While Europe is coming off a down year for deals, investors maintain there are still opportunities to acquire assets in certain areas of the region, despite the political and economic challenges that exist.
BERLIN—Europe’s vast array of hotel markets possesses attractive acquisition opportunities even if political uncertainty, terrorism threats and waning industry fundamentals continue to erode the region’s choices, according to panelists speaking on the “Investor on the Spot” general session at the International Hotel Investment Forum.
Desmond Taljaard, managing director of hotels for London & Regional, said the global perception that all European markets are created equal is an obstacle investors must overcome.
“The one thing that always puzzles and amuses me is discussion upon Europe as some kind of single market versus a set; the territories and within those territories are quite separate,” said Taljaard, whose London-based company counts more than 6,600 hotel rooms in its portfolio. “There are some that are still trading in green light. The U.K. provinces and places I’ve heard of are trading pretty successfully in London. London is holding after a bit of a wobbly last quarter in 2016. North Mediterranean … is very astute for us.”
Sanjay Singh, managing director for Bangkok-based Fico Corporation, agreed that solid investment opportunities still exist.
“We see that the markets still offer some good values,” Singh said, adding that the U.K., Spain and possibly the Netherlands provide opportunities for acquisitions. “From our perspective, it’s a good value proposition. We are able to buy assets at replacement cost. … So there’s going to be more and more I suspect Asian capital in the markets here. … The real value sits in regional portfolios.”
Coley Brenan, partner and head of Europe for KSL Capital Partners, also agreed and said his company sees the resort sector as a particularly attractive opportunity.
“In terms of resorts, generally I’d say you have an honest conversation with the big owners—there are a certain portion of them that fall away when you start talking resorts rather than urban or suburban or we start talking about a more complicated P&Ls,” he said. “Those complicated P&Ls are what we like about them, and we have a number of lenders in transactions in North America and Europe who understand the power approach, and so I think hearing the story of the sponsor and how you manage those more complicated P&Ls gets them generally more comfortable.”
Brenan said he wasn’t surprised by the lack of transaction volume in Europe during 2016—a fact mentioned regularly throughout the three-day conference.
“I expect the broader volume in ’17 to increase more than ’16,” he said. “Last year we had sort of a start-and-stop kind of environment that was driven by political events and sort of the outcomes, high-expected outcomes of some of those events, where transaction volume was of course affected, but not necessarily a direct impact on valuations.”
Even deals that were completed left the buyers with some questions—including L&R’s acquisition of Atlas Hotels from Lone Star Funds for £575 million ($706.7 million) in April 2016. The deal, which was consummated just prior to the vote that confirmed the United Kingdom’s exit from the European Union, included 46 Holiday Inn Express hotels and one Hampton by Hilton.
Taljaard said the office mood was “jubilant” after the deal was completed but the company knows it has some hurdles to clear.
“A big challenge for us now is (deciding) how are we going to up occupancy strategy in that sector,” Taljaard said.
Brenan cited the number of important European elections scheduled in 2017 as well as Brexit and Greece’s continued search for a deal with creditors as key elements that will affect deal volume in 2017.
“It looks quite scary, but at the end of the day, I see fundamentals as quite strong in terms of demand and growth,” he said. “I’m surprised at where we are today given what happened last year, and I wouldn’t be surprised if at the end of this year we’re actually in a more stable place … with the EU remaining intact with the remaining numbers and coalitions and alliances being formed to effectively prolong the growth of the EU within Europe overall.”
Therefore, it’s a situation in which buyers and sellers are carefully exploring options as the political and economic landscapes ebb and flow.
“Fundamentals are the same, taking cash flow and trying to exit if you need to at the right time,” Taljaard said, adding that there isn’t a miraculous vision in year seven of a hold to determine direction—it must be planned well in advance.
The right hold period
The hold period for an asset is more important than ever, and KSL carefully maps that out for each acquisition, Brenan said. The company has owned assets for as few as two years and as many as 13 years.
“The same way you think about capital structure to be able to survive multiple parts of the cycle or multiple cycles you also want to have your equity and your actual investors in line with—we’ve got a 10-year start to finish, two-year extension, so it’s really a 12-year life for all of our funds,” Coley said. “That’s unique to us because we come at is as private equity rather than real estate private equity.
“How we feel about hold periods—we have flexibility,” he added. “But we’re in the business of creating institutional quality investments out of things that are particularly broken in some way, shape or form. So long as we do our job, we’re confident that where you are in the cycle that there’s going to be a pocket of capital.”
Brands in the spotlight
The investors spent a fair amount of time during the discussion talking about the importance of brands—and decided there were pros and cons to them in the hotel industry.
Taljaard said he prefers to approach it as justifying why he should put a brand on an asset, and even questions the value of the branding on the hotels acquired in the Atlas deal.
“When charged with the brand loyalty, booking.com, credit card commission, I go back and say I wonder who’s benefitting from all this hard work and investment in real estate,” he said. “If brands can find a way to keep the equation between cost of value-added in balance, then I think there’s still a lot of formula.
“They have real commercial challenges in implementing that particular quota,” Taljaard added. “On the other hand, if they don’t do that, the challenge of where they add value is going to get more (difficult). These are obvious questions we ponder in our spare time. If they do move fast, yes there will be short-term impact but maybe they’ll secure their longevity. “
“It’s a fascinating time right now in terms of I do think there is transparency in what fee structures are like,” Brenan said, noting that KSL now owns North America’s Apple Leisure Group, which has six brands that use 41 third-party owners.
Singh was clear about his thoughts on brands.
“There is a lot of value to what brands bring to the table,” he said. “We believe brands have a value as long as costs are managed.”
The distribution equation is among the biggest values for brands, according to the panelists. Taljaard said those brands need to regain control of inventory given to online travel agencies to add to their value.
“Basically (OTAs have) stolen our business and most of our capital value,” Taljaard said. “It’s a fundamental crisis. … For me that’s a really big empire-strikes-back value we’re going to see at some stage over the next five years. ... I’m saying we need a lot more weaponry.”
Editor’s note: Also participating on the panel was Zachary Schwartz, VP of European hotels for Cerberus Capital, who requested to conference organizers that his comments be off the record with the media. HNN is honoring that request.