Europe’s evolving deal market proves difficult
Europe’s evolving deal market proves difficult
06 NOVEMBER 2013 7:27 AM

Despite the availability of capital and numerous assets on the market, closing traditional hotel transactions in Europe is still a frustrating ordeal for investors, panelists said during The European Hotel Investment Conference.


LONDON—Capital is flowing in Europe and banks have distressed assets at the ready, but the deal market is proving maddening for owners seeking traditional hotel acquisitions, according to a panel at the 25th European Hotel Investment Conference hosted by Deloitte.

“It’s really a question of product,” said Cody Bradshaw, senior VP of Starwood Capital Group, during a session titled “Silver bullets at the ready.”
“When you look at the opportunity, most of the product you’re seeing is not what the everyday investor is going after,” he said. Of the many hotels for sale, many are non-performing loans.

Missing from the mix are the single-asset deals that used to trade hands with great regularity, Bradshaw said.

Those that do emerge are often bid beyond a realistic financial evaluation by private equity and sovereign wealth funds, the panelists agreed.

Replacing single-asset transactions are large, complex portfolio deals that require a lot of resources and expertise to execute.

“Bigger is better,” Bradshaw said when asked if Starwood Capital’s size provided a competitive advantage.

But even then deals take time. Coley Brenan, principal at KSL Capital Partners, offered a case in point as he described KSL’s five-year pursuit of Malmaison and Hotel du Vin, which the private equity investor finally closed on in May. The 27-hotel portfolio transaction was funded from KSL’s third fund, less of half of which has been deployed since it closed in 2011.

“It was a business we’d come to know as outsiders very well,” he said, adding KSL recognized the opportunity to add value through operational expertise by bringing in third-party manager De Vere Group.

The global recession was the largest, and most obvious, obstacle to closing the transaction, Brenan said. Beyond that, it was finding an “in” with the appropriate part of the capital structure. KSL had to wait for Malmaison to go into administration before it was unlocked from its pre-existing ownership structure.

“The other way we look at pursuing deals is making sure we talk to owners who have a realistic view of that bid-ask,” he added.

“The big-ask gap continues to be significant across a lot of continental Europe,” Brenan said. “That’s been a frustration of mine and our team for the past five or six years. … I’d say the gap is narrowing, but it’s still pretty meaningful.”

Where to buy?
Weaving its way throughout the 40-minute panel were mentions of target markets.

“We’re much interested in doing more specifically in London. The (United Kingdom) is a different question,” said Struan Robertson, executive VP and chief investment officer at Host Hotels & Resorts.

Because Host’s structure as a real estate investment trust limits its involvement in operations, the company invests primarily based on real estate, he explained. And because Host’s previous portfolio investments show a higher total return on capital for gateway cities, that’s primarily what the REIT is targeting.

Its existing footprint in 16 countries gives it some flexibility within that parameter, but the going is still difficult, Robertson said. 

“Even at this point in the cycle, which is arguably halfway through a recovery cycle, we are slower on our pace of new investment than we anticipated we would be,” he said.

Helder Pereira, chairman of Redefine BDL Hotels, represented the other side of the coin. As a third-party management whose affiliated Redefine Property Group has an ownership component, Redefine BDL is more focused on driving value through operations. That means markets throughout the provincial U.K. are entirely up for grabs.

And representing yet a third perspective, Bradshaw discussed the shift in thinking for United States-based Starwood Capital. From 1999 through year-to-date 2013, Europe represented only a single-digit percentage of the group’s overall capital deployed across all its funds. However, of the approximately $2 billion deployed from its ninth opportunity fund, 40% was spent in Europe. When the $4.2-billion fund is fully deployed, that percentage will be closer to 50%, Bradshaw said.

“We’re looking everywhere in Europe,” he said.

Internet and investment
Moderator Margaret Doyle, head of financial services insight for Deloitte, closed the session by asking each panelist how the Internet was impacting investment.

“It doesn’t change the fact that we’re going to invest in hotels,” Robertson joked. But it does change how Host looks at distribution channels and the cost structures required to fill rooms in various ways.

“It is a very significant factor but only one of many as we look at the demand side, the distribution question and the cost associated with filling those beds,” he said.

“It’s probably both a positive and a negative,” Redefine’s Pereira said. While the Internet widens a property’s distribution network, it also increases costs in the process.

KSL’s Brenan focused on the competitive advantages wrought from the complexity of distribution.

“What it does is highlights that sophistication disparity,” he said. “If you have the right team in place managing those channels, that’s how you can create value.”

Bradshaw agreed, pointing to Starwood Capital’s significant investment in experienced personnel to manage distribution.

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