RIMINI, Italy—Resort investment is no relaxing matter. The segment was a godsend for owners amid the pandemic and continues to push out strong cash flow on the back of robust rates and complementary demand. And, according to investors, this dynamic is not expected to end any time soon, despite a precarious and tenuous macro-economic climate.
"We are exiting our best summer season in history," said Felipe Klein, managing director of investment for Hotel Investment Partners, which invests in leisure hotels in southern Europe, with a current portfolio of 74 hotels, speaking at the Italian Hospitality Investment Conference. "We are seeing great cash-flow results and it's difficult to imagine a decline in pricing—only if demand changes. Business on the books is strong, despite this inflationary period. But the debt structure in Europe is sustainable. There are defects, but the reality is not a big disturbance."
It's a topsy-turvy market, indeed. Though interest rates across the globe continue to rise, cap rates are not following the same trend as they typically would. Part of it is the strong customer demand, part of it is the amount of capital chasing assets that many owners have not yet decided to part with, creating a larger delta between what the buyer is offering and what the seller is comfortable with.
"No one can understand it," said Klein. "Interest rates are up so cap rates should expand in theory. The reality is they are not, even with costs up."
The resort market is gaining investment from different types of investors, including sovereign wealth. Last month, Singapore's agreed to buy a controlling stake in Mediterranean luxury resort operator Sani/Ikos Group in a buyout that values the company at €2.3 billion. It's the largest deal in the European hotel sector since the pandemic.
"These type and size of transactions—especially when backed by sovereign wealth—do have highly positive impacts on the wider spectrum of tourism with adding much more confidence in the destination and you need this crucial step to begin addressing all-year-round tourism," said Roger Allen, CEO of advisory firm RLA Global.
In Italy, the Italian government is helping drive investment in the tourism sector via tax abatements and other incentives. Italy continues to attract the luxury end of the market. Six Senses recently announced a 96-room hotel in Rome, which Bain Capital and Omnam Group will bring Marriott's Edition brand to Lake Como by 2025. The two will own and develop the hotel through a fund managed by investment management company Kyralos SGR.
“There is an incredible opportunity for hotel investments in Italy, not only in large tourist destinations like Rome and Milan, but in specific locations that have a strong appeal for guests that look for high quality services and unique experiences,” said Paolo Bottelli, CEO of Kryalos SGR.
The distinctness of resorts sets it apart from other asset classes, requiring large CapEx spend and an expansive staffing structure. It's a capital-intensive business that is cash-flow dependent. According to Klein, resorts are at an early stage of where cash flows will be, and the segment is attracting new and longer-term investors, such as pension funds that are less dependent on debt. It's also looking at different models, like all-inclusive. "It's a resilient business that is resilient during inflationary times," he said. "It’s a business that can renegotiate rates every day."
With the debt markets clenching up, deals will require higher equity and lower leverage, which will change the buyer profile. As John Taylor, head of UK hotels for KPMG, pointed out, "Debt challenges are equal across all commercial real estate sectors. Borrowing money from banks is shifting to other sources."
"We are coming from a decade of deals coming from private equity, which relies on a lot of leverage," said Klein. "We are facing a change in the type of investor that is depending less on debt."
The fluidness of the economy has also put the impetus on operators to manage and monitor costs more acutely, what is known as "sweating the asset." The majority consensus is that rates will flatten out over the months ahead, which could put further pressure on expense lines.