Investors eyeing Europe hotels despite slow deals pace
 
Investors eyeing Europe hotels despite slow deals pace
31 JULY 2019 8:21 AM

Although total hotel transaction value in Europe likely will be down for full-year 2019 compared to the previous two years, sources said an increasing number of investors are looking to deploy capital.

REPORT FROM EUROPE—The last five years have seen a great deal spent on single hotel assets and portfolios in Europe, and sources said investors are still planning to invest a great deal of capital.

Nicolas Auer, analyst at HVS Hodges Ward Elliott, said Europe continues to be an attractive continent for hotel investment.

“Europe’s multifaceted economy provokes the intensity of transaction activity to be very diverse from one country/market to another, (but) what we have seen in 2019 to date is that there is definitely still a lot of investor appetite as well as funds available,” Auer said.

The pace of transactions isn’t like to abate anytime soon, said Jessica Jahns, head of hotels and hospitality research for Europe, the Middle East and Africa at JLL.

“Record levels of dry powder have been raised for acquisitions,” she said. “In addition, debt funds provide an alternative way of accessing the sector.”

Different types of financing are also becoming more popular.

“Although banks still account for the most real estate lending, there has been a strong flow of debt funds coming to the market,” Jahns said. “Investing in the hotel sector through debt has become more attractive as interest rates rise and yields come under pressure, particularly at this point in the cycle.”

Jahns said JLL predicts a rise in the amount of funds raised to specifically invest in hotels, stating that the “composition of this fundraising is shifting to debt strategies, with 21% comprised of debt funds in 2018, up from 17% in 2017.”

Revenue per available room remained strong across Europe in 2018 and fueled increased spend on hotels as a viable asset class, Jahns added.

The last two years have seen noticeable movement, according to HVS Hodges Ward Elliott’s 2017 and 2018 “European Hotel Transactions” reports. Auer and Jahns stressed that the HVS data includes transactions with a value attached, thus they do not include assets sold without a published fee.

In 2017, Europe reported €21.7 billion ($24.2 billion) in hotel transactions, which was a 22% increase over 2016 and the second-best year on record in terms of transaction volume. At €902 million ($1.01 billion), Lone Star’s sale of 21 Jurys Inn hotels to Pandox and Fattal Hotels was the highest-value portfolio sale. The largest single-asset sale involved the 494-room Grosvenor House JW Marriott Hotel in London, which Sahara India Pariwar sold to Ashkenazy Acquisition for €621 million ($692.8 million).

In 2018, total European hotel transaction volume decreased 14% to €18.6 billion ($20.7 billion), although it was still the fifth-highest year in terms of transaction volume. Blackstone’s 46-hotel sale to Spanish real estate investment trust Hispania for €2 billion ($2.2 billion) was the highest-value portfolio sale. The sale of the 603-room Hilton London Kensington by Rotch Property Group and the Farnsworth Group to Cola Holdings for €293 million ($326.8 million) was the largest single-asset sale of 2018.

Jahns said investors have observed the hotel sector is growing room rates faster than office and retail real estate.

“While overall economic growth is slowing, the tourism market’s gross domestic product growth continues to outpace overall economic growth. … As such, the hotel sector represents a ‘defensive’ strategy for investors targeting a path of relative growth,” she said. “This will continue to result in increased capital allocations to the hotel sector.”

Money goes west
Auer said hotel investors are focused on the United Kingdom, Italy, Spain and the Netherlands. So far in 2019, large portfolio transactions have included Queensgate Investments’ acquisition of a four-hotel Grange Hotels portfolio in London for £1 billion ($1.2 billion); Oaktree’s acquisition of a 15-hotel portfolio in Italy for €300 million ($334.6 million); and Westmont’s acquisition of the mixed-use Ven Amsterdam Portfolio from Omnam Group for €130 million ($145 million).

But total transaction volume year-to-date is down 12.1% to €7.4 billion ($8.3 billion), with the number of deals decreasing by 4.4%—69 single assets and 40 portfolio deals—versus the same period last year, Auer said.

“Portfolio transaction volumes saw a decline of around €1 billion ($1.1 billion) year to date,” Auer said, “which is interesting due to the fact that both periods under review had two large deals, which more or less make up for the difference in volumes, namely the Grange deal … and Blackstone’s acquisition of Hispania in April 2018 for €2 billion ($2.2 billion). This means that, disregarding these two substantial deals, portfolio transaction volumes remained relatively flat compared to last year.”

Auer added that 2019 so far has recorded more portfolio deals (+14.3%) but fewer single-asset transactions (-12.7%), while the transaction volumes single-asset deals are down 2% year to date.

“In 2019, investment volumes across EMEA are expected to soften by between 5% and 10%,” Jahns said. “In (the first half of) 2019, hotel deal volumes in EMEA reached $9.3 billion, with portfolio deals accounting for just over half of all deals, with the Grange Hotel portfolio in the UK the largest deal so far this year. While political uncertainty in the U.K., France and Italy is expected to distract some investors, tourism and business fundamentals remain solid,”

Data from STR, the parent company of Hotel News Now, said the U.K. has led hotel transaction activity in the past several years and remained buoyant despite its last peak in 2015, which saw 271 transactions that totaled approximately £2.8 billion ($3.4 billion) in transaction value.

In 2018, the U.K. saw 101 transactions with a combined value of approximately £1.6 billion ($1.9 billion), at least of those with a value attached. The 2018 transaction value was a 33% increase over 2017 (£1.2 billion ($1.5 billion)) but a 75% decline from the 2015 peak.

Jahns said the global economic and real estate markets are expected to stay healthy in 2019, but emerging catalysts such as increasingly volatile equity markets and slower economic growth projections will test investor sentiment.

“Hotel occupancy and underlying property performance remain strong, with travel and tourism slated for another record year,” she said. “2019 is expected to represent another strong year, with overall transaction volume holding close to last year’s total. Although overall growth is expected to be slower, investment volumes are expected to hold steady thanks in part to record levels of dry powder, pressure on investors to deploy capital, an attractive hotel-yield profile compared to other sectors and ongoing mergers and acquisitions, large portfolio and entity-level activity.”

Single, double or multiple
Auer said single-asset sales generally comprise a majority of total transaction volume over portfolio sales, yet year-to-date 2019, portfolio volumes were even more dominant, accounting for 63% of total transaction volumes.

“Looking at the pace of deals, both single-asset and portfolio deals were recorded more numerously in Q1 2019 than in Q1 2018, whereas Q2 2019 recorded 26% less single-asset deals than during the same time the year before (29 in 2019 year to date versus 39 in 2018 year to date),” Auer said. “A total of 15 portfolio deals closed in Q2 2019 against 14 deals in Q2 2018.”

Auer said it is evident that portfolio deals and industry consolidation are dominating the hotel transactions landscape.

“As large investment volumes are required, private equity giants such as Blackstone or publicly traded investment managers including Invesco and Goldman Sachs will most likely be sticking around this year, potentially with a focus on niche and/or lower-scale chains/brands, as we saw in (Goldman Sachs’) proposed acquisition of B&B Hotels for $2.2 billion earlier this year,” he said. “Most European hotel transactions, however, will likely be concluded between continental buyers and sellers with a longer-term investment horizon. We estimate that the transaction pace and volumes will be slowing down in comparison to last year.”

Jahns said in the first half of 2019, private equity buyers were the most dominant buyer group, accounting for almost 40% of all activity, which is reflective of buyers’ need to deploy capital.

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