Christian D. Kielgast, a partner in Nordic Hotel Consulting, laid out recent improvements in the area’s hotel market.
“Copenhagen was relatively hard hit by the crisis, but 2012 so far has seen 5% to 6% (revenue-per-available-room) growth for the city and new supply coming to the market. Stockholm has started to flatten out a bit; it started recovering in 2010 and is flattening out in 2012. There is still a little bit more supply coming into the Stockholm market, but overall there has (been) a stable 6% increase in roomnights. Oslo has seen a bit of a decline this year, around 6% RevPAR, and demand hasn’t grown either. But overall there is new supply coming into the market and I guess we will see performance there start to flatten out.
“The economics are fairly strong so overall Scandinavia is holding up quite well.”
Kielgast was one of three presenters who spoke during a panel titled “A focus on Scandinavia” during the Hotel Investment Conference Europe, or Hot.E.
Supply issues continue to be a drain on the region, particularly in Norway and Sweden, he said. “Performance has been quite strong but there is a lot of new supply coming onto the market, so we are starting to see some declines of around 4%.”
Acquisitions also have picked up. Kielgast highlighted Swedish firm Balders’ €45 million ($58 million) buy of the Marriott Renaissance in Malmo earlier this year, as well as other investments by AFA Fastigheter and Blackstone Group LP.
The Scandinavian hotel market is still “very much dominated by local and regional investors,” he added, as business and leisure travelers alike are more loyal to homegrown brands.
Challenges to investment
The region’s domestic bias is one of several challenges facing outside investment, the panelists said.
One of the most pressing: The prevalence of the lease structure, according to Anders Braks, GM of Event Holding GmbH & Company KG., a Cologne, Germany-based investment firm that specializes in the acquisitions, management and sale of investment-grade hotels and office buildings.
“In the Nordic countries it’s almost all lease,” he said. “For us, it’s a little bit tougher to find the right opportunity, as we are not lease buyers. What we are looking at in particular is assets where there are short-term leases, where leases are expiring or where there is an opportunity to buy out the management.”
Event Holdings recently acquired a portfolio of 18 hotels located throughout Sweden.
Added Nordic Hotel Consulting’s Kielgast: “The market is still unsophisticated when it comes to leases … The Danish mortgage system used to be very old-school and simple. As long as there was a good balance sheet on the property, they would be confident. The mortgage banks are now starting to feel more concerned about transparency in the leases. In Scandinavia, we have very little transparency, and that is an issue. The mortgage banks have become a little bit more wary as we have seen lease values dropping like crazy.”
David Overby, a partner at privately owned investment management company Solstra Capital Partners, highlighted further obstacles.
“There is actually some kind of finance gap at the moment in Scandinavia. It’s always easier if you can get one of the existing mortgages renewed, but typically they will only go up to 60% maximum as is usual. But many of the mortgage institutions are quite conservative with their valuations. There is little appetite with international banks to go into Scandinavia as they cannot compete with the low mortgage rates … There are a lot of distress deals but there is also some reluctance from the banks to lend on these.
“I think in general it’s fair to say that Scandinavian banks are much less aggressive than the rest of the world,” he added.
Blurring between segments
Despite an uptick in investment, the Scandinavian market still lacks ample budget hotel stock, Braks said. This, coupled with a general lack of definition between star ratings, has created some interesting opportunities.
“In Scandinavia there is almost no budget segment, but what we are doing is trying to upgrade our hotels from 2- to 4-star so hotel guests feel they are staying in a 4-star but paying for 3-star,” he said.
“We don’t build from the ground now, but we like to renovate all our hotels and also to extend (our lease period) if possible.”
Solstra is focused more on the upper end of the market, investing in 4- and 5-star assets, Overby said.
Despite challenges, Braks said the outlook for investment in the Scandinavian hotel market is positive.
“We will have a lot more foreign equity coming in,” he said. “It’s just difficult to find the right assets.”