In Sync

Investors ‘drooling’ over sector

Investors continued to be attracted to the sector despite the current pandemic, attendees of the In Sync event heard.

In an absence of distress, investors were looking at the public equity markets, where stocks had fallen, and at buying with cash.

Ramsey Mankarious, CEO, Cedar Capital, said: “If you like hotels, you’re drooling today. If you believe as we do, that the hotel markets will recover, now is a great time to buy”

“We would and have bought properties in cash before Covid: for trophy assets, when it’s a luxury hotel. We’re buying a hotel at the moment in the US in cash and we’ll refinance it later. But it’s only certain assets that we’d do that for. It’s riskier, it’s something we hold for a longer period of time, until the financial market recovers.”

The assembled panel echoed the thoughts of Amal Del Monaco, head of sector specialists, AXA IM - Real Assets, who said: “We not considering changing our current strategy.”

Cody Bradshaw, MD, head of international hotels, Starwood Capital Group, said: “Globally the action is all happening in the public equity market. There’s not a lot of transaction volumes, it’s very difficult to mobilise an asset right now. Less opportunity on the debt side in Europe, where banks are less quick to act. You’ll see a shift in the profile of buyers and a shift in how assets are valued.

“Alternative accommodation offerings were growing before this and we made some investments in them. The offering is still valid, but how are you going to grow and if it’s too exotic, how do you exit? I would still watch that space.”

Anders Nissen, CEO, Pandox, agreed, adding:  “If people want to invest in the industry today they should buy shares in public companies.”

Looking ahead, Olivier Harnisch, head of hospitality, Public Investment Fund, said: “What’s going to be interesting is observing the behavioural changes. Travel will come back, but what will people look for? It’s about bringing people together and renting space. Social distancing will definitely have an influence. Look at restaurants, the trend towards home delivery has changed the way you build a restaurant. Investment will be driven by these behavioural changes and we will invest in different areas to get that yield per square metre? We remain long term and we are very optimistic. Thinking in terms of a decade, Covid-19 is not that relevant.”

Bradshaw added: “Europe is going to have the benefit of seeing a number of regions test this out. It looks like Europe is going to be one of the last to open their hotels. If you’re not a limited service hotel you need to rethink how you make profits. From that can come a lot of knowledge and ways to make this sustainable and improve profitability, improve labour, improve sustainability. This is a chance to restart everything in our approach to hotel operations, for the first time in out history.”

The panel did not reach a conclusion on whether leases or management agreements were the better choice, with Nissen commenting: “The lease is the absolutely best model. A turnover model is best as you all wake up in the morning thinking the same thing.”

Del Monaco said: “With 50% of the portfolio under management agreements, it’s true that we knew we were more exposed to operational risk, but we knew that. It does show that there is a difference between a lease contract and a management contract and this should be reflected in the pricing.”

Insight: del Monaco’s comments spoke to a time, post-crisis, when Things May Be Different in investor land and there are hopes - as we heard in the panel on owners, operators and brands - that there will be a more even spread of risk between all the parties in the hotel stack. Or that pricing reflects involvement.

There are already hints of that out there - there are reports that the rising interest in ground rent deals before the pandemic have come off somewhat, as the risk averse pension funds look at the sector with somewhat widened eyes.

But, as was pointed out on the panel, the sector has never been stronger. It is carrying less bad debt than during the global financial crisis and the market has never been more professional, moving as it was towards being a mainstream asset class. Transparent, understandable, lashed to ever-rising travelling. If you can look past the next 18 months, why wouldn’t you be drooling.

Many can’t, of course. At the moment there is little visibility on this and, with many hotels still closed, no lenders want to end up owning closed hotels. Prepare for a return to the era of pretend and extend - this time likely to be even longer. For those now wanting to take a punt just yet, head to Wall Street.