While investors caution against painting Europe with too broad of a brush, many say hotels continue to be a good bet.
BERLIN—Hotel industry cycle dynamics depend on many factors present in a given region, and in Europe, hotel developers and investors are optimistic about the health of hotels as a real estate asset class.
“If you look at the excesses created in previous cycles, a lot of those aren’t here,” said Abhishek Agarwal, managing director of real estate for Blackstone. “Demand is still exceeding supply. Leverage remains in check. That combination of demand and supply in check and leverage in check makes you optimistic. Yes, there is some political risk; you can’t paint all of Europe the same way. You need to look at each market and what’s going on there.”
Agarwal spoke on a panel titled “Money makes the world go round” at the recent International Hotel Investment Forum, and his optimism about hotels was echoed by other speakers.
“We invest across asset classes, so we don’t need to invest in hotels if we don’t believe dynamics are good,” said Mai-Lan de Marcilly, principal, real estate, at Kohlberg Kravis Roberts. “We see growth ahead of us in Europe and especially in hotels. People have appetite and understand that growth.”
She acknowledged the presence of political instability in certain pockets, citing Brexit in particular, but she said that’s “the new norm,” and companies must continue to invest in realistic fashion moving forward.
Cody Bradshaw, managing director and head of European hotels for Starwood Capital Group, said his company also sees upside in hotels as an asset class, which is bolstered by ongoing economic stimuli in several economies and record low unemployment.
“The market is still active in terms of buyers and sellers,” he said. “When we look at Europe, there’s been some slowdown in certain countries from a macroeconomic standpoint, but we like the volatility. Investors are continuing to pour money into real estate funds.”
Christophe Vielle, CEO and co-founder of GCP Hospitality, also acknowledged a bit of an overall slowdown, as well as political factors—he cited China and the U.S.—affecting liquidity, but he remained positive.
“What’s happening right now is investors will be a little more careful,” he said. “They’re waiting. Everyone believes there will be better deals to come by the end of this year, but I personally think it’s too early.”
Investment strategies and key locations
Because Europe is so fragmented, investors zone in on their individual strategies in order to find success.
“We take a city-by-city strategy, because Europe really calls for it,” Bradshaw said, adding that his company likes value-add opportunities in cities with strong supply and demand fundamentals that are set up with good tourism and good infrastructure, like airports.
Agarwal said overall, demand in Europe and many of its countries is exceeding supply, and his company looks closely at key gateway cities that “grow way more than the country overall,” he said.
Speakers had a lot to say about the prevailing trend of large brand companies making big-ticket acquisitions.
“The big five are buying everything,” Vielle said, referring to the major hotel brand companies. “From an investor standpoint, if you have size like that you have the weight. But if you don’t, it’s going to be more and more difficult to get what you want. To me, it’s an issue I’m not happy with.
“I understand what they’re doing, but I don’t think for the investor it’s good. I’m not happy to deal with only five companies when before I could have dealt with 20 and made more bids and tried to get something out of it.”
Agarwal agreed that megamergers have an impact, but he acknowledged the value for hotel owners when it comes to distribution and an upper hand in negotiations on costs.
Bradshaw was a little less optimistic on this topic.
“I think the cost savings to owners will be limited,” he said. “They justify the acquisition price based on synergies they’ll achieve with consolidation but that’s not happening. And because all are public companies, they’re under immense pressure to achieve aggressive expansion tactics. As an owner, there’s an inherent misalignment of interests there.”