Despite some investor uncertainty, a “wall of cash” is poised to act when the right hotel investment opportunities arise, delegates heard at the International Hospitality Investment Forum (IHIF) today in Berlin.
Sluggish transaction volumes might seem to imply reluctance around the asset class, but that Is very far from the truth, an expert panel told moderator Julian Allen, Head of Real Estate Investment Banking, EMEA, CBRE Capital Advisors.
Michael Swank, senior managing director - real estate, Blackstone said: “The market is definitely slower than it was 12-18 months ago, and I’m not sure we will get back to the environment of unlimited free capital. Having said that, indications that the behaviour of the Fed is stabilising are likely to fan the market.”
Blackstone raised $30.4 billion in early April for its largest real estate drawdown fund ever, taking its three opportunistic strategies (Global, Asia, Europe) to $50 billion of capital commitments. As the firm follows secular trends and continues its shift away from office and retail real estate, hospitality is featuring high on its hit list.
“In Europe, we are performing well in high-end leisure across the Mediterranean region and particularly in Spain. Budgets in Spain are well above what we were budgeting for this year. We are seeing good leisure performance in the UK, and a little in the extended stay market, to which we are exposed in the US,” Swank noted.
“There’s lots of talk about the ‘champagne effect’, about revenge spending post-pandemic, but I don’t think we talk about enough the fact that going into Covid there was a long-term trend towards experiences and spending more on travel. That was interrupted by Covid, but not disrupted. Of note is also the rise of a global middle class and the potential impact of Asia and China in particular returning,” he added.
Impressive numbers
Laura Brinkmann. senior vice president of KSL Capital Partners agreed that “the post-Covid recovery is real”. She told the panel: “For us, that theme absolutely continues across our European portfolio. We’ve seen impressive numbers even without Chinese leisure demand in Europe. Despite the cost of living and energy crisis challenges, we have performed well through investing in assets, in people and in systems to hedge against rising prices.”
Adding to that, she said, consumer trends were favouring the sector. “The mass affluent customer may be squeezed but not to the extent of changing lifestyle choices. Meanwhile, corporate travellers are displaying a tendency to stay a little longer amid broader behavioural changes in how customers travel.”
Matteo Milan, managing director, real estate finance, Cain International, said that the impressive fundamentals propping up hospitality were encouraging lenders to support the market. “Although the economy is struggling at the moment, everyone thinks there is going to be a soft landing, rather than a massive crash,” he told the panel. “Hotels are performing well and everyone wants to diversify. As a lender, we don’t have much appetite for retail or offices, but the living segment and beds – including hospitality – are interesting.”
He added “We are very happy to lend against the hospitality sector. Pent up demand from Covid and excess savings have helped. It is one of the few cases where we have seen cap rates move out a bit, but remain completely offset by the net operating income. Operational businesses can offer something more than other sectors in this environment.”
Broader class of investors
Backing this thesis, Brinkmann alluded to a broader class of investors targeting the sector than KSL had perhaps ever seen in its 30 years in hospitality. “Typically, institutional investors didn’t take on any operational risks. In recent times we have seen a lot of specialised investors emerge as awareness and talent have been developed to tackle the sector,” she said.
Swank agreed. “If you roll back, hotels were the realm of private equity funds and family offices. More and more institutional investors have now entered the space and as the trend away from retail and offices continues, hospitality is clearly going to be a be a big beneficiary of this.”
Milan said that lenders would continue to be interested in the hospitality space, particularly where it was resilient to macroeconomic markers. “We probably favour the luxury end, because it’s less sensitive to the cost of living crisis,” he affirmed.
Brinkmann, however, felt that the investment market was a little way off buoyancy due to the ongoing “bid-ask” gap, creating a prevalence of off-market deals. “Leverage is available, but it is costly,” she noted. “I don’t see anyone really balance sheeting deals of magnitude.”