Non-EU investors target opportunities in Europe
Non-EU investors target opportunities in Europe
02 OCTOBER 2019 7:30 AM

Major Asian investors, who are gung-ho on yields and do not shy away from risk, continue to shape Europe’s hotel landscape.

LONDON—Despite European political turmoil and hints of a looming recession, the continent remains top of mind for investors, especially those from businesses in Asia and, to a lesser extent, the Middle East, according to sources.

That ebullience does not mean that challenges are not visible for those investors, sources added, who placed supply at the top of the list above geopolitical issues.

Jacek Kułakowski, director of French real estate management company PAREF Group—whose main shareholder is Chinese owner Fosun—said Chinese capital is fueled by two considerations: the notable rise of Chinese outbound travelers and the three overriding concepts of Chinese expansion—health, wealth and happiness.

“Chinese tourist numbers have risen from 10 million in 2000 to 160 million today,” he said at the recent Hotel Investment in Europe Conference.

Those visitor increases mirror the increase in Asian investment, including other regional players such as Thailand.

Dillip Rajakarier, chairman and CEO of Thai hotel owner Minor International, spoke of his company’s 94.1% buy of Spanish hotel operator NH Hotels in October 2018 for approximately €2.3 billion ($2.5 billion).

“(Minor) would have been happy with 55% of NH, as we had to run around and get funding, but the good thing is that in Asia there is a lot of cash, and it is cheap money,” Rajakarier said. “We were able to raise debt across all the region, and we did not want to dilute our existing shareholders.

“We bought NH at a 10-times multiple, so the deal was accretive to shareholders. Yes, it was a painful transaction, but most value transactions are not easy. It took more than a year as the shareholders were quite fragmented.”

Rajakarier explained in mathematics how cheap that money is.

“We got a 1.2% euro interest rate after the Thai bond was converted,” he said. “When we tried to raise money three years before that in our buy of Tivoli Hotels in Portugal, we could not do as well. Then, it was 5% interest. The timing (on the NH deal) was fantastic, as the euro was weak.”

He did mention that currency exchange flows both ways.

“Now the earnings are in euros, (and) they are then converted into Thai baht. Well, you cannot have it both ways,” Rajakarier said.

Will Duffey, managing director and co-head of European transactions for JLL’s Hotels & Hospitality Group, said Singapore also is a major player in Europe. The U.S. remains at the very top, he admitted, although its companies largely have different strategies in how they deploy capital and how they return that capital to shareholders.

“South Korea, too, is big, mainly in lease. … (And) Israel has come from nowhere in the last 18 months, creating huge portfolios, and if you ask what is driving that, all you need to see is that bond markets are at 3% in Israel, but if they invest in assets that provides around 6%,” he said. “For many Asian firms, hotels are now core assets sitting in investment portfolios that need to be more diversified.”

Ali Borhani, GM at business consultancy 3Sixty Strategic Advisors, which mostly advises clients investing in the Middle East, Africa and the new Silk Road, said what’s exciting is Asian capital repurposing zombie assets on main European shopping and hospitality streets.

“They are not just looking to only place capital in existing assets,” he said. “Now is a time of reincarnation.”

Borhani added 85% of Asian capital is return-focused, rather than product-focused.

“Very little is in love with hotels,” he said.

Supply and other headwinds
Duffey said supply is the true headwind in Europe.

“Can it be absorbed, and how does it impact the current stock?” he asked.

Minor’s Rajakarier said good management can do much to offset any problems, returning again to the weight of capital in Asia and the attractiveness of investing it in Europe.

“Thailand goes through some sort of crisis every year, but we come out of them pretty well,” he said, adding that when Indian tourists catch up current outbound Chinese numbers, they would not have Europe at the center of their travel plans.

Global investors looking to deploy capital in Europe are still reliant on partners. Borhani mentioned Chinese hotel firm Jin Jiang, which announced on 16 September its investment in three new hotels in Damascus via its French platform Louvre Hotel Group. These are the first signings in Damascus since civil war erupted there in 2011.

“Who has the courage to buy in Syria. … A lot of Western capital is happy in their comfort zones, which is why you mostly see Asian mobilization of capital in such places,” he said.

Capital granularity
With so many European nations to choose from, there are pros and cons to all of them, panelists said, and yield rules the show.

Budapest yields 7% while London is closer to 3%, but investors have to be comfortable in Hungary, Duffey said, referring to the country’s headline-grabbing politics.

Kułakowski said Italy has potential, as it remains very fragmented and is popular with Chinese travelers, while Borhani said that skiing is a major draw for Chinese.

“There are 850 ski resorts in China. Few people realize that,” Borhani said, hinting that Chinese travelers would not just come to Europe to see major landmarks.

Rajakarier said the influx of Asian visitors remains very, very low.

“Only 8% of Asians are coming to Europe, and NH gets 1% of that, but their average spend is higher and average length of stay is longer,” he said.

Borhani said in Europe there is a lot of mobilization in a lot of currencies.

Consider the Greene King deal, when all thought pubs were over. There is a lot of dry powder in Asia,” Borhani said, referring to Hong Kong-based CK Asset Holdings’ buy of the Norfolk, England-based brewer and pub- and country house-style hotel operator for approximately £4.6 billion ($5.6 billion).

Borhani added that Middle Eastern firms currently are net sellers.

“They are proud sellers, selling off-market and not shouting about it,” he said. “They still like London, and Brexit is something that will give in eventually, and I see capital even still looking at trophy assets in London, believe it not.”

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