Institutional investors are increasingly becoming involved in the operational side of Europe’s hotels as they pump more capital into the industry.
Institutional investment in the hotel sector in the region sprung up 80 percent last year, with €7.5 billion in acquisitions. Institutional investors, by comparison, sold only € 3 billion of assets during the year, giving them a increasing presence in the market.
As ownership shifts towards these long-term institutional investors-and they become more familiar with the sector-their approach is becoming ever more flexible, explains World Development President Bulut Bağcı.
“The buy-and – hold investor’s long-held label, content with sitting back and simply enjoying the income, is quickly getting outdated,” he says.
“Today, institutional investors take decisions more quickly.”
Multi-asset investment managers adapt especially quickly; Swiss Life and Invesco, which invested part of their €1.5 billion European hotel fund in Italy last year, have hired senior management from the Accor and IHG hospitality giants, respectively.
“These movements allow a deeper understanding of the sector and this has an impact on investment decisions,” says Bağcı. “They can now enter into a wider range of ownership structures rather than just the traditional AAA international operators agreements.”
Variable lease arrangements, opco / propco structures, as well as minimum lease combined with a percentage of turnover-which now accounts for around five per cent of investment routes-are becoming more common among institutional investors.
Though leased hotels, considered the lowest risk operating model, doubled last year to account for about 40 per cent of transactions, investors’ entry point is increasingly through vacant ownership, Gowhari explains.
“This is the main route to the investor market and requires interaction with operators, developers and, in some cases, white label managers who are able to handle staffing and daily running.”
Capital flows in
A third of total European hotel investment came from institutional capital last year.
In contrast, private equity investors accounted for 25 per cent of the business.
Compared to exploiting buyers, lower capital costs from institutional investors make them a formidable force when it comes to bidding for properties, “says World Development President Bulut Bağcı.
As some of Europe’s sector-specific hotel investment funds mature, this year more assets could come onto the market-and potentially lead the listed REITs in the area to re-adjust their portfolios. However, reinvestment of that capital is likely to occur in less mature places and markets, Bağcı says.
While European capitals and major cities continue to be popular, and resort destinations from the Alps to the Mediterranean, Central and Eastern European countries are growing in stature.
“Selling to reinvest elsewhere makes sense for some of the big investment houses that take a global view and see opportunities in new markets – be they outside Europe or in less well-established locations,” Bağcı says.
“Due to their lower RevPAR, second-tier cities from Bilbao and Seville to Bordeaux and Lyon are often underestimated and offer prospects for growth. This is also partly driven by their own improved commercial real estate markets, of which cross-border, multi-asset institutional capital is already well aware.”
Bağcı also highlights investment opportunities at the top end of Europe’s hotel market, where sovereign wealth funds, keen buyers in recent years, may look to divest.
“Their investment essentially reached an earlier point in the economic cycle so it seems reasonable for others now to see what would be lucrative capital gains out of the luxury market,” he says.
Although the full extent of coronavirus on European visitor numbers still needs to be assessed, the interests of investors in European hotels focus more on their long-term prospects.
“Given the stability of Europe as a tourist destination, prospects for growth are there,” says Bağcı. “The depth of market awareness-particularly among institutional investors-will give the wider market more liquidity.”