Where can investors find opportunities to drive income and capital appreciation, and which asset management strategies are proving most accretive?
Dr Peter Ebertz, managing partner and head of hotels at Art-Invest Real Estate Management, argues that the definition of value-add opportunities has changed “because you cannot underwrite something now, underwriting a higher or lower yield, because nobody knows that exit scenario”.
Instead, he says the focus needs to be on increasing the net operating income (NOI): “It’s the difference to the previous cycle, when you bought in 2013-15, you could underwrite it with a high exit,” he explains. “Just doing a rebranding is for me not enough, you also have to discuss usage of public space, re-investing money, re-allocating uses. It’s not enough to just focus on a new brand.”
Romain Semmel, CEO of Vertell Asset Management, which is focused on the growth of its mountain lifestyle resort brand Faern in Switzerland, says that repositioning is a key goal for creating value in most of its deals, but that, “you need to be absolutely certain that the entry price you’re getting in the deal is sufficiently comfortable that, if things happen and capex increases dramatically, you still have a pretty good basis.”
He adds: “It’s challenging to do capex at the moment, you need to be really clear about what you want. The strategy for us is to drive value by doing renovation, but how can we maximise NOI without spending too much money at the same time?”
When it comes to increasing NOI, Vertell like deals and opportunities with potential for improvement through new tech stack, operating strategies, and revenue management, driving performance before money is even spent on the asset.
Where are the value-add opportunities?
However, as has been widely reported, the post-Covid wave of distressed assets didn’t emerge to the volume expected.
“I don’t think anybody at the moment, particularly banks, wants to trigger anything because nobody knows where the value is,” says Semmel.
“As soon as the performance starts to deteriorate… if we have a recession, that’s when people will start to get nervous… that’s probably when we’ll start seeing opportunities.”
Vertell’s strategy is building a leisure portfolio in mountain regions (mainly Switzerland but also Italy, France and Austria and potentially the Nordics) where demand is driven by locals, areas Semmel says contain “big pockets of value” compared to the already-expensive seaside and Mediterranean resorts.
He says that people still want to go on holiday and are willing to spend money on a nice hotel but would rather take the car or train to a destination nearer to home and is hopeful that a “wall of opportunity” may emerge at the end of this year.
Rob Mangan, director at Bain Capital, meanwhile, wonders if the staycation bubble is due to burst: “We can see from our own hotels, booking pace is ahead of last year, people are still booking last minute, I don’t think everyone has fully calibrated their household budgets to the higher inflationary environment… something’s going to have to give.”
Bain Capital sees opportunity in the upper-upscale to luxury end of the market, which has historically proven resilient to economic downturns.
“There’s less price sensitivity and you can push up rate to hedge against cost inflation,” explains Mangan. “We would consider extended stay, but there’s no point us just buying one Residence Inn, we’d need a big portfolio. There isn’t those types of platforms in Europe that we’ve identified.”
However, the business is focusing on single asset acquisitions to build its own portfolio through its strategic alliance with Stoneweg in Iberia.
Art-Invest has its eye on German developers who may have historically acquired sites and are now struggling to achieve the exit they had been expecting.
“That will be the next source of deals, we are already seeing that,” says Dr Ebertz.
He adds: “Developers, banks, and then also there are a couple of investors in Germany that simply don’t know how to handle all this repositioning. They don’t know how to handle their ESG commitments, big institutions have this wall of investment in front of them that they don’t know how to handle, so these are groups where I could see deals coming from.”
Costs and financing
However, deals are also taking longer to get over the line, and although Semmel points out that this allows for more time to be spent on analysis and business planning, it still means additional costs.
Mangan points out that, with margins going up, there is pressure to deliver a stronger business plan and, if yields aren’t coming in, it’s harder to justify the exit price.
“With HMAs [hotel management agreements], we’re pushing for more key money to reduce the level of equity that we have in… it’s definitely slowed the pace of deals,” he says.
“If you have a good deal, I would just do it and try to obtain the equity. If that’s not possible it’s very hard,” advises Dr Ebertz. “The second strategy would be to obtain some kind of vendor loan… the third one would be alternative lending.”
Semmel says there are good partnerships to be found, including with alternative lenders and credit funds.
“The local banks are still there but I’ve found it more and more challenging to work with them,” he says. “What I find interesting with alternative lenders and credit funds is that you have people in front of you who know what they’re talking about, are really willing to help you achieve your targets – because at the end of the day they are incentivised as well on the success – and it’s more of a partnership than the traditional relationship with a bank where you’re trying to convince them to come on the journey.”
All those quoted in the article appeared on stage at the International Hospitality Investment Forum (IHIF) held in Berlin between May 15 and 17, in a session called: In Search of Appreciation: Sourcing Value Add Opportunities.