The risk-conscious now buying ‘where they grow olives’
The risk-conscious now buying ‘where they grow olives’
30 OCTOBER 2018 8:33 AM

Fundamentals have aligned in the Mediterranean to bring in a new host of hotel investors with differing risk-reward profiles and capital structures. But the largest barriers are the scarcity of opportunities and the lack of seller sophistication.

VOULIAGMENI, Greece—Buying and selling hotels in the Mediterranean is not for the faint of heart, according to sources.

But investors interested in the Caribbean have moved on from “the idea that you never invest where they grow olives,” which bodes well for continued investment in the region, said Steffen Doyle, manager director of Credit Suisse, who moderated a panel at the recent Mediterranean Resort & Hotel Real Estate Forum on “Getting deals done in the Mediterranean.”

Banks are also reporting distress on the books, according to panelists.

Tina Yu, SVP of KSL Capital Partners, said the fundamentals remain good in the region.

“Leisure travel has been relatively constant,” she said. “Added to that are new trends such as wellness, things that have more tailwinds than headwinds.”

Another plus for the region and its continent is that Europe is behind the U.S. in regards to the industry cycle, panelists said.

“Within the Mediterranean, it depends on where you are,” said Rosa Brand, principal of real estate at KKR. “Spain clearly has an amazing run over the last few years, and that will continue, although it definitely depends on the location. Greece and Croatia are recovering, too.”

Italy is a concern, but the bottom line for that market and all over the Mediterranean is that investors have never yet bet against the sun.

“In Italy, the business world is moving separately than the political world,” said Yannis Ermilios, managing director and head of European portfolio management at Colony Capital.

Miltos Kambourides, founder and managing partner at Dolphin Capital Investors, agreed Italy has a lot of inherent advantages.

“Good culture, food, weather,” he said. “That sounds naïve, but it is what still brings in tourists, although demand has not caught up with supply, and there are not enough quality units. There are issues, but overall it is an interesting place to look at.”

What to buy
Panelists said investors in the Mediterranean are searching for standing products on front lines that are deemed to be underinvested.

“The Mediterranean offers these for institutional capital, especially from family offices looking to recycle capital. Consolidate and reposition,” said Neil Kirk, principal of Henderson Park Capital.

As an example, Kirk referred to a project in which his firm helped to bring the Grand Hyatt brand to Athens. The Grand Hyatt Athens opened in August.

“It has a stabilized demand environment, and there is still good downside protection from corporate demand,” he said. “And leisure travelers are coming in and then going out to the islands. We hope to see that in other markets in the Mediterranean. Where you are comfortable depends on your risk priorities.”

Ermilios said investment firms, including his own, are actively financing developers in Greece.

Brand said her firm is very much a transitional owner looking for more value-led propositions.

“We like to clean up more complex structures, such as rooms built illegally—things an institutional fund might not want to touch,” she said. “We’re focused mainly on Spain, Portugal and Italy—more-established markets. Elsewhere we’re more opportunistic. We’re happy between €30 million ($34.2 million) to €50 million ($57 million), including CapEx, with a three- to seven-year hold.”

Who’s buying, who’s lending?
The Mediterranean market is open, even more so after U.S. private equity has exited, panelists said.

“U.S. private equity has made it more competitive but also viable for all,” Yu said. “It has made it a more attractive, liquid market. The main risk is where and what is the exit.”

Panelists said medium-term lenders are becoming more active in the Mediterranean.

“Mostly it is local players, also (real estate investment trusts), insurance companies and those very eager to have hospitality platforms,” Kambourides said. “Also we’re seeing higher-return capital coming in, those looking for value-add and a sale to institutional capital.”

Ermilios explained it another way: “Buys are somewhere between those that can sell and those that think they should sell.”

Kirk said additional interest is coming due to what he termed “a chase” from “people who think that real estate can only go one way.”

These chasers, and everyone else, are of course looking for yield, panelists said, and all the complexities of investing, developing and operating can affect returns and the risk-reward profile.

“What the banks are doing affects how we underwrite a deal,” Brand said. “In terms of asset type, (with) an established hotel, we’re looking at 15% (return on investment); in an asset that needs some work, new management, around 22% to 25%.”

“This also depends on how much you want to be in the region,” Kambourides said. “You would accept lower yields on the first deal.”

Ermilios said the Mediterranean has a mature mortgage market.

“We’re seeing 60% to 65% (loan-to-value) senior debt, which now can go higher, up to 80%,” he said. “In Greece or Spain, that’s a problem for the allocation committee. At the end of the day, it is about the business plan.”

Sober minds
Kirk said it’s important that pricing is realistic and that investors can find pricing based on expectations.

“Then it is about understanding local customs versus written law,” he said. “Clean those things up and make everybody comfortable with what looks black and white.”

Kambourides said the sellers in the region have not had as much experience and sophistication as buyers might wish they had.

“Sellers can be unsure of what they are,” he said. “Do they wish to keep some involvement? That can be messy. The problem is that there are not too many deals out there, and those that are there are chased by many.”

Brand added: “Patience is key—certainly as some sellers you will only see once—and then flexibility.”

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