Europe hotel investors accept more risk for same return
 
Europe hotel investors accept more risk for same return
14 NOVEMBER 2018 9:14 AM

While the current level of risk in buying hotels might indicate a downturn is around the corner, investors say those risks don’t outweigh the rewards. In fact, the current economic environment is perfect for better underwriting, analysis and monitoring consumer travel trends.

LONDON—The thought processes of hotel investors in Europe have firmly entered the acute end of the risk-reward spectrum, according to sources, who added investing behind the macro themes will occupy more of their time going forward.

One recent trend is investors are taking more risk for the same return as mature markets have become more institutionalized.

Speaking at a panel titled “Investing in the opportunities of tomorrow” at Deloitte’s 30th European Hotel Investment Conference, Coley Brenan, partner at KSL Capital Partners, said there is one big question occupying investors’ time.

“Are you being compensated for investing in the U.K.?” Brenan asked. “We cannot quantify what that risk is, and we continue to be positive, even bullish, about the U.K. as we see opportunity to add value.”

Brenan’s fellow panelists echoed that sentiment and voiced additional concerns.

“There is potential upside, but we, too, debate all the time as to whether we are being paid for the risk, but that is true across all of Europe,” said Keith Evans, SVP of European hotel acquisitions for Starwood Capital. “Everything needs to be incorporated into our underwriting, and there is more sensitivity that needs to be ticked. We are already seeing some of the risks of Brexit.”

Brenan said no one knows what Brexit will ultimately mean, but there will be enough qualified institutional investors that remain interested in deploying capital.

Evans agreed.

“(Europe) is still a deep pool,” he said. “It depends on what you are selling. There is a lot of competition in the buyer pool.”

Hotels up, retail down
Hotels continue to be a good investment in the current economic climate, panelists said.

“I do not think hotels are having the same existential crisis that retail is. The desire of travel is now global,” Brenan said.

Evans said there remains a reasonable level of volume transaction.

“Some risk is properly priced, but there is a general trend of taking more risk for the same return,” he said. “Traditionally investors have looked for higher yields or new markets, but now you are looking at more liquidity risk when comes the downturn. When you start layering all that in, the capital expenditure and return differentials start looking not as attractive. You need better business plans and more efficient construction and operational models.”

These new considerations can allow fresh thinking and capital to locate and act on opportunity.

“We’re long-term, which is why we’re active in the United Kingdom, places where we look for similarities to the model in the Nordics. A lot has to do with knowledge,” said Jacob Rasin, director of business development at Swedish hotel firm Pandox.

Pandox recently bought Jurys Inn.

“Jurys Inn was messy, but we rearranged it to more suit our strategy, an opco-propco platform, and as we do management, leases, franchises and independents we can always find projects not of interest to institutional capital,” Rasin said.

Brenan said the new landscape made it paramount for investors to support hotel company teams and management.

“It is about finding, identifying and putting our efforts behind teams where we see their thesis and strategy,” he said. “That’s the sharp end of our stick, and we just keep away from those markets where our style of capital is not appropriate. Germany, for example, no, we’ll be priced out.”

Other European countries have other difficulties.

“Political risk differs, and that can be difficult to underwrite,” Evans said. “This is something we are spending more time on.”

Brenan said the increased institutional face of Europe investment adds to the comfort level of firms such as KSL.

Evans said such a shift has provided more liquidity on exit and more confidence on entry.

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