Aggressive debt, noise from Brexit and concern on cap rates in certain markets might result in some mild wobbles, but overall, Europe is showing all the right fundamentals to continue the placement of capital and repositioning of assets.
LONDON—With Europe accounting for more than half of all air-passenger arrivals—some 600 million in 2016 and likely to increase to 900 million per year over the next 10 years—sources said the continent is still considered a shining star for investors.
During a recent panel at the Hotel Investment Conference Europe, better known as Hot.E., titled “Expert views from the International Hotel Investment Council,” Cody Bradshaw, managing director and head of European hotels at Starwood Capital Group, said the conclusion of his team of asset strategists is that Europe is the top global market for hotel investment.
“Its supply-demand fundamentals are more compelling,” Bradshaw said. “On the demand side, it has grown 3% per annum as far back as tracking goes, and now it is 4%. Reasons for this include aircraft design and fuel, which opens up a lot of secondary cities. And its supply since records began has been around 1%, which is unheard of, regardless of moratoriums.”
But that doesn’t mean other markets throughout the world are suffering, panelists said.
“There is not a lot of distress globally,” said Majid Mangalji, president of Westmont Hospitality Group. “The U.S. is always good in terms of value-add, but Europe will see the most exciting opportunities.”
Bradshaw said Starwood Capital has concentrated on assets in Spain, while Guus Bakker, CEO of Europe, Middle East and Africa at Frasers Hospitality, said Frasers is putting its Malmaison brand in Ireland, which, along with Portugal, Greece and Spain, suffered greatly from distress during and after the recession.
“We bet on the Spanish market earlier than others, and there was first-mover advantage, but no one expected the Spanish market to bounce back as much as it did,” Bradshaw said. “There still are hundreds of resorts throughout Spain that can be repositioned and see upside through distribution. What you are seeing in Spain in upside is sustainable.”
Bakker said Frasers’ No. 1 thrust to obtain upside will be by repositioning food and beverage.
General economic conditions throughout Europe are continuing to improve, panelists said.
“We’re seeing enormous rotation of capital into Europe, and this is due to economics, and gross domestic growth against the underlying performance of assets,” said Steffen Doyle, managing director and co-head of European real estate investment banking at Credit Suisse. “The definite perception is that political solidity is far more present in Europe, not in the U.S. or Asia. Perhaps the exception is Brexit, but transactions are still being done, and there has been no disastrous fall as a result in the United Kingdom.”
The other banker on the panel, Tim Helliwell, head of hotel finance at Barclays Bank, said he is equally optimistic.
“Here, in the last year, looking at the Dutch, Italian, French and Germany elections, everything went very smoothly, and where it could have been rocky,” Helliwell said. “Numbers in Europe have not been stellar, but they have been confident.”
There’s also a chance that Brexit might affect the U.K. a bit less than anticipated, he said.
“As for Brexit, there will be a lot of noise, and we are all hopeful for a softer Brexit,” Helliwell said. “Barclaycard does a monthly report, and as the card accounts for a lot of spending, it’s a good gauge, so if you look since the Brexit vote last June, there has been 4% year-on-year growth until March of this year, then 3%, perhaps down to 2%.”
He added hotels, restaurants and bars have all tracked far better than those numbers, and at the moment are performing slightly better.
“Brexit, I think, is an opportunity as it creates a little friction,” Helliwell said.
But Helliwell said one concern is that inflation is outpacing wages in many European countries.
Competition to place capital has increased, along with the amount investors are willing to spend, panelists said.
“Ten years ago, it was Blackstone (Group), KSL (Capital Partners), SCG, you knew who would turn up,” Doyle said, “but despite Chinese (state-owned enterprises) having basically shut up shop, Asia also means Singapore, South Korea, Thailand, Indonesia, Malaysia. Huge sums, but also, still, the big sponsors raising huge funds, and then there is institutional capital with longer hold periods and smaller costs of capital.
“New capital and strategies is what is underpinning the market,” he said.
Financing is predominantly domestic, Helliwell said, along with, in his words, “the odd sexy cross-border deal in senior debt.”
“There is increased comfort from investors with hotels as an asset class,” he said. “Some parts of the hotel market have no bank involvement, and while I am not saying for every deal there are hundreds of lenders, for every deal there still are plenty.”
Helliwell added deal pricing also has steadied, which indicates investors are confident in hotels as an asset class.
“The market is sustainable, and the best place to be is single-digit leverage across the cycle,” he said. “There is, though, some aggressiveness coming through.”
Mangalji said the cap rates he sees in markets such as Japan and Germany are still a concern.
“They are worrying, but as debt is so cheap, it can be justified,” he said. “We are not seeing leverage of 80%, though. As interest rates go up, cap rates will have to follow. Alternative investments are not so favorable in terms of returns, so hotels should remain attractive.”
Westmont has “recapitalized with cheaper money, so there is less reward, but there is plenty of capital sources,” Mangalji said, adding that high net-wealth families are “willing to go along this path.”
With the region so ripe for investment, there are plenty of new faces behind the capital as well as the properties, sources said.
“We’re spending a lot of time dealing with lenders on assets perhaps with some less traditional aspects, ones banks might shy away from,” Bradshaw said. “The incredible thing is the diversity of capital coming in to markets such as U.K., and if there is a lot of bidding for the top assets, there is still sufficient capital for second and third bids.
“It is easier to sell, so we have to continue moving up the risk curve. The cost of our capital has come down, too, and where underwriting was 18%, it is now 15%,” Bradshaw said, who added SCG had become more attracted to platforms, which he said allowed sufficient means to deploy capital and benefit from the upside Starwood Capital created.
As for being at the market peak, Credit Suisse’s Doyle said he did not see industry cycles and consolidation as having apexes.
“M&A is not cyclical,” he said. “I look at it as low, medium or high. We’re in a good place. More of the problem is around opportunities. Transactions will be up on last year, although not as strong as 2015, which was an incredible year.”