LONDON—What is piquing the interest of sovereign wealth funds and high net worth capital? The simple question prompted a complex discussion last week during a panel titled “A focus on investors - sovereign and high net worth” at the Hotel Investment Conference Europe held at the InterContinental Hotel London Park Lane.
Philip N. Feder, partner and chairman of global real estate practice at Paul Hastings LLP, moderated the session and began by asking whether sovereign wealth funds and high net worth individuals looked at hotel investment differently from equity funds in regards to core investment values.
“It’s not so much about returns,” said Cristopher Broderick, senior VP of Hotel Capital Advisers, which advises Kingdom Holding Company. “Everyone is looking to make money, of course, but the biggest distinguishing factor is that (sovereign wealth funds and high net worth individuals) are not subjected to the same hold period. The hotel industry is so cyclical, so for those able to hold onto assets, they can do so until the best period to sell.”
In agreement was Ramsey Mankarious, founder of Cedar Capital Partners, which focuses on luxury European properties. “Private equity firms have high hurdles, while (sovereign wealth funds and high net worth individuals) might look at deals in the same way but have a lower return demand, say 10% to 14%. Thus, they can also look at different types of assets.”
The trick in understanding the investment strategy of such wealth is to identify what drives it, Broderick said.
“Effectively I work for the Saudi prince (Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud), who owns such assets as the (Four Seasons Hotel) George V in Paris,” Broderick said. “He is obviously interested in helping overall growth grow faster, but most importantly he wants to be seen to be doing business on a global level. He is not interested in selling trophy assets because of their global presence. Also, he does not want to pay fees but to retain equity control so that he can retain overall decision making.”
“Such money wants these jewel-of-the-crown properties in their portfolios, as they have a value that is completely different and because they hold their residual value,” said Edward Wojakovski, CEO of Tonstate Group, which has investment in such properties as the Hilton London Metropole.
Billy Skelli-Cohen, director of hotel acquisitions and development for Deerbrook Group, which is currently redeveloping London’s Sea Containers House into a 360-room Mondrian hotel and 280,000 square feet of office space, added that the “George V is probably the best hotel investment in the last 15 years, but everyone thought (the Saudi prince) was nuts when he bought it for, what was it, about a million dollars a key?”
Acquiring such hotels in major gateway markets adds an extra layer of stability, he added.
“The first two cities (travelers) want to travel to are London and Paris, and I do not see that changing. Disposable income wants to travel there,” Skelli-Cohen said.
“London is a transparent market, and the legal system works. It is a secure environment, and if you buy in cash, no one can take it away from you,” he added.
Location is key
Trophy assets usually reside in trophy cities. Top of the list, according to the panelists, are the aforementioned Paris and London. But even there, they said, finding a strong local partner can prove challenging.
“Union strength is another concern,” Skelli-Cohen said. “I’d rather work with unions in Paris than in New York. In Paris, they are a pain in the side, but in New York they stop you making money.
“We also have a saying in the office that we do not invest where they grow olives,” he continued, referring to economically volatile Mediterranean nations such as Greece and Spain.
Broderick added staffing to the list of potential minefields. “It’s expensive to reposition assets in Europe. We did in one property, and it costs us $14 million to offload the staff and get the property to where we wanted it, although in that case it was worth the cost.”
“In London, revenue per available room dropped 15% two years in a row and Prague’s by 40%. At that point, there is no more staff you can cut. Again, you have to have the ability to hold it,” Mankarious said.
Another concern is operating costs outpacing rate growth in key gateway markets, Skelli-Cohen said.
“What I hear time and time again is that good assets in good locations continue to do well, but even with the George V and with Four Seasons involved it is not always so easy to stay fully on top of things. Revenue can be left on the table,” he said.
United States’ money Europe-bound
The high net worth and sovereign wealth landscapes also are getting increasingly crowded, Broderick said.
“A lot of U.S. capital is starting to look for deals in Europe,” he said. “They are looking for core, safe markets in which to place money and have the dividends flow back, but this might not happen in prime markets, so this money—from what I hear—is going into secondary and tertiary ones, where there is far more value. The problem with that is that there is no guarantee you will be able to sell those assets. It is really tough to sell.”
If trophy assets work, resorts do not—or do not do so readily, according to panelists.
“We looked at a few markets in Spain before the crash, but the markets are so seasonal,” Mankarious said. “Today the prices are not cheap enough for people to take the risk.”
“Conventions are also getting shorter in length, down by a day, and airlift is a major factor that amazingly not everyone looks at,” Skelli-Cohen said. “Many resorts built in the early 2000s have no airlift today. From an investment perspective, you cannot see the returns.”
Broderick and Wojakovski do see glints of light at the end of the tunnel.
“The market for (resorts) will come back, although from an acquisitions viewpoint, they make for inefficient repositioning,” Broderick said.
Wojakovski said that there were some hotel companies, such as Orient-Express Hotels Limited, that were able to make successes of such investments.
Careful financing
The message emanating from the session was that the hotel industry still presented sizable benefits to sovereign wealth funds and high net worth investors but that this investment needed to be done in safe locations and after all homework had been prepared and evaluated. Also, even if the new economics is gearing itself toward buyers, it’s a moot point as few are selling, according to the panelists.
“Now is a great time for properly organized investors to invest. Top of the list is to work with a bank that knows the industry. It makes all the difference in the world if your bank doesn’t jump up at the first sign of worry, believe that the world is coming to an end and want immediately to sell,” Mankarious said.
“Recently, we bought assets with cash and then refinanced them,” Wojakovski said, “which can be a painful exercise if you do not have the right collateral. I would add that getting this collateral is becoming easier.”
“A cash-on-cash return, however, does not lie. You have X amount of capital and then add some debt, and from that you can sort of see the expected return, or at least gain a better analysis,” Skelli-Cohen said. “There are good lending partners out there, but you cannot blame banks for lending money to those who already have it.”