LONDON—Capital is flush across the European hotel landscape, according to speakers at the 26th European Hotel Investment Conference hosted by Deloitte.
Before the conference, Deloitte reported the amount spent in hotel transactions in Europe during 2014 sat at the €9.1-billion ($11.5-billion) mark, which represented an increase of 75% on 2013 figures.
And the hotel sector in Europe saw another shot to the arm on Wednesday from the approximately €1.2-billion ($1.5-billion) purchase agreement of Louvre Hotels Group by Shanghai Jin Jiang International Hotels Group from Starwood Capital Group.
For those present in London, the first word of the deal came minutes after the morning session of the conference.
Thus, it was no surprise that speakers on a panel titled “Riding high, the U.K.’s newest hotel owners,” on which sat two relatively new hotel management executives, brimmed with excitement at business opportunities. They were joined by representatives from investors Lone Star Management and the aforementioned Starwood Capital.
James Riddell, executive director of investment firm Lone Star Europe, said following his company’s acquisition of the Project Rock portfolio (with assets spanning all real estate sectors) earlier this year, executives saw a clear opportunity to trade early last summer.
“It is difficult to change the cash flow in many sectors, but with hotels it is easier to drive value over longer-term holds. The hotels within Project Rock were the most attractive part of the (Project Rock) buy,” Riddell said.
Included in that portfolio was QHotels and Puma Hotels. In September, Lone Star also acquired a 38-hotel Hyatt portfolio for approximately $590 million.
Cody Bradshaw, senior VP at Starwood Capital, said he and his team benefitted from having first-mover advantage, stemming from the acquisition of the 23-hotel Principal Hayley portfolio in March 2013, although he added sector consolidation was disrupted by there being so many new people to the party.
He said Starwood Capital is now targeting under-the-radar single assets to “bolt on to our platform.”
“The reason we are in Europe is that with the United States entering its sixth year of revenue-per-available-room growth, it’s hard to get deals done there. In Europe, we’re saying, ‘Hey, we’ve seen this movie before.’ And with interest rates close to zero, everyone wants to pump money into equity markets,” he said.
Bradshaw added Starwood Capital had $65 million of dry (close) capital to targeting all real estate in Europe, with the United Kingdom being one of the more attractive markets.
Welcome to the pleasure dome
Long-established partygoers are being joined by a new wave of debutantes.
Topland Group entered the hotel market in April 2012 with the single-asset buy of the Royal Crescent Hotel in Bath, England. In December 2013 and September 2014 it bought two hotel portfolios that included 30 U.K. properties.
Lionel Benjamin, the company’s director of hotels, said Topland executives decided to enter the hotel market for two reasons: They sensed opportunity due to property under-investment and because the future was positive.
“For us, it’s not just bricks and mortar but about the longer-term value-add coming from capital expenditure on infrastructure and technology. It’s about the investment, turnaround and consolidation,” Benjamin said.
The other new entrant, Kew Green Hotels, also saw ripe possibilities. It added 19 Holiday Inn hotels to its portfolio in September, thus becoming InterContinental Hotels Group’s largest European partner.
“Our investors were astute and provided the capital for us to look at the benefits we see in mid-market provincial (U.K.) properties,” said Paul Johnson, CEO of Kew Green, who added he is not looking for significant rate increases.
“The regions are tough, but we have a big (capital expenditures) program, and we know what we can do with (our properties). And we will acquire more,” Johnson said.
In through the out door?
While Benjamin said Topland also remains on the acquisition trail, stating he is “cautious but opportunistic,” the two panelists backed by large-scale investment machinery were more scientific in their approaches.
“The underlying economics of deals have changed to exploit the gap between cap and CapEx rates,” Bradshaw said.
Riddell said his “platforms had allowed (Lone Star) to negotiate the complexity of any situation and underwrite synergies.”
“The U.S. is so boring compared to the U.K., where there are so many levers you can play with,” Bradshaw added.
All the panelists expect to see healthy average-daily-rate growth in 2015 across the industry, with predictions ranging from 5% to 8.5%.
Talk of the likelihood of seeing a further increase in transaction volumes also came from Bradshaw and Riddell.
“Anyone who bought an asset or platform back to 2012 are looking to crystallize on that value creation. Some might see a way that would allow cheaper capital to add value, although with banking markets today having liquidity, I do not see why anyone needs to go down the complicated paths of (real estate investment trusts) and (initial public offerings),” Bradshaw said.
“We’d regard IPOs as a potential exit, but not across the whole portfolio as it is too disparate. Simpler methods exist,” Riddell added.
Benjamin and Johnson are happy enough to sit on their new assets.
“Where would we invest the money from an exit into something that would give us the returns that hotels are giving? What is needed first is to have (gross-operating-profit-per-available-room) rates getting back to reasonable levels, which will take some time,” Benjamin said.
“We’ve had three sets of investors already, so (an exit) would not make much difference to us,” Johnson said.