Dive into our exclusive executive interview from IHIF 2024 featuring Patrick Saade from JLL's Hotels & Hospitality Group! Gain valuable insights into the current state of the hotel investment market as Patrick shares his expertise. Explore trends in capital flow, the impact of reduced transaction volumes, and emerging opportunities for first-time buyers entering the industry. Understand why investors are turning to hotels amidst strong fundamentals in Europe and competitive advantages for Asian investors. Learn how changing consumer preferences and a robust travel market are shaping investment strategies. Stay ahead of the curve with Patrick as he discusses future outlooks, deployment strategies, and navigating geopolitical landscapes. This is an essential discussion for savvy investors!
Patrick Whyte:
Patrick, thanks so much for joining us today. So could you tell me a little bit about the current state of capital flow within hotel investment markets?
Patrick Saade:
The current capital flow within the hotel investment market is quite interesting this year. For the second time ever we've seen 1,400 transaction happened, which means that volumes were down 51 billion, so 30% down from 70 billion before. And the reality is we're seeing smaller tickets trade versus larger tickets. Out of all the investment that we have seen, 19% of it globally has been first time buyers into the industry. And the reality is those first time buyers are seeing something, have had capital sitting on the sideline that was not competitive and are now deploying into our industry. The longer we'll see turmoil in the financing market, the longer our asset class with the solid fundamentals that it has is going to see more capital coming into it.
Patrick Whyte:
What do you think is driving those newcomers to the market? What are they seeing that maybe others aren't seeing at the moment? It's very interesting to know that number.
Patrick Saade:
So a lot of them wanted to invest in hospitality, but couldn't do it. As the pension funds and the insurance funds are now mostly sitting on the sideline because... And they used to be the lowest cost of capital. New buyers are now coming in, they're mostly all cash or lowly levered. And when they're levered, they lever with relationship banks. For example, we've just done a deal in Paris with a Korean investor, Sono, that has levered leverage, but they levered in Korea. And this dynamic is going to continue first quarter of this year, we've already transacted 1.7 billion of deals and a lot of these have been with foreign investors. Out of all the deals in Europe, 50% this year have been foreign investors.
Patrick Whyte:
What are they seeing? Is it a currency play? Is it a demand play? What's driving that capital?
Patrick Saade:
Well, what they're seeing is fundamentals in Europe are still strong, performance is still evolving. Their capital is competitive, their cost of capital is competitive. And for the Middle Eastern Europe is an extension of where they're at. For the Asians, it's a market that they do understand very well. And unlike the US, the volumes in Europe tend to be smaller and so more digestible and so easier for them to perform and to acquire.
Patrick Whyte:
And how would you say interest in the hotel industry has evolved in particularly compared to other asset classes like retail office? We know they're struggling. Are people more prepared to risk with hotels more, would you say?
Patrick Saade:
What I would say is that obviously the dynamic is on our favor. The fundamentals are strong. We're offering yield, which other asset classes are struggling with, and banks and lenders are following sponsors that are buying hospitality. So I think we're one of those asset classes right now, which are benefiting from the whole interest rate rise. It's a harsh statement, we're not really benefiting from it, but we're lesser of a pain versus other asset classes which are suffering much more.
Patrick Whyte:
And changing consumer preferences for offices retail. People aren't shopping as much, people aren't going to work as much, they're still traveling more than ever, which is a good thing.
Patrick Saade:
That's right. The travel demand is still there and it's going to continue. And Europe is one of the largest travel markets in the world. Pre-COVID. We used to have north of 50% of all travelers globally used to come to Europe. Right now, the dynamic is very similar. The numbers are not out yet. So that's one thing that is appealing in our asset class. The other thing is there's a stat out there which is 3.5 trillion of equity sitting on the sidelines in the money markets, which is going to make its way back to the bond market eventually and to the real estate market. And when that happen, this is where we're expecting to see a huge pop in value.
Patrick Whyte:
Yeah, definitely. In terms of types of hotels as well, are you seeing any trends there, whether is it luxury, upscale, select service, service departments? What's the preference out there at the moment?
Patrick Saade:
Last year it was the tail end luxury because it performed and limited service because it performed. And investors find these two pieces quite easy to underwrite. Lifestyle is another one, which again fits into the luxury lifestyle where investors find it simpler to underwrite. What we're seeing is investors are now taking concerning views on everything in between, and it's the right time to do it because the travel is there, it hasn't stopped. And so as soon as the capital markets come back, capital value should increase.
Patrick Whyte:
And obviously we're living in certain times at the moment, war, geopolitics, the economic situations is in flux. Are there any kind of things you can see in the short to medium term in terms of capital flow trends for the next 12 to 80 months maybe?
Patrick Saade:
Yes. Well, again, it depends where you want to deploy. It depends how you deploy and it depends who you are. But what we are seeing is, for example, in the recent past, the Gulf countries with the oil prices and with the real estate market performing so well, are putting a lot of equity to work in real estate, in hospitality in Europe and the US we're seeing the Asia market opening up and also finding quite interesting relative value in Europe and the US versus local players that are slightly more muted because again, they have their own issues to deal with and they need the leverage to acquire, whereas the others might not or might take a longer term view. So everything that is happening from a geopolitical perspective and is creating opportunity for certain type of investors, especially the low levered investors.
Patrick Whyte:
Fantastic. Patrick, thanks so much for your time.
Patrick Saade:
Fantastic. Thank you so much, Patrick.