Earlier in February, PGIM Real Estate announced its European Core Plus strategy had raised over $400 million, adding that the firm would target investment in Europe’s most liquid markets and signalling an interest in the hotel sector.
The asset management business said the strategy, led by Jocelyn de Verdelon and Tobias Waldschmidt, would allocate to sectors which benefit from structural trends driven by digitalization, changing demographics and decarbonization, noting that investment wouldn’t just be in sectors such as last mile logistics, residential and offices but also in mispriced sectors such as hotels and self-storage.
Hospitality Investor met up with industry experts to discuss what PGIM’s strategy and what its interest in hotels means for the sector.
Richard Dawes, director, hotel capital markets at Savills
PGIM looking at the hotel sector is hugely positive. We have seen stronger appetite from owner operators over the last two to three months in investing in hotels. More institutional parties don't necessarily come with their own operational platform so investing with partners, and the conviction they have with $400 million going into the multi sector approach is certainly demonstrating their conviction in the longer-term viability and value opportunity in hotels. Certainly, pre-Covid, we were seeing $20 to $25 billion a year of hotel transactions in across Europe, including the UK and so this is a small part of that. But absolutely, it's a good testament to the market and the maturity of the segment that we have these core plus investors like PGIM looking to increase their allocations.
In terms of the longer-term trends across the Europe and the UK, fundamentally we're seeing huge outperformance in the better quality operators, better quality product positioning and both corporate and leisure travellers’ willingness to pay more for the right product. There are more better quality/stronger operators performing and it's a much more mature industry from an operational and capital markets perspective, which is ultimately underpinning value, providing opportunity and secure investments to buy into.
The ability to move into markets - not just London, the Paris’s the Frankfurt's, the Amsterdam's etc - provides opportunity. In markets where it's quite difficult to secure planning and the barriers to entry are quite heavy, ultimately the values of assets should hold very well and see some good performance growth. So perhaps some of the smaller non-traditional gateway markets will provide opportunity for the Core Plus strategy as well, allowing them to spread their net wider.
Saar Sharon, head of hotel capital markets at Colliers
Hotels are generating good returns and are pretty stable over long periods of time. PGIMs decision to invest in the hotel sector doesn’t surprise me. Other companies are raising money in the space and institutional money is going into hotel real estate more and more. We talk to PGIM a lot about investment in hotels and we know about their interests and where they’re looking at opportunities. While I can’t specifically talk about PGIMs interest, the general rule is to acquire properties in good locations – not necessarily prime locations - that have good supply and demand ratio, good location in terms of transport and less exposure to seasonality. Generally, investors with a lot of assets under management would look at key gateway cities in places like UK, Germany and the Netherlands; there would be some aversion for many of such companies to invest in the UK first but they will do the occasional investment in the Netherlands, Belgium if the deal is right.
Over the last three years, there has been a lot of money looking at hotels, waiting for something to happen. This year, we think we will see more opportunities closing for a number of reasons. One, there money that needs to get invested; it can’t sit in banks forever. I think we’ll see a lot of those who have been sitting waiting for investments. Many have been waiting for repricing and we're starting to see some repricing in hotels, which is positive. But I still think we’ll see a spread between between sellers and buyers in terms of bid ask spread but I think it will it will start to shift in the second half of this year.
We welcome the increased involvement in the hotel sector. We think it's a good time in the market to explore investment opportunities for institutions like PGIM. They're not the only ones and we think there's a lot of dry powder sitting in similar institutions as well as other investment funds that will go hunting in the next six to twelve months in hopes of getting better yields for their investors. Now that interest rates have moved out, they have to go into value-add opportunities where they were probably less comfortable investing in before.
Kerr Young, head of UK national hotels transactions, capital markets at JLL
It is encouraging to see increasing numbers of institutional investment looking to deploy capital into operational real estate.Generally, we're seeing a number of institutional investors looking to increase their exposure to operational real estate and specifically, operational hotels are set to benefit.
We certainly think we will see more interest in hotels both home and abroad following the prolonged disruption that impacted performance during COVID. Typically, private equity investors are the larger investors in the market which often have sought more value add or opportunistic investment strategies given whereas institutional investors - given their lower cost of capital - are able to look at more core plus investment opportunities. They will be a welcome introduction to the sector.
One of our investment trends for last year was that we expected about an increase in institutional capital to come into the sector. It didn’t come through quite as strongly as anticipated last year as we had anticipated but certainly PGIM are not the only institution that will increase their exposure to operational hotel assets.
As with every asset class the key to their success will be aligning themselves with a best in class asset/operating partner.