ROME — The competition is heating up among institutional investors to find premium hotels and resorts in Italy that can command high enough average daily rates required to fulfill return on investment.
Investors are also assessing their risk profiles to create additional value and provide the right unique selling propositions at an exit. To get to that point, executives with major hotel investment companies say potential investors must have even more skin in the game.
Italy, while famous as a travel destination for more than a century, has in the last couple of years been discovered by a new wave of American traveler and investor, said Puneet Kanuga, chief investment officer at EQ Group. He added EQ Group — which has almost 50 hotels in its portfolio across Europe — is spending more and more time in Italy.
“Italy has been discovered by the U.S. in a big way since the pandemic. When the U.S. dollar was strong, demand increased, but [despite the U.S. dollar softening], we do not see that demand softening. Italy offers value. The trend will generally be upwards,” Kanuga said during a hotel investment and yields panel at the Italian Hotel Investment Conference.
In Italy, EQ Group has asset-managed the 266-room JW Marriott Venice Resort & Spa with the hotel's owner KSL Capital since April following the exit of previous owner Westmont Europe.
Brookfield Asset Management has a real estate portfolio valued at $18 billion in assets, with half of its properties in Europe, said Brookfield Senior Vice President Li Zhang. He added the company has three hotels in its portfolio in Italy and is looking for more amid a general expansion across the major European markets.
“We’ve seen above inflationary cost growth, so you have to continually be innovative in regard to demand drivers," he said. "Ten years ago in Rome, there were maybe three luxury hotels, but today that landscape has changed materially. Now there is more high-end, more lifestyle, more boutique. We believe that demand always was there. In 2013 and 2014, we could not look at Rome, but Rome has invested in its airports.”
Rome's luxury hotel segment has grown such that now there are nearly a dozen hotels able to charge more than €1,000 ($1,162) per night.
Zhang added Brookfield’s interest is to expand beyond Italy’s top four or five markets.
New inbound markets such as the Middle East, India and China were helping to fill hotel rooms in Italy, Kanuga said.
“Middle Eastern demand has changed things. China is not really back yet, but India is waking up. Indian inbound is up 14%+ per year, and this year it is already up 25%. Indians are not just going to London and Paris now,” he said.
Challenges and opportunities
With strong demand for Italian hotels leading to high occupancy, rates and revenue, global hotel investors are increasingly trying to enter the market. One persistent challenge is ownership across Italy’s hotel industry remains fractional and family-based.
Another is that Italy also continues to have a bad winter market, Kanuga said.
Sunshine and warmer weather are among the most popular amenities for both travelers and investors, Zhang said.
“We love the southern Mediterranean, and Italy is a key part. The challenge is getting access to deals and then get to consensus and closing,” he said. “Our success has come via transacting with institutional capital, converting an office to a hotel, where it is easier to see what each partners wants. Sardinia, Sicily, are good, too, but the further out you go the more fragmented it becomes.”
Sometimes finding and executing on a hotel deal requires being very granular, Kanuga said. He added investors need a zen-like concentration on yield stabilization, repositioning, adding value and pricing both on the entry and the exit.
“We love data and being involved in that data and the P&L. Then we want to fully understand what are the [guest] nationality mix, the OTA commissions. We have seen a lot of [average daily rate] inflation in many Italian markets, but not in all,” he said.
Zhang said it is competitive if an investor wants to pay below-market yields.
“What the final product looks like, well, the key driver of that is what the stabilized yield looks like,” he said.
There's also value in bringing certain skills to the table that an investment partner on a hotel deal might not have.
“Dig down into the P&L and analyze demand,” Kanuga said. “We try and combine a lot of disciplines under one roof, to have a one-stop shop. Sometimes, partners have strength in investment but not so much in operations. We emphasize yield management, and that helps us unlock value. We can do acquisitions, asset management, CapEx repositing and exiting all under the same roof.”
New investors still are entering Italy's hotel sector from other real-estate classes, even if sectors such as office and retail have looked “pretty beaten up” for a while now, Kanuga said.
Zhang agreed.
“The beauty of our business is that it is a private equity play,” Zhang said. "A lot of [hotel] investments are in platforms — build a brand, maximize its value, reposition with brands — and that has gained attention and seen more capital enter. This new blood initially looked at urban hotels as they could see the demand and the similarities of what they did in office or retail, but now they are saying, wow, look at resorts, which have always performed well in good and bad times.”
EQ Group has also seen its debt-partnering business grow, Kanuga said.
“We love good deals where we see conviction, but Italy is not as liquid as some markets,” he said.
Kanuga and Zhang agreed European hotel fundamentals remain positive.
“Europe is the world’s museum, but there are worries. Government policy in the United Kingdom, taxes in Amsterdam,” Kanuga said.
“Lifestyle and experiential are here to stay, but geopolitics is resulting in a lack of stability, which creates hesitation in investment,” Zhang said.