Groupe du Louvre’s Steve Goldman (left) and Ashford Hospitality’s Doug Kessler told attendees of last week’s Hotel Investment Conference Europe that major gateway cities will always be a focal point for hotel transactions.
LONDON—Hotel hot spots in Europe are easy to find, according to executives speaking during the opening session of the Hotel Investment Conference Europe. Look no further than major metropolitan urban centers and unique resort destinations, experts said.
“The place to invest, we believe, is in the gateway cities,” said Doug Kessler, president of Dallas-based Ashford Hospitality Trust, a real-estate investment trust that traditionally has owned a portfolio of hotels in the U.S. but is looking to expand its reach in Europe. “The supply-demand fundamentals for gateway cities are pretty strong.”
That, plus the concern over the future pricing of distressed hotels in provincial areas, has Ashford and others scrambling for big-city assets.
“Hotels in the strong capital cities will always trade,” said Steve Goldman, CEO of Paris-based Groupe du Louvre. “I view resort destinations similar to capital cities … resort destinations that can’t be replicated ... that's the main criteria.”
Strategic Hotels & Resorts’ Laurence Geller: “My appetite for risk outside of major cities in Europe would be nil.”
Added Laurence Geller, president and CEO of Chicago-based Strategic Hotels & Resorts, which owns hotels in London and Hamburg: “The central-city markets in Europe are following the U.S. My appetite for risk outside of major cities in Europe would be nil.”
Goldman said the performance of hotels in Paris and the French Riviera have been strong this year.
“The major cities are OK,” he said. “It's once you get away from the major cities that it gets a little tougher.”
Gerald Lawless, president and CEO of Jumeirah Group, said his company is relatively new to Europe but has been performing well. He said the Dubai-based brand has driven much business from the Middle East to its five properties in Europe.
“Frankfurt's doing real well,” he said. “It's been a very good summer season in London. … The sector that's a bit more challenging is the corporate sector. Occupancy has been OK, but rate hasn't.”
Geller said Strategic’s decision to sell its European assets before the downturn was the right call to make, and its two remaining properties have shown mixed performances.
“London is terrific; Hamburg is flat,” he said.
Competition over assets
Performance aside, there is plenty of competition to buy assets that do come to market because of the limited number of hotels available, the panelists said.
“The buying profile is more about (the companies) that have ability to go into their pocket,” Goldman said.
He said an enormous amount of investment in Europe is coming from the Middle East, which is less reliant on debt.
Jumeirah Hotels & Resorts
One such company is Dubai Investment Group, which owns the Jumeirah brand. Lawless said the company is positioned to find a way to obtain financing for properties it wants to add in Europe and elsewhere around the world. It has added 11 properties globally in the past 18 months.
For others, it requires taking a more traditional route to acquiring hotels.
“You have to have a combination of debt and equity, and you might have some contribution from brands as well,” Kessler said. “There’s really no true activity in lodging right now. The CMBS market is essentially non-existent in Europe.”
Distressed deals difficult
Much like in the U.S. and other regions around the world, lending institutions in Europe have a number of distressed hotels on their balance sheets as a result of defaults during the recession. Geller wished the industry luck in trying to free those assets from the banks’ grasp.
“There's no benefit for them to go out on a risk just because you’ve got a pretty property,” he said. “I don't think you're going to see desperation selling in Europe. It will be sensible selling.”
Kessler said it would be detrimental overall if there was a massive sell-off of hotel assets well below their market values because it would negatively impact values well into the future.
None of the panelists said they believe banks will shed their hotel assets any time soon. Geller said identifying long-term trends is what banks have analysts for, and they will be patient.
“Banks can choose the time to sell when it suits their balance sheet,” he said. Analysts know “you shouldn't sell distressed.”
Kessler said there’s another big issue: Because hotels represent such a small piece of a lender’s overall real-estate portfolio, they tend to get pushed down on the priority list.
“We are just a small microcosm of the banks’ problems,” he said. “In the scheme of things, they have much bigger issues that may have the focus of those that make decisions.”
‘European leases are changing’
Another trend the panelists spent time discussing is the rapidly declining use of fixed hotel leases in Europe.
Lease models typically are based on a fixed payment or linked to revenue where the lease might include a guaranteed minimum payment with the lessee retaining operational control of the property for the term of the lease.
“What's substituting leases is take the risk through a financial enhancement or guarantee that's not going to go on your balance sheet,” Goldman said. “Fixed-rate leases kill you. You're somewhat limited on the upside, and you get crushed on the downside.”
“European leases are changing,” Geller said. “The major brands will drive it because they don't want to lease it. I don't see Marriott (International), Starwood (Hotels & Resorts Worldwide), (InterContinental Hotels Group), Hilton (Worldwide) signing many leases any more. The accountants are going to kill them.”
Chinese travelers filling a void
The outlook for the European hotel industry remains murky. However, there is one element that could make a big different in a hurry.
Outbound travelers from China “can solve the problems we have at a stroke,” said Russell Kett, chairman of the London offices of HVS.
The panelists agreed that outbound Chinese travelers to Europe eventually will impact investment trends as well. Goldman said the more Chinese are allowed to travel out of the country, the Chinese government will steer them to places where they have investment.
“Travel out of China has been growing substantially,” Goldman said. “At some point you will have to see them investing into Europe. We've had an enormous amount of interest from China, but they’re not quite ready to do anything.”
Lawless foresees other impacts.
“The Chinese are desperate to start their own brands,” he said. “They will develop brands in economy and upper sectors. As they travel more and more, there will be more demand for their own brands.”