Despite the imminent wall of refinancing in real estate, hospitality is unlikely to throw up many distressed opportunities, according to experts in the sector.
“In 2023, hotels looked overpriced,” says Carine Bonnejean, managing director hotels at Christie & Co. “Rapid changes in monetary policy saw deal activity halve compared to the previous year.” And yet the sector has defied repricing theories, she notes. “It's all about beds and sheds currently, and the hotel sector has clearly been real estate’s outperformer.”
Buoyant occupancy figures and room rates have continued to shelter the sector this year, she notes, “making 2024 a much better vintage”. While markets including Germany and the UK have been bearing the brunt of macroeconomic headwinds, their markets have looked “more attractive… with the UK already registered 40 per cent of Europe’s transactions, year to date”.
Another market picking up speed is France, where major deals have underlined its attractiveness, she says. Adding to the competition is a wave of buyers from beyond Europe, including Middle East and Asian capital.
Expiring loans
In conclusion, “the UK has seen a little distress but not massive amounts, and overall there have been very few casualties even if interest rate have significantly increased.” However, she warns that “there are a lot of loans that are going to expire this year and next year, and that might create some opportunities for all of us, while margins remain high.”
Larry Kwon, managing director, Moelis & Company, agrees that while interest rates have stymied dealmaking to a certain extent, high inflation figures have arguably been a part of hospitality’s positive tale. “Inflationary patterns in the US have been notoriously hot, just as hotel demand – a consumer discretionary sector - has been stubbornly high,” he says. “Although that signals inflation staying higher for longer, the benefit is that assets are performing incredibly well and I think we will see a recovery in transaction volumes.”
Ryan Donn, managing partner & principal, Trinity Investments Europe, is equally optimistic about the outlook. “I think I've been waiting for demand to wane for two years and it's still there. People are traveling and spending money, and everybody knows that they've probably never spent more to be on a trip than now. So, I'm pretty bullish about the sustainability of demand, and that's something that the hotel business has that other asset classes don't.”
Adding value
For Robert Mangan, operating partner, Bain Capital, the positive tailwinds mean that “yield compression and capital appreciation” can essentially be “written in” to business plans, but he underlines that Bain “works hard to add value”, for example by “taking on complex construction projects”. He also notes that the hotel business includes such rarities as “high net worth individuals” and “emotional buyers” which “can skew prices; they’re aspects you don’t get in an office deal”.
He notes that luxury is an interesting segment for investors – due to undersupply and the fact that “luxury always comes back the fastest” – but advises care in finding suitable markets. Asia, for example, might lack “the right labour force both in terms of numbers and qualified experience to work in that kind of hotel” or even the appropriate infrastructure to make luxury travel sustainable.
Refinancing war?
On the pricing angle, Xiao Sun, investment vice president, Tikehau Capital, believes that “there are going to be some distressed situations in the coming years” but suggests that impact on hospitality will be minor compared to asset classes such as offices, “due to the fact that there has been increased top-line performance after Covid”.
Yet he cautions against wholesale optimism: “We do need to admit that there will also be a refinancing war in the coming years, which will impact the liquidity of certain owners in the current market”.
Counters Kwon: “There are two kinds of distress, though. There's operating distress and then there's kind of balance sheet distress which comes from the capital stack. I think we’ll see the latter but it won’t manifest into distressed sales, due to the fact that the private credit market is basically stepping in to take the place of traditional mortgage lenders. We’re certainly seeing that in the US, and we're starting to see that in Europe as well.”