.
Yu said even more focus must be placed on what exactly is the investment risk in any acquisition and also to analyze what is its customer niche and proposition.
“It is hard work to build [operating companies], and there is a limit of earnings before interest, tax, depreciation and amortization growth it can bring you without the [property company],” she added.
Values
The COVID-19 pandemic has added value to the travel industry and to individual hotels and portfolios, panelists said. Hotels have benefited from the decline in office as a real estate class, although hotel owners need to constantly measure all asset classes so not to fall into the trap that hospitality is the only safe asset class.
For hotels, the increased quality of sponsorship in evidence over the last five years is very welcome, Yu said. But she added every deal requires more homework while the current acquisitions market appears “healthy.”
Hoyo said she prefers to describe the hotel transactions market as “interesting.”
Yu added the current economic landscape, now with inflation appearing to be more settled, does allow underwriting over the next five years or so to be more sober and controlled.