LONDON—The road of real estate investment trusts in Europe is fraught with complexity, with localized regulations and codes governing different investment decisions for different regions, assets and ownership structures.
To avoid the potentially perilous pitfalls of pan-European property partnerships, investors are wise to examine each opportunity through the legal framework of the country in which it originates, according to panelists during “A focus on investors – REITS,” a session at last month’s Hotel Investment Conference Europe.
“There is no tax regime that is pan-European and gives REITs the tax efficiency found in the U.S.,” said Carmen Hui, senior VP of acquisitions in Europe for Host Hotels Limited. “In Europe, the REITs themselves are restricted from investing in management contracts, while in the U.K., sitting on a long lease that will just taper off with time is not particularly attractive.”
Dan Bowden, senior fund manager and head of alternative real estate at AXA Real Estate, said it would be wonderful to have a level playing field across all of Europe, but he could not see it happening.
“Luxembourg looked into it, but the fundamental problem is that you would need all 27 European nations to agree, and that’s unlikely. The speed in which Luxembourg dropped the idea said everything. So, we use specific tax arrangements depending on the country in which we are developing in. For example, in Spain we use a Dutch vehicle,” he said.
Each deal also depends on whether leases or management contracts make more sense, said Bowden, whose REIT just acquired the NH Grand Hotel Krasnapolsky in Amsterdam and the InterContinental Marseille - Hotel Dieu in France.
“The (revenue per available room) growth in European gateway cities would probably lend itself better to a management contract,” Bowden said, adding that in Europe often the preferred model was still the long-term lease agreement.
The U.S. investment landscape is more structured and transparent, which makes it easier for REITs to jump on a given opportunity, he added.
Mixed-use developments
Ailish M. Christian, portfolio head of South East (U.K.) and London for commercial property company at Land Securities, said her company is expanding into hotels and leisure where it makes sense within mixed-use retail.
“We do not do standalones. Where a hotel fits into a mixed development, then, yes,” she said. “What we would not do is to develop a property until it is let, as we do not have the internal expertise.”
Christian said Land Securities, which has mostly long-term-hold properties in the U.K., was limited to leased properties mainly at the budget end of the market.
“We do not have broad exposure,” she said. “We’re development-led, we pre-let on leases, we maximize the value on the day we complete and we want the longest lease possible. It works for us. Premier Inn has taken a couple of leases recently, as have Travelodge and Accor, and a few more are in the pipeline.”
Such economy players have grown increasingly assertive during the past 24 months, fighting for the right parcel of land, Christian said. Whereas retail, office or other real-estate classes previously won out, hotels are increasingly winning the battle.
Hotelier chains’ desire to spread their respective footprints is spilling outside of London into the regions, she added.
“Tightening supply has benefitted the regions’ slow recovery, although the jury still is out as to where regional yield best exists,” Christian said.
Bowden also saw an increased interest outside of London. “Especially attractive are midscale properties,” he said, adding that luxury assets are typically more risky and require the experienced guidance of a specialist asset management REIT.
European REIT hot spots
Looking beyond the U.K., Hui said strong opportunities also exist in Paris, Berlin, Munich and Hamburg, Germany.
“But everyone else is chasing them, too,” she said. “Scandinavia is quite compelling. Also, Dublin is slowly migrating from the bottom of the list to the top. Personally, I also find compelling the top markets in Spain—that is, Barcelona and Madrid. While Spain has not made that transition to the top, it will over the next 24 to 36 months when more attractive pricing is available.”
Bowden still sees worth in gateway markets where business and leisure co-exist and in the same cities that Hui pointed out.
“Our debt team is increasingly looking at tertiary markets, but those markets are on the whole driven more by opportunity than is by strategy,” Bowden said. “Investment also needs to be aligned to the increase in brand penetration in Europe. Increasingly, we want to align ourselves with the right operator. Flags are everything.”
Christian said that if she were investing her own money, she would “take a punt on U.K. regional cities, but only after thorough research.”
Meanwhile, Bowden said he would personally want a share in the hotel his company had just developed in Amsterdam. Hui said she was attracted to high-end properties—although perhaps not luxury—in Barcelona.
“I could retire there,” she said, “as the city has diversified demand and fantastic weather. Its macroeconomics are changing, and during my lifetime I will see returns.”