Investor Profile: Hybrid leases and strong real estate underpin Invesco Real Estate’s success story

In 2006, Google bought YouTube, Italy won the World Cup by beating Germany, and Invesco Real Estate launched its debut hotel strategy, a closed-ended vehicle focusing on hotel properties across Europe. As far as real estate investment ventures go, this was a fairly mutinous act in a sea of office and retail deals that characterised the commercial real estate sector at that time.

Yet what was true then, is true today, and that is “the fundamental value of a well located, high-quality asset”,  according to David Kellett, Invesco Real Estate’s head of alternative investments, Europe. “Before we look at buying a hotel, we look at it as a piece of real estate,” he says. “Then we underwrite it as if it were a business, with far more than just an operational appraisal.”

This principle has stood Invesco in good stead in the last 17 years of hospitality investing, according to Kellett, who has been with the firm since 2018 and was formerly head of hotel transactions. Although he has recently been promoted to a broader remit, Kellett is still very much in the hospitality space, as his new alternative investments role includes “anything with a bed, and anything with a really strong operational component, which will extend to include data centres and life sciences, which are some of the fastest growing sectors”.

Impressive returns

Kellett thinks that it is also a great time for hospitality investment, given the fact that returns have been generally impressive despite a patchwork of different macroeconomic, social and political events in recent years.

“As an institutional investor, we’ve been in the space for a long time and that has seen us invest over three billion dollars of equity into the hotel sector, own over 50 hotels, while we currently own 27 assets across Europe. It’s a sector that we like, it brings a slightly diversified income stream, and is linked to the GDP cycle but can also potentially outperform other asset types,” he says. As well as three successful strategy vintages to date, Invesco also acquires hotels for other clients’ separate accounts, and has further non-sector specific mandates that invest into hospitality.

Kellett says that one hallmark of Invesco’s successful approach to hotels has been its hybrid lease model, which includes a minimum fixed rent with a variable lease on top. “That is largely linked to turnover, and since the recovery from Covid has been a lot stronger than people were expecting, we have been able to generate variable rents quite a long way above our underwriting,” he says. “I wasn’t expecting to sit here and say we are outperforming 2019 business plans, but here we are. This has been both macro driven with some benefits of inflation supported by our asset selection in strong markets with balanced demand drivers.”

Economic scenarios

While Kellett concedes that inflation can still have a negative effect on tenants and costs, he notes that this rental model has on the whole helped them ride out a range of economic scenarios.  

After the success of Invesco’s first hotel fund, it launched a second, closed-ended vehicle from which it again achieved an impressive exit in 2016 when the portfolio was sold wholesale to Pandox. The deal saw Invesco dispose of seven assets for €415 million, which the firm said at the time represented a return for investors “above the fund’s original target of a net IRR of 12 per cent” thanks to successfully managing the portfolio “during an interesting market cycle”.

Invesco’s current dedicated hotel programme, its third such vehicle, is invested across Europe in 13 hotels today. Its most recent deal, inked in January of this year, saw Invesco acquire the NH Collection at Milan’s CityLife from Italian developer IGEFI for €55 million. According to Kellett, deals such as these are a reflection of how Invesco’s sector experts work collaboratively with their the “on the ground teams”, which is a facet of the recent restructuring which saw him promoted to head of alternatives.

“We have brought together our transaction and asset management teams into single investment teams across Europe to increase accountability,” he says. “While my colleagues run verticals country by country, we have brought all of the alternative sectors together on a pan-European basis to enhance our delivery. That makes for a more synergistic way of working across teams and driving accountability and collaboration. We own hotels across Europe, and our strengths lie around locally understanding the operator, negotiating with the operator, and having strong operational insights.”

Underlying real estate

Despite these changes, looking forward, Kellett thinks that the focus will remain on the evergreen factors of “quality real estate in key locations that serve consumer needs”, with a willingness to explore everything from hostels and limited-service hotels through to successful lifestyle properties that are underpinned by dynamic restaurants and bars. He adds: “The willingness of core investors to have sub-investment grade tenants has gone away since Covid. Leases are only signed with the best-in-class, even better if directly with the brand, who tend to want to stay long term in key locations.”

Does he see room for significant further investment growth, given the murky economic outlook? The answer is a resounding yes. “It is a specialist sector, but on a relative basis it is performing pretty well in our view. UK RevPAR alone is up 20 percent on pre-Covid levels. At the same time, the market has started to reprice. I think that is going to throw up some really interesting deals and ones that I believe will bring real rewards to both operators and owners over the next few years,” he notes.

He is bullish about net tourist inflows into Europe, even if the outlook for the dollar has started to recede slightly as euro and sterling look set to benefit more from China’s rebound. “I don’t think US tourists are only looking at the value of the dollar when they decide to come to Europe. It’s an important destination for them historically, they see it as a living museum. Meanwhile, the return of Asian tourism to Europe – and we’re not fully there yet – is going to be significant.”

He concludes: “Even pre-Covid, the balance was starting to shift in hospitality’s favour, and as this interesting macroeconomic climate is likely to persist for at least the next three years, that signals opportunity – and makes my job more interesting!”