There is a lot capital on the sidelines waiting to be deployed, but European investors said that's likely where it will stay, at least for the foreseeable future.
On stage at the recent Alvarez & Marsal’s European Hospitality Investment Conference, investment executives said that the reasons for that capital slumber include a lack of hotels on the market in desirable locations and price segments.
Even in the luxury and upper-upscale segment, which has rebounded strongly from the pandemic, there are few hotels up for sale.
Martin Edsinger, principal at KSL Capital Partners, said his firm in July acquired a majority stake in Italian hotel firm Sereno Hotels. The company has two luxury hotels — the seasonal Il Sereno on Lake Como, Italy with 40 suites, and Le Sereno on the beach of Anse de Grand Cul de Sac on the West Indian island of St. Barthélemy, or St. Barts, with 39 rooms and suites.
“People with a lot of money are doing very well and paying what they have to in order to get into the hotel they want to get into,” Edsinger said.
Billy Skelli-Cohen, CEO of Zien Group, said his firm focused on a niche that combines the “best of the guest house and an inspirational home with the amenities of a hotel” that would attract a wide range of guests and booked room nights.
That idea attracted KSL in mid-2022 to acquire a majority stake in Edyn Hotels, which became Zien and now includes a hotel brand called Edyn.
It is “a product that also interests the corporate traveler and in destinations that are close to nature,” Edsinger said.
Some things never change, namely the importance of location and the challenging surrounding macroeconomics and geopolitics.
David Mongeau, chairman and founder of London-based Avington, said “things are so expensive, you cannot do a new build, and if you buy land, you have to get the entitlement, and you can only do that if you have the right location. There are deals, but there is a lot of slogging, and you need good advisers.”
Iain Cahoon, managing director at GIC, said: “The market has changed dramatically. You need a clear path to a transaction, not the situation where you are competing in a broad auction with 31 other parties.”
Edsinger said the overriding challenge is in financing, to have capital that stacks up.
“That capital also is being sought by competitors,” he said.
Rob Stapleton, head of hotel capital markets at business advisory Savills, said now is the time for some “old school brokerage to better match capital with opportunity.”
He added everyone is targeting high-yielding hotel stock, which often means having hotels in the best locations.
“That costs a lot of money. The investor criteria is the biggest conversation we have at the moment. There is a lack of conviction in the market, [which is] understandable due to what economies have gone through, and the bid-ask space continues to be wide,” Stapleton said.
Edsinger said few deals exist that will take on a lot of debt.
“We have to identify the white spaces and then find the best companies dealing with that space, after which we can create value and nurture relationships with the people you want to do business with,” he said. “We have equity on one side, and we have a credit facility on the other, so if you do not want to sell, we can still do business. We believe we can squeeze businesses a little more aggressively than our competitors.”
Singapore-based GIC sovereign wealth fund also has a “very active credit business,” Cahoon said.
He said he is seeing a little more distress and legacy capital stacks not adding up as they used to.
“That might mean more opportunity for non-bank lenders as banks get itchy feet,” he said.
Another problem is that in order to buy something they want, investment vehicles might need to sell what they have, and that is proving difficult for all the same reasons.
“Companies might be having difficulties getting out of the businesses they are in now, so they have less opportunity to move into businesses they might feel are better fits this side of the pandemic,” Edsinger said. “The struggle is to get people to take on debt.”
Mongeau said he continues to play the waiting game.
“In the U.S., I see 212 hotel businesses where debt is coming up, but of course their management might say, 'So what? [Average daily rates] are going up, and interest rates are going to come down,'” he said.
Stapleton agreed a steady hand is required.
“Timing is all. The composition of debt has utterly flipped. Where before it was 65% retail lenders, now it is 35%. I think there will be some more stagnation, so it is all about time. If interest rates do not fall down fairly quickly, then some [businesses] will be in trouble. Some of the income growth has upset yield forecasts,” he said.
Cahoon said he won't venture a guess on when the transaction markets might open up.
“Just be prepared for all eventualities,” he said.