BERLIN—Hotel investors are slowly tip-toeing their way back into Europe, although persisting macroeconomic and political volatility has funneled most activity into major gateway markets such as London, Paris and Rome, according to investors.
The hungry buyers range from U.S.-based private equity funds to high net-worth individuals in the Middle East to cash-rich buyers within the continent itself, they said during a breakout session titled “Foreign inflows of capital into the European market place” during the International Hotel Investment Forum.
Russian investors, for one, have been very keen to enter the region, said Andreas Gravenhorst, partner with Clifford Chance.
“They have a clear concept in terms of pricing and what they want to achieve,” he said. More importantly, they’re willing to pay a premium on a prime location.
“They are not opportunistic,” Gravenhorst added. “They are happy to pay a good price.”
Middle Eastern investors continue to track the gateway markets as well, added Craig Cowie, head of real estate investment and advisory for Qatar-based Qinvest LLC. But they tend to be “very, very picky” in what they can do, he added. Cowie’s clients often are outbid from their counterparts in China and Malaysia, he said.
From the U.S., private equity funds are taking the lead, said Desmond Taljaard, head of asset management, Europe, for Starwood Capital Europe Advisers LLP. He pointed to the firm’s recent deal with London-based Principal Hayley Group for 23 hotels scattered throughout the U.K. and Europe as an example.
That transaction wasn’t easy to get done, he said. “That was more a function of the complexity of the opportunity. Actually getting across the finish line was the biggest challenge.”
Next comes the planning and implementation phase, where Starwood will look to reposition and reinvest in those assets.
Jon A. Cummins, co-owner and COO of U.S.-based Amerimar Enterprises, said his team takes a more proactive approach when investing.
“We really like to try to figure out as much of our positioning as we can upfront and then adapt our positioning if our market moves on us.”
That was the case when Amerimar purchased the St. Ermin’s Hotel in central London in May 2010 from NH Hoteles. The deal paved the way for the company’s entrance into Europe.
Lenders lean in
“It certainly seems as there is a picking up of pace, particularly on the debt side in the last few months,” Cummins said of the transaction environment on the continent.
U.S. banks are beginning to deploy debt in London and the U.K., he added.
Their counterparts in the U.K. are beginning to loosen the spigot as well, Taljaard said.
“On the origination side, it’s almost getting competitive for the right sponsor, for the right asset, for the right location,” he said.
Taljaard speaks with some experience. Starwood Capital Europe Advisors LLP recently raised a new fund in the U.K. for real estate lending.
“It was not earmarked specifically for the hotel sector, but again we tend to gravitate there. … It is quite competitive in terms of making sure you’re pricing well compared to the risks you’re taking on,” he said, adding mezzanine pricing has come down 100 basis points to 200 basis points in the past year.
Raising senior debt is proving to be more difficult, Cowie said. “With what’s going on in Europe, I think the funding challenges in senior debt will continue.”
Gold, silver, bronze
With lending loosening and investor interest on the rise, it’s getting more difficult to close on deals.
Qinvest has lost five out of five bids in recent months, coming in second each time, Cowie said.
“There’s a lot of wasted efforts,” he said, although not without a silver lining. “The benefit to that is we have impeccable research on the market that really has helped us. By coming in second you’re building a presence.”
The deal landscape is also getting more transparent. Gone are the days of off-market deals, panelists agreed.
“The true concept of off-market transactions with each passing year gets less and less applicable,” Cummins said. “That’s not to say there aren’t off-market transactions. I think it used to be years ago there was this perception that if an international (company) was selling something at the wrong time they were selling into weakness and they wanted to keep that quiet. I think, in general, it’s probably turned the other way.”
“There’s nothing off market in Europe … or very little,” Cowie added.
With transparency comes shame. Each miss means a black eye, the non-U.S. investors agreed. But Cummins shared a different perspective.
“In the U.S., it’s just part of doing business. It really doesn’t get talked about. You’re going to lose more than you’re going to get by a long shot,” he said.
The REITs are coming
The speakers closed the session by discussing the likelihood of U.S.-based real estate investment trusts entering Europe—a topic which sparked more disagreement.
Taljaard said he didn’t think it was likely.
“It’s incredibly difficult for anyone to invest in a different market without actually having your feet on the ground,” he said. “There has been talk of this deluge of remote parachuting in of the Navy SEALs from the states coming in and buying up all the gateway trophy assets. But I think there’s a real challenge to do that, because you’re competing against the likes of Starwood, Blackstone and others.”
Cummings, again, was ready to counter.
“I respectfully disagree on this one,” he said. While REITs might not descend on Europe in a deluge, “I think it’s coming.”
“I’ve had in the last month discussions with several different American REITs that have said, ‘I see you on (the St. Ermin’s) in London. We’re thinking about maybe coming into London. Are you doing anything with it?’
“There’s a primary reason for it,” Cummins continued. “Most large American hotel REITs have a mandate to stay in the top 10 to 15 U.S. metropolitan markets. They have a lot of product in those top 10 to 15 markets already. They are not capital-constrained. Our REIT markets have come a remarkably long way in the past 20 years. It’s very liquid. It’s proven to be liquid in various stages of the capital market, which was not true even as recently as 10 years ago. …
“These companies have gotten big enough and sophisticated enough they’re able to move through different cycles,” he said. “They will be formidable competitors.”