The third edition of the Hotel Investment Conference Europe opened Tuesday with industry executives discussing transactional and financial trends, and they agreed things are looking up on both fronts across Europe.
The session, called “A look into the crystal ball by the IHIC,” was open to the press with the caveat that comments and information discussed during the session couldn’t be attributed to specific panel members. Following are 10 trends gleaned from the panelists’ comments—all of whom are members of the International Hotel Investment Council.
Moderators were Jan Hazelton, director of IHIC Limited and VP of development for Europe at Four Seasons Hotels and Resorts, and Marvin Rust, partner at Deloitte. Panelists included: Cody Bradshaw, senior VP of Starwood Capital Group; Steffen R. Doyle, managing director and head of lodging at Jefferies; Martin Kandrac, a former executive with Blackstone Group and currently an independent investor; and Desmond Taljaard, CEO of Mildmay Capital.
1. Capital is out there
There is plenty of capital in the market; one panelist called it “a huge amount of capital.” The panelists agreed the number of new financial players in the market is a surprise.
One speaker said private equity real estate funds raised $100 billion last year and another $40 billion this year, so there is plenty of money to go around.
“There are more players, more capital, more volume,” said one panelist. “This will be a very quick compressed window with a lot of transactions in Europe.”
Another panelist said the window of opportunity, especially for individual assets, is going to close quickly.
2. A good situation for Europe
A big part of the renewed interest in European hotels is due to the lack of opportunities elsewhere. Record low interest rates, a tremendous amount of deleveraging that needs to happen and an overall economic recovery that’s showing signs of life are major contributors to the action.
One of the panelists said his company completed a $4.2-billion investment fund earlier this year and more than half of it is earmarked for investments in Europe.
There are opportunities for acquisitions in nearly every European country—even the ones hit hard by the recession.
“You can find them if you look hard,” a panelist said.
“What will separate winners from losers in this round: You have to have the expertise or partner with someone,” another panelist said. “If you have the specialized skill set it gives you a competitive edge in this bidding environment.”
3. The new buzzword
The latest buzzword for Europe’s hotel industry is “platform.” Every company is looking to add value by combining economies of scale into one platform for better efficiencies.
One panelist said his company has created platforms, such as urban and conference, for it assets to be grouped in.
But it’s not easy to make it happen because “a number of opportunities come with nasty brand agreements,” he said. “It’s finding the unencumbered assets that will be a challenge.”
4. Where are the brands?
Brand companies aren’t anywhere to be seen in the participation of potential transactions. One moderator suggested that could be because there is so much capital waiting to find projects to invest in that the brands don’t have a need to be part of the financial landscape at the moment.
5. Portfolios wanted
While individual assets in prime locations are always highly sought, the panelists generally believe hotel portfolios are in high demand because of the limited number of potential buyers.
“In the U.K. there’s been a tremendous availability of those,” one panelist said. “Time will tell if it happens elsewhere in Europe.”
“Every week there’s a portfolio (available),” another speaker said. “Eventually someone will take down a larger company—public company or not.”
6. Hilton IPO lauded
Blackstone Group’s recent announcement that it filed an initial public offering for its Hilton Worldwide asset gained praise from one panelist.
“It’s an incredibly attractive asset,” he said. “It’s going to be a fantastic play for Blackstone.”
7. Leases remain a good option
Leases and sale-lease backs continue to be the talk of the industry in Europe. Starwood Capital’s acquisition of Principal Haley earlier this year included a number of those provisions.
Many leases in Europe are for long periods—in some cases up to 200 years—and that provides some comfort for buyers. One panelist said cap rates for deals that include such long leases can be in the three-to-four range.
8. Spreads are shrinking
Since beginning of year, overall real-estate spreads in general have come down approximately 100 basis points—a little less for hotels.
9. Good times ahead
“It’s a very exciting time in the U.K.,” one panelist said. “The banks are being quite sensible about offloading their assets. It’s an ideal time to be investing in the U.K., and there will be a ton more activity next year.”
Provincial U.K. assets with more risk will be the primary hotels on the market in 2014, the panelist said. Another speaker said those provincial hotels will be bought with interest rates at about 10%, and a fairly significant capital expenditure program will be put in place.
10. There are some concerns
The panelists agreed not everything is rosy for the European hotel industry. Among the biggest concerns is the inability for the overall industry to raise rates despite robust demand growth—facts that were presented by STR Global managing director Elizabeth Winkle earlier in the opening general session.
“As an industry we haven’t found a way to grow the income the way other industries have grown their income,” one speaker said. “It’s a big challenge for us all.”