Investors scramble for Spanish cities, coasts
04 DECEMBER 2015 9:32 AM
The future looks sunny for Spain, which is opening up to new business models and international investment.
MADRID—As a country attracting a new diversity of operating platforms and investors, Spain is the new frontier of Mediterranean investment, according to sources.
Speaking during a panel titled “The real investors: Who is investing, and what are they looking for,” at the inaugural Mediterranean Resort & Hotel Real Estate Forum, it quickly became clear that there is a bounty of private equity capital available in Spain, and a lot of investors are interested.
“Spain has bounced back quickly, with very good growth fundamentals and possible operational levers. A lot of new investors are showing up,” said Keith Evans, VP of hotel acquisitions at Starwood Capital Europe Advisers. Evans added that Starwood Capital has been in the Mediterranean for more than a decade and was active in the last 12 months in Spain, including signing a joint venture with Meliá Hotels International.
“We’re also looking in Portugal and Italy, although those markets are slower and could use some restructuring,” Evans added.
Moderator Luis Arsuaga, executive VP of JLL’s hotels and hospitality group, said his calculations had seen year-to-date revenue per available room in Spain reach double-digit figures, resulting in more profit to the bottom line. Other positives in the country include enhanced liquidity, fewer exit concerns, banks somewhat returning to the fold along with capital expenditure and established real estate investment trusts.
All these investments need returns, so expect average daily rates to increase, panelists said.
Projects doing the right renovations with the right management will see returns, they added, and brands will start to proliferate.
“There are more and stronger growth-oriented plans and a lot of checked boxes,” Arsuaga said.
“With the lack of easy liquidity from banks, one major change from the last cycle is that local investors are looking to align themselves with some of the most-proven international operators and investors,” said Yannis Ermilios, SVP of Colony Capital.
“Capital is looking to grow income and cash flow, to grow valuations accordingly, and risk is being diversified,” Evans added.
Another change is that brands are on the way up.
Most Mediterranean hotels are family owned, “but they see that brands return more profits,” Ermilios added.
As with other European nations experiencing overall healthy metrics of late, growth is not uniform across Spain, with resorts and gateway cities consuming the lion’s share of investor appetite. Spain still needs help from its friends, panelists said.
“The story is different if you want to run a hotel in, say, Denia, rather than in Barcelona. Then you need local expertise,” said Alejandro Hernández-Puértolas, CEO of HI Partners, a 6-month-old entrant that manages €1.2 billion of assets ($1.3 billion).
“We have 25 hotels with approximately 2,000 rooms, via management agreements, with us taking control of the risk. All (are) in Spain, and 80% are resorts,” Hernández-Puértolas said, who added his firm’s intention is to soon start buying independently from its bank partners.
Seasonality and CapEx
Before the recession, Spain probably was quite happy during slow seasons. Not anymore. Panelists said the new and steady breath blown into hotels needed seasonality, and—with brands steadily marching across the country—repositioning, too.
“Seasonality is an issue throughout the Mediterranean, but hotels have a little more flexibility from new management companies in the game, and governments also are aware of the problem,” Ermilios said.
Evans said the Canary Islands was one Spanish destination that does not have any downtime.
“The Canary Islands are making money all year now, where that was not the case. In other destinations, the labor component is a concern, with hotels closing down (for the slow season) but also having to open up swiftly, too,” said Evans, who agreed that renovation is key to staying profitable in the region.
“There’s a lot of the Mediterranean under-CapExed,” Evans said. “Previously, it was about competing on price, not on quality, but the next generation is having a say as to this redevelopment. The outlook is positive, and owners have a little more cash. They’re pushing rates to the next level, although I would not necessarily call that aggressiveness.”
With owners becoming more comfortable with brand affiliation in Spain, the country also is seeing a widening gap between the property’s bricks and brains.
“Especially in the 4- to 5-star products, investors and owners see that by having the right management platform they can dominate the market,” Ermilios said.
Hernández-Puértolas said he foresees more operators investing in sea, sand and sun.
“With urban beach hotels, it’s hard to find the right partner, with the exception of Meliá, so I think we’ll see new operators specializing in coastal hotels in the next years and the formation of a big differentiation between owner and operator, which is already happening now,” Hernández-Puértolas added.
Evans also believes the region will see product increasingly purchased by international investors looking for best-in-class operators and independent management companies operating several brands under franchises.
Adding to Spain’s mix is investment moving across the Strait of Gibraltar from North Africa.
“Fewer French are coming to Morocco; they are now going to Spain and Portugal,” said Hervé Louis, CFO for Africa and Middle East at AccorHotels. “Investment has dried up in these (North Africa) countries, some of which are perfectly fine but tainted by association with, say, Tunisia and Egypt.”
“Be calm. Clearly the market is rebounding. When the light turns on in Spain, people get very excited,” Evans said.