With its recent purchase of Alqonquin, Schroders intends to grow its hotel portfolio by targeting development in the U.K. and expanding in Europe.
REPORT FROM EUROPE—Publicly traded real estate investment trust Schroders has re-entered the hotel business with its purchase of Algonquin and plans on starting a United Kingdom-focused investment portfolio to complement Algonquin’s existing properties throughout Europe.
On 3 May, Schroders agreed to acquire Algonquin, a Brussels-based hotel investment firm specializing in pan-European hotel ownership that has a portfolio of 43 hotels—located in France, Belgium, Spain, Italy and Poland—that comprise 7,500 rooms across a range of brand flags.
Algonquin has been renamed Schroders Real Estate Hotels and will be led by head of hotels Frédéric De Brem, the former CEO of Algonquin. Algonquin founder Jean-Philippe Chomette will remain an advisor to the new hotel team’s investment committee, according to Schroders Global Head of Real Estate Duncan Owen.
Schroders controls approximately €14.9 billion ($17.5 billion) worth of assets across all real estate sectors. Since its inception in 1998, Algonquin has bought hotels with its own capital and managed them; at the time of the Schroders deal, Algonquin’s total assets under management were worth €1.8 billion ($2.1 billion).
Owen said Schroders has explored hotel ownership in the past.
“We had a dozen (properties) or so in the United Kingdom, France and Germany, but they were all investments that were part of balanced strategy,” he said. “In all cases without exception, these hotels formed one part of a larger investment.”
Recent hotel industry performance metrics made Schroders look more closely at the sector, Owen said.
“Many hotels in Europe are family and private businesses, with the sector’s investable universe in Europe being around €700 billion ($821 billion), but there is only €7 billion ($8.2 billion) invested from funds,” he said. “That 1% of the total of the investable universe is open to institutional investors.”
De Brem said his strategy is to develop partnerships and joint ventures via its core strategies with existing business partners such as “Cardif (Groupe BNP Paribas), Aviva and Amundi (Immobilier) but also with our private equity partners such as KKR, Benson Elliot (Capital Management and) Walton Street Capital when it comes to value-add and opportunist strategies.”
“On top of this, which is pretty much the same development strategy as the one we used to have in the past, we want to develop our own discretionary investment vehicles by plugging the fantastic distribution capacity of Schroders on the outstanding skills and track record of Algonquin,” he said. “These vehicles could take the form of listed (real estate investment trusts) and/or private joint ventures with existing Schroders’ business partners.
“Of course, we will be cautious to keep the strategies of these new investment vehicles separate from the strategies of our existing joint ventures and partnerships. As such, we target to launch at least a U.K.-focused vehicle and a pan-European vehicle.”
De Brem said a former Algonquin partner, Stephane Obadia, will be responsible for acquisitions and disposals for the new Schroders hotel division.
Owen said Asian investors are eager invest in the European hotel space.
“Partners, hotel funds and joint ventures are very interested and would like a focused team specializing in hotels to help them invest and manage,” Owen said. “We want to open up a sector that is undermanaged to pension funds and other institutional investors who are able to identify the opportunities.”
Owen and Schroders also realized how fun the hotel real estate class can be.
“We just liked the performance of the sector, its hands-on nature, its management,” he said. “We will both be operating and managing.”
Owen said Schroders Real Estate Hotels “will be able to leverage other skills at Schroders such as debt, funds and other real-estate expertise with its value-add style.”
“(The former Algonquin) does with hotels, as we do in retail,” he said. “It turns the worst hotel on the best street into the best hotel on the best street. This deal will give us a quantum leap to access the hotel sector in a bespoke way, and we believe the hotel sector will only grow.”
Owen also noted that the hotel cycle is one fundamentally different to that of commercial real estate.
“The continued growth of business and leisure is a really good indicator even in times of recession,” he said. “We have a good view of the current supply constraint. It is hard to open hotels, and there are barriers to entry, which I like as it stops others doing so.”
Schroders Real Estate Hotels will have access to Schroders’ funding, he said.
“We want them to continue business as usual, but we also want to look at a fund that will give them and partners the ability to strategically invest in an agile way and in scale,” Owen said, who added the parent company aims for a 10% to 15% return from any funding.