Europe’s hotel transactions are still showing positive signs and likely will continue even if the investment makeup, source of capital and business models are beginning to shift.
BERLIN—Hotel ownership in Europe continues to move up the food chain, according to sources, who added the dominance of private equity ownership will see a natural dip as holding patterns inevitably come to an end.
“With office (real estate) not being so expensive, where is your long-term income coming from?” said Chris Day, global managing director at business consultancy Christie & Co. “Investors increasingly are saying (it’s) in hotels, certainly with more people continuing to travel.”
Speaking at a panel titled “Follow the money” at last week’s International Hotel Investment Forum, Day mentioned declines in office real estate have been accentuated by the trends of shared-office spaces and more employees working from home.
The rise in hotel transactions is evidence of continued investor interest in Europe, said George Nicholas, global head of hotels at Savills.
“Global hotel transaction volume equaled $64.7 billion in 2017, of which 34% was portfolio sales, and Europe reached record transaction volume of approximately $21.5 billion,” he said. “Fifty percent of all transactions were in Europe, and 50% was on single assets. Driving it is debt, the pump of liquidity. Debt is relatively cheap, and credit is relatively accessible, so we will continue to see hotel investment. I believe 2018 will see much the same in transaction volume in Europe.”
A total of 40% of that investment is coming from within Europe, panelists said. In the U.S., 83% of hotel investment derives from domestic sources.
“In Europe, cross-border finance is 35%, as opposed to the U.S. where it is 13% and (Asia/Pacific) where it is 12%,” Nicholas said. “Europe remains the geographic focus of hotel investment in 2017, and that will likely still be case in 2018.”
Future of investment
Ömer Isvan, president of Servotel, said private equity is the clear leader in terms of European investment.
“(Private equity) also has invested in the debt,” Isvan said. “The question is whether that is a warning sign or another way of organizing the package.”
Panelists pointed to the recent sale of Jurys Inn as indicative of the health of the European hotel industry.
“In 2015, 31 hotels were bought by Lone Star for £680 million ($946 million),” Day said. “In 2017, (Jurys Inn with) 37 hotels was sold for £800 million ($1.1 billion).”
Day added he expects generic portfolios, quality single assets and peripheral high-yielding assets to be the next targets of investors.
“2018 will be another year of steady growth, but with no explosion,” he said.
The market has moved in the last four years, and certainly in the 21 years of the existence of IHIF, Day said.
“In the last four years, we’ve seen the re-emergence of European fund groups, including Pandox and Fattal Hotel Group (the buyers of Jurys Inn),” he said. “(Private equity) and opportunity funds are and will become the sellers, and of course the super-Chinese companies have even more recently become sellers. … The rumor is that the Chinese government has taken over the finances of Anbang.”
Panelists said finding sites and hotels remains a challenge for all investors, including U.S. private equity.
“I think we will see the creation of more core-type funds, which will be very successful, adding value,” Nicholas said. “Now (for U.S. funds) it is steady sailing ahead, but the U.S. still needs to compete with China and Middle East, not the companies we’ve seen of late but private money from Hong Kong and China.”
Isvan said Chinese investment in Europe will continue. “Totally liberated income is coming out of China, too,” he said.
Day said other European markets also have seen increased investor activity.
“Spain has become the fulcrum of hotel investment opportunity, and the focus is now shifting to Italy and some of the smaller markets in the Mediterranean,” he added.
In terms of the business model investors want, Day said leases are becoming more popular.
“Leases were few and far between at the first IHIF in 1997,” Day said, adding yields are sharpening for leases, as well as for management contracts.
“The process of the shift (to leases) is still going on in some Mediterranean countries,” he added.
Day said provincial cities in France are looking attractive with the onset of the Emmanuel Macron presidency. Nicholas added London remains a sure bet, and Berlin is looking attractive, too.
Nicholas said hotels have proven to be reliable investments.
“The great thing about hotels is that you model the (return on investment) you need,” he said. “Hotels are a natural hedge against inflation, as you can reset the rent every day.”
Isvan said investors are getting the most of their money from value-add deals.
“Most transactions have been buy and sell, but the biggest return remains in value-added transactions, which requires a little more hard work,” Isvan said.