Foreign capital has not relaxed its laser-focused search on buying European assets, but there is much to hinder it, including buy-sell dynamics, home-soil advantages, a constantly changing economic picture and heightened competition.
LONDON—For international investors, Europe’s economic benchmarking metrics change so much, the success of jumping into the market can simply be a matter of having excellent timing.
Overall travel demand for the continent and favorable currency differentials, though, still bode well for an increased involvement from international capital, according to sources.
During a breakout session at the recent Hotel Investment in Europe Conference, better known as Hot.E., three international buyers spoke about what they’re seeing in Europe.
“Forward purchasing is becoming more prevalent. You cannot get away from that in a Europe where the number of deals is diminishing, but that is hard as there often is a requirement for immediate income,” said David Ling, head of strategic development of Singapore-based CDL Hospitality Trusts, a real estate investment trust subsidiary of Millennium & Copthorne Hotels.
“We make it simpler by financing the asset ourselves and then look for onshore financing when it comes to Capex,” he said.
That fewer assets come to market is as much Ling’s fault as anyone else’s, he hinted. “Usually we do not sell, but recently we sold two hotels in Australia to a German company,” he said.
Turnkey properties find owners not too long after forward-purchased ones.
“I might look at a turnkey, which you are paying full price for, but generally not unless it is quite a unique site. The problem is timing. Mostly, we want control. We want to reposition,” said Christophe Vielle, CEO and co-founder of Bangkok-based GCP Hospitality.
“I do not have the balance sheet in most cases. All deals come from our relationship bank,” he said.
Two macroeconomic considerations buoy Europe, the panelists said.
“Demand and economics will sustain the continent, despite Brexit,” said Baron Ah Moo, managing director of Eugene, Oregon-based BLI Capital Group, whose capital derives from high-net-worth individuals and family offices.
“And the pound (sterling) is cheap,” Vielle said.
On the downside are cost pressures and labor woes.
“The cost of operations has gone up 5% to 7% in the U.K., and employees earn less due to currency exchange and because their home countries have also picked up,” Ling said.
Vielle’s GCP Hospitality, recently acquired 10 hotels in Spain. The company owns the most expensive hotel in the world in terms of real estate value—the 503-room InterContinental Hong Kong—and has approximately $4 billion in hotel assets, he said.
“Europe is our new focus, mostly because I believe hotel acquisition is about cycle. We’re opportunistic, except for trophy assets—that is, if we could find one,” he said.
Ah Moo said BLI Capital Group also is “opportunistic.”
“There is no dry powder sitting on the sidelines,” he said. “I have eyes to do more in the U.K., as the U.S. in my opinion is too volatile.”
CDL Hospitality Trusts invests “across Asia-Pacific and Europe, and we’d be comfortable with 30% to 40% of our portfolio sitting in Europe,” Ling said.
Ling added his company is not looking for trophies.
“It is not a trophy asset if it has high yield. As we know, it is very tight in city centers such as London and Paris, but we look at it in long term, and, again, timing is very critical in order to get the value appreciation in the next cycle,” he said.
Ah Moo said Europe’s star markets are appearing brighter as some markets in Asia dull slightly.
“The commercial terms we are seeing in parts of Asia are like the ones we saw in Greece and Italy, where there is not the transparency and the fundamentals,” he said. “We finance locally or syndicate it ourselves, raising a little debt, usually recourse debt. I see the market loosening up a little, though.”
The bear pit that is Europe
The panelists said the business models they employ in Europe have changed, too.
“Our preference is franchise, but there is an increase in management agreements, as at the end of the day it all goes back to the value add, and we like to believe we know a little about the hotel industry,” Ling said.
He said “it is difficult to compete for fixed leases with some of the French and German institutional capital,” adding, “we’re mindful that we are not experts on the ground.”
Vielle said it’s as true in Europe as it is in Japan. “If I buy in Japan, it’s because the Japanese did not want to buy, not when they are lending money at 0.5%,” he said.
“In Europe, I will try not to look at management as I would not want to create a new platform,” he said, adding that his vehicle is managed, franchised and leased.
“A platform would give us more opportunity on the exit. It adds half a point on the cap (rates) when you sell it to a strategic buyer. There is opportunity in Europe, but the European firms have priority, so we tend to look at deals that are off the radar,” Vielle said.
“I am not a (United Kingdom) guy. London is way too expensive. I am more interested in Southern Europe, although in terms of tourism, 2018 will not be a great year there. Cap rates are still pretty decent in Europe compared with Asia.”
Ah Moo added that he likes “Southern Europe, but it takes a lot of brain activity.”
Ling is looking there, too, but in its major cities.
“I would not go to the (Spanish) islands. I am beginning to make trips to (Central and Eastern Europe). I am beginning to appreciate that landscape, and Germany’s security and stable income always presents interest,” he said.