International capital sees gaps in ‘closed’ Nordics
International capital sees gaps in ‘closed’ Nordics
05 JUNE 2017 8:04 AM

Capital from international investors is eager to develop hotels in the Nordic region, but executives tasked with generating returns admit the market is a difficult one to enter.

COPENHAGEN, Denmark—The Nordic region’s reputation for being a hotel market with a high barrier to entry is not stopping investment companies and owner-operators from researching the region with goals of developing a footprint in its profitable gateway cities, according to sources.

Hoteliers from the region also point to different reasons why inbound capital increasingly was targeting Denmark, Finland, Iceland, Norway and Sweden.

Anders Braks, CEO and owner of Event Hotels—which owns and manages approximately 60 assets in Germany and the Netherlands—said high prices but low yields in many parts of Europe have caused owners to cast their nets farther.

“Public equity is suffering, while insurance and pension funds and Asian capital are entering,” Braks said at a 31 May panel titled “New investment approaches” at the Nordic Hotel Consulting Conference. “Funds now are developing into areas where public equity had all the share.”

Martin Edsinger, SVP of KSL Capital Partners, disagreed, and said private equity cash still has muscle in the region. One goal, he said, is for investors to aim capital at challenging but potentially higher-profit vehicles.

“We do see a little downtown, (which is) inevitable at the end of the cycle,” Edsinger said. “We’re looking at assets that can be repositioned, or a rollout that is more risky but can provide good returns.”

Overall, there are no huge threats to the hotel industry, Edsinger added, and his firm is in the Nordics for the long term despite having no current footprint.

“The (United Kingdom) is hampered by Brexit, but the Nordics still look attractive,” he said. “There is still growth, and it is easier to do business (there), although increases in prices and cap bases can make things difficult.”

The Nordics have also seen a rise in leisure business, which now outpaces corporate business, which he said made sense.

“We believe that if we enter into bidding (in the Nordics), we have a good chance of winning,” Edsinger said.

Aksel Lundquist, director of advisory at investment firm Brunswick Real Estate, said his company’s hotel pipeline is thin.

“Banks in the region prefer short-year loans, while we’re typically seven-year holds,” Lundquist said. “They require leases and guarantees, but that might slowly be changing. … The space is crowded in terms of financing.”

Loosening leases
Braks said Asian capital is inhibited from entering the region by its dislike of lease agreements.

“I’m seeing hybrids, where operators take on the employees, capital the real estate and where we take on 100% of the operations,” Braks said, who called the platform a “waterfall,” with the profits flowing back up from the operating company to the property company.

Braks added that private equity, which typically likes as much alignment as possible with operations, is becoming hesitant.

Edsinger said the flipside of investing in the Nordics is the region’s markets are attractive tourism destinations.

Lundquist said Brunswick intends to concentrate on Swedish assets.

“We’re focusing on Sweden, but we wish to be everywhere, and across all sectors,” Lundquist said. “We want to do the real estate underwriting and understand the product and business.”

And independents have as much chance of being scooped up as branded hotels and portfolio, panelists added.

“We’re collecting one by one to get the volume we can work with or sell,” Braks said. “Independents have (in the Nordics) the same occupancy and average daily rate. Brands will take less importance over the next decade.”

Broader capital interests
Edsinger said KSL has a broad mandate for the next 10 to 12 years to spend on a variety of assets such as golf courses in the United Kingdom and ski resorts in the U.S.

“The genesis is resorts; in Europe, it is hotels,” Edsinger said.

Lundquist said Brunswick’s strength is in having a wide-ranging set of owners as well as having a discretionary mandate.

“It is necessary to sit down (with owners) to learn their business goals,” he said. “I would also say the business still is in need of more data.”

Taking the plunge into new ownership at the current time produces different headaches for different hoteliers, panelists said.

“When 60% to 70% of profits come out of non-rooms, that’s difficult for some to get their heads around,” Edsinger said.

Event Hotels’ Braks added that mezzanine funds find it tough to allocate capital when all banks are happy giving 65% loan to value.

Braks added public equity was not happy either.

“You can get the same (return on investment) in hybrid leases in the Nordics as the traditional banks are happy with leases,” he said. “It should not be the case that the percentage of risk (associated with hybrid leases) has gone, but it has, which is why it is difficult for private equity.”

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