With private equity’s exit, new investors eye Europe
 
With private equity’s exit, new investors eye Europe
02 OCTOBER 2018 8:22 AM

Hotels in Europe and the United Kingdom continue to see modest performance growth, but U.S. private equity is being replaced with a new group of investment vehicles, which still includes capital from China.

LONDON—European hotels and hotel companies will remain attractive investments as a result of the constant desire for global travel and the continued exit of U.S. private equity, according to sources.

In fact, hotels are one of the more stable investments available.

“Yes, there is uncertainty around global macro-economics and geopolitical risk, but in terms of investment (the hotel industry) is one of the most blessed industries out there, backed by the emergence of the middle class and other demand drivers looking for experience and enrichment,” said Steffen R. Doyle, managing director of Credit Suisse, at the Hotel Investment in Europe Conference. “I am not concerned about supply. Demand seems to be macro, long-term-driven.

“The market is becoming much more sophisticated and might not be driven by what happens in the U.S. It is market-driven.”

Cody Bradshaw, managing director and head of European hotels for Starwood Capital, listed several reasons why hotel investment remains attractive.

“Hotels used to be considered a different animal, but now it is office and other real estate classes being disrupted the most,” Bradshaw said. “Population growth; the Chinese; baby boomers; record travel numbers—8% growth in Europe—all the fundamentals are very impressive.”

Panelists said it is time for more clever thinking, a re-analysis of strategy, adding different types of assets and finding white space and value in different markets and price points.

“Replacement cost is a pretty flexible metric you can use in your favor.” Bradshaw said. “Maybe this means serviced apartments in fringe locations of primary and secondary cities. After all, in urban centers, how can you replace a grand dame? There, valuations always will be above replacement costs.

“Europe still has opportunities in the Top 20 markets, but you have to spend a lot of time targeting situations.”

Coley Brenan, partner at KSL Capital Partners, said it’s less about identifying individual markets today.

“It is more about finding the team that can triple cash flow,” he said. “Who are these people, who are the operators, who are the people who have the clever ideas?”

Marvin Rust, managing director of Alvarez & Marsal, agreed with Brenan.

“Those teams and the motivation for deals come today in four buckets: the consolidation play, companies in growth mode, re-branders and capital redeployment,” Rust said.

Trading cycles
The panelists explained how their thinking, strategy, capital deployment and flexibility were changing.

“There is an enormous amount of capital out there, both debt and equity, so we look at growth, profitability, relevance, but we are focused on resilience,” Doyle said.

Resilience is important because costs are steadily going up, panelists said.

“Top-line numbers might be going up, but a lot is being consumed before the bottom line,” Rust said.

Bradshaw said low-growth figures shouldn’t cause hoteliers to feel comfortable.

“Two percent, 3% at the top is not going to cut it. I look at that type of number, and I think of the costs,” Bradshaw said, who added Starwood Capital executives currently regard themselves as net buyers.

Desmond Taljaard, managing director, London & Regional, asked the panel if a downturn could be just around the corner.

“Might we see the terminal decline of the four-star market because it cannot get the (revenue per available room) needed to sustain it?” Taljaard said.

That would come down to how that property is structured, Brenan said.

“We’d make sure we made the decisions ourselves with the management team for them to be aligned with us, not with brand X, Y or Z,” Brenan said. “Assets are not staying ahead of capital cycles. There are some markets where there are opportunities. In the Canary Islands, for example, where you can reinvest.”

Doyle said finding success today starts with product and proposition. He cited Travelodge UK as a good example of a company where strategy and demand go hand in hand.

“Track where wholesalers are sending their customers and planes,” Bradshaw said, who hinted fewer planes might be going to Spain in 2018 because the market has shown “negative RevPAR this year.”

New players in the European landscape might come from further consolidation or the increase in real estate investment trusts, panelists said, and they suggested Whitbread could be the next to make a deal.

“Maybe something from coffee-less Whitbread will spin out as it did from (AccorHotels). Or from a REIT,” Brenan said. “There are 2,000 REITs in the U.S., with $60 billion, but only around 10 in Europe. There also is, I think, a disparity amongst the brands that understand what the new customer wants and those who do not.”

But Doyle said there are some obstacles ahead.

“The capitalization of leases will knock some people,” Doyle said, who referred to Whitbread again by mentioning that the British company in his estimation had leases on 60% of its hotels.

Asia remains
Rust said Whitbread now looks very attractive to buyers.

“I still see an abundance of Asian money, and a lot of this is Chinese money that is not in China anymore,” he said.

Rust said in the U.K. beginning as early as next year, overseas sellers will pay capital gains on real estate disposals but that the new legislation does not include hotels.

“So we are looking more attractive to all investors,” Rust said.

Doyle said Asia is now in for the long haul in Europe.

“The true left-field buyer is rarer today,” he said. “There are no eye-watering prices, and Asia is taking a long-term view. Most overseas capital looks at the U.K.’s stable, predicable law.”

Bradshaw said ownership vehicles in his opinion will see more growth in Europe as cap rates continue to fall.

“Protecting liquidity on exit with buyback options will become more attractive in the U.K.,” he said.

Bradshaw added he sees another way in which he saw hotel giants protecting themselves: distribution leverage.

“You will see some of the larger chains unplugging from (online travel agencies) until they get the leverage that want,” Bradshaw said.

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