Europe owners: Investment requires strategy, nimbleness
 
Europe owners: Investment requires strategy, nimbleness
20 NOVEMBER 2017 8:18 AM

Finding the right places to invest in Europe can feel like a maze today, and while confidence remains, the problem is now many investors are competing for the same deals.

LONDON—A hodgepodge of differing geopolitical and economic fortunes, the countries of Europe pose investment houses major headaches as they contemplate capital allocation amid confusion as to the exact point of the industry cycle in the continent.

One thing is certain, though, according to four ownership voices at a panel titled “Outlook for investment” at the 29th edition of Deloitte’s European Hotel Investment Conference: Oodles of cash are available.

“There is an absolute wall of capital, in quantity and at very attractive prices,” said Steffen R. Doyle, head of hotels and real estate at Credit Suisse.

Doyle said the transitional capital he has helped place requires larger returns, say 20%, and that the real challenges came from the huge amounts of debt and private equity present in the continent and finding opportunity to begin with.

“You have to be more scientific; it is about the product. It is entirely aggressive for the well-positioned, well-managed product. It is a market of distressed buyers, that is, anxious ones, not distressed sellers, all looking for something to fix or hyper-grow,” he said.

Mai-Lan de Marcilly, head of hotels at KKR, said she was encouraged because Europe has “lots of families operating hotels not in the ways we would operate them, and that is an opportunity.”

De Marcilly’s investment profile also does not bet against Northern European travelers seeking warmer climes.

“We’ve invested in the Balearics, where 50% of the customers are British. For sun, Spain remains one of the cheapest, and the Nordics and French are coming more, too,” de Marcilly said.

Brad Hyler, managing director at Brookfield Property Group, said challenges come from everyone favoring the same locations.

“Barcelona is at most risk given the recent political situation, not so much the terrorism. Dublin continues to be a very dynamic market in our view, and I spend a lot of time there. Going forward, Berlin and Paris (are also attractive) for different reasons. Berlin is a huge growth market, and it is a very exciting place, and Paris will continue to improve. Smaller markets such as Lisbon and Copenhagen are also on our radar,” he said.

Gaël Le Lay, deputy CEO of Foncière des Murs, agreed.

“We have 45% French exposure, 30% German, but also in Barcelona, Madrid and Amsterdam. Twenty percent of the total portfolio is in Paris, and we are in Berlin and Brussels. The recovery is there in these markets hit by terrorism,” he said, adding he was one of the few questioning the United Kingdom.

“The U.K. is good from a real-estate point of view, but when the timing would be for that is the problem,” Le Lay added.

De Marcilly said she is not seeing the opportunities she’d hope for in the U.K.

“As a discount investor, we look at growth, so you would expect to pay less now for the U.K., but you are not seeing that in prices, so that makes it more difficult for an investor such as us,” she said.

Panelists said a lot of caution about the U.K. in their opinion was noise.

“(Foreign exchange) is a consideration but never a primary one. The U.K. has the second-largest economy in Europe, the fifth-largest in the world, and that is not going away. The discount is in the currency, not in the multiple you buy an asset for,” Doyle said.

Hyler and Doyle said in the U.K. there were yields of 12 times, which they thought was sustainable, while in London that number was higher.

“We’re in the market right now, and the market remains firm. Prime product will go higher, 16 times in London, and we will see higher multiples continue for the high-quality stuff,” Doyle said.

That might be the locations for capital all sorted out, but the panelists said complications have arisen in Europe as to the business components of those locations.

“Yields are decreasing, and we set limits we do not want to fall below. This is why today we are willing to do lease contracts as well as management ones, to be more agile and a natural partner, which is a way of having access to other types of deal,” Le Lay said.

“You have to more granular, or otherwise you’ll just sit on your hands,” de Marcilly said.

Hyler said the current market was all about making acquisitions more mature and demonstrating that operating teams can add value in the eyes of the next buyer.

Second helpings
If all those prime locations and markets are near to saturation, panelists wondered where capital could be aimed.

There seem to be shades as to what comprises a secondary market, they added.

“Ones just under the radar, such as Antwerp. Some people might ask where it is, but it has great fundamentals, the second largest port in Europe, huge retail. There are lots to be grown in markets with less consolidation and more fragmentation,” de Marcilly said.

“Scale and liquidity are the two issues to get comfortable with. Secondary is defined by them not being primary, but that does not mean two secondary markets have the same fundamentals,” Hyler said.

“We look at secondary as part of a larger strategy as perhaps liquidity coming out of a secondary market might bring greater risk,” Hyler added.

Le Lay said diversification allowed risk to be reduced and gave additional leverage, while Hyler said an emphasis on growing cash flows also made for an extra buffer.

Cycling in circles
Knowing where the industry is in terms of the cycle is critical in terms of returns on investment, but that doesn’t mean it’s a simple matter to pinpoint where Europe’s hotel industry is in the cycle, the panelists agreed.

“The rotation of capital into Europe is because it is deemed stable. It is healthy for everybody,” Doyle said.

The phrases “cautiously optimistic” and “optimistically cautious” were used liberally, and overall confidence remains.

“Maybe midcycle?” Hyler said. “Macro seems good, supply and demand look pretty balanced, and there is a lot of liquidity. It looks like it will remain pretty accommodative, and we think there is still room to run in Europe."

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