Although hotel investment has continued to rebound from the pandemic, with 2024 transaction volumes expected to exceed £5 billion in the UK and expected to surpass the €20 billion threshold in Europe according to Cushman & Wakefield, senior investors warn the M&A market isn’t all sunshine-and-roses and that challenges still remain.
They highlighted one of the challenges being a tough fundraising environment, with funds raised across the private equity space at 12-year lows.
Investment strategies
Stephen McCall, managing director at Partners Group says fundraising remains challenging, noting gravitation towards highly specific investment strategies and adding that the traditional approach of buying hotels with the expectation of organic value growth doesn’t cut it anymore.
“There’s a lot of opportunity for very specific strategies - we have become more thematic and more deliberate about the kinds of assets that we're looking to acquire. We will drop a lot of investments that would have looked quite good a long time ago because there isn't a specific value creation angle and we wouldn’t buy an asset hoping to create value through organic appreciation of rate or better management margins,” he said, speaking at the Alvarez & Marsal's European Hospitality Investment Conference 2024.
He adds that the reasons investors shied away from hotels in the past such as operational intensity, capex intensity, cyclicality in revenue streams, are now seen more as a value-creation opportunity. Assets with transformative potential — those that can generate value through strategic innovation rather than solely through operational efficiencies – are now seen as more attractive.
Bridging the gap
However, the challenge of a wide bid-ask spread for some of these assets remains and it remains a sticking point for transactions, with experts continuing to emphasize the need for a shorter bridge between the expectations of the seller and buyer.
Coley Brenan, partner – head of Europe at KSL stresses: “Parties on either side need to come together with a spirit of being commercial and being creative in order for deals to happen.”
McCall agrees, adding: “There is going to have to be a realization that some prices are too full for the market.”
And with consumers increasingly favouring experiential spending over physical products, driving stable fundamentals, the waves of distress that were anticipated haven’t quite materialised and this necessitates the need for more creativity.
“Distress has come in spots but not in giant waves like some were expecting - I think the need to be creative with capital structures and the need to be commercial on both sides of the lender and the borrower is probably of greater importance to date than it was two years ago when there was still the prospect of waiting for the distress to materialise,” Brenan says.
Turning to areas of interest, James Francque, global head of transactions at Hyatt says that branded residences and the wellness space are key growth areas.
“We’re keeping an eye on, and going to be leaning in more into the branded residential business. I also see an opportunity for us to integrate wellbeing into our other brands,” he says.
Addressing region-specific challenges
Experts also note that while Europe remains attractive, there are region-specific challenges to be dealt with.
“Europe is one of our key markets for growth. While it’s a very fragmented area of the world in terms of hotel ownership, types of assets, types of ownership with a lot of leases – and that makes it complicated – but in terms of overall strategic importance, Europe is near the top of the list,” Francque says.
Tobi Weissinger, CEO at Hamilton Pyramid Europe adds that the UK Budget also presents challenges. “We’ve seen tremendous average daily rate growth in certain markets and European gateway cities over the last couple of years. But when we look ahead towards next year, I'm quite worried about certain aspects of the Budget that are going to have a very severe impact on payroll and margins.”
Moving forward, Weissinger stresses the need to underwrite opportunities really carefully to properly identify where there’s room for that ADR growth and where there will be pockets of consumer spending that will allow the sector to outpace payroll growth and drive margin.
He advises. “You need somebody who's in the weeds and who looks at this in detail. Those who are able to do tie that all together will be successful with their business plans. The opportunity to buy hotels and do well with hotel investment opportunities is there - you just have to underwrite really carefully.”
The bright side
But its not all doom and gloom, as they note there are a lot of players showing interest in the sector whether that be new entrants of well-known names who have continued being – and will continue to be – active.
“I’m seeing some new interest and there are new names popping up whether that's money from Asia, from the Middle East or for example a UK-based family office that we're interacting with. It’s very promising,” Weissinger says.
Brenan adds: “The risk profile of hospitality real estate is far greater understood today than three or six years ago and I think that's led to increased liquidity in the market. I think that today, it's a very good time to be a borrower in the hospitality space for the right type of hard asset, the right type of management and the right type of operating solution. I believe that will continue.”
And according to JLL's Global Hotel Investor Sentiment Survey, 2024 has seen a notable increase in new investors entering the hotel sector, with a record 27 per cent of year-to-date September investment volume driven by first-time buyers. The survey also found that a record 80 per cent of investors intend to maintain or increase their capital investment in the hotel sector over the coming year.
However, McCall warns: “While there are a lot of new players showing interest, you need to be very clear about your strategy. It’s still challenging and although it’s getting easier, it's going to be a long haul to see that capital flowing much more freely.”