Alex Sogno, CEO, Global Asset Solutions, looks ahead to a year of growing hotel transactions as the cash crunch eases.
The hotels’ sector has never been more attractive as an investment opportunity, this much we know, with Travel and Tourism contributing more than 10% of global GDP prior to the pandemic. Mainstream investors are drawn to the chance to combine daily income with growing asset valuation particularly when combined with effective asset management; and since the pandemic, the sector has recovered more quickly than many other asset classes.
The pandemic has seen a shift in the real estate paradigm. With people able work from home more, the office sector has been off its historical peaks; retail suffering in the face of online shopping and reduced footfall in prime locations; whilst even owners of large distribution units (the darling of the pandemic age) beginning to feel nervous as Amazon announce losses that will result in closing some locations.
Compare this to the hotel market, which saw falls in corporate demand offset by a massive rebound as leisure travellers, in particular, deployed cash they had accrued during lockdowns to reacquaint themselves with travel, enjoying the rest and relaxation they had missed while also catching up with friends and family.
The upwards trajectory was somewhat curtailed by Russia’s war in Ukraine, which created a geopolitical situation risk that put upward pressure on energy and food prices, which fanned the flames of inflation, leading to a rapid rise in the cost of debt to dampen the fizz.
This has left the transactions market in an uncertain position as we get stuck into 2023. The leisure sector has dominated deals since restrictions were lifted, with the largest deals in the hospitality sector in Europe, including KKR’s purchase of Roompot for €1bn and Blackstone’s acquisition of Bourne Leisure for around £3bn.
The growth of leisure continued with Hyatt acquiring the Dream Hotel Group lifestyle hotel brand and management platform, to add to last year’s acquisition of Apple Leisure. The asset-light acquisition included 12 lifestyle hotels (nine managed and three licensed), with another 24 signed long-term management agreements for hotels expected to open in the future.
The deal completed at the start of February, but does it mark the continuance of a trend? On the face of it, yes. As Hyatt was drying off the final signatures, a consortium led by funds managed by Davidson Kempner Capital Management, and including Highgate and Kronos, closed on a deal to acquire ECS Capital in Portugal for a reported price of €850m.
The acquisition featured two funds managed by ECS, whose assets included 18 hotels, among them the 154-room Conrad Algarve Hotel and the 176-room Hilton Vilamoura As Cascatas Golf Resort & Spa. The deal was a long time coming – more than two years – after quibbling about what would be in and what would be out of the transaction.
Other long-delayed deals included the sale of Generator Hostels, which looks likely to go to France’s PAI Partner for around €650m. Hostels were one of the surprise assets of choice once travel restarted, with the joy of well-priced trips overwhelming any concerns about staying in what might be thought of as a crowded space. Such is the evolution in the hostel market that what many may remember from their youths as a triple-bunkbeds crammed in a windowless basement is now somewhere with locally-sourced food, craft beers and meeting rooms for the edgy corporate traveller. Generator led this trend and continues to tempt the private equity market.
What seems certain when it comes to transactions is that caution will be key. There will be more due diligence – and more delay than before.
As for what is coming to market, let’s go back to the pressures which are giving guests pause, now the freedom frenzy is subsiding. Chief of those is the cost of debt – the cost of mortgages to consumers, but also the cost of doing deals and owning hotels to the investor community. The cost of debt is causing some deals to falter and is limiting the number of participants. As that cost rises, so we are likely to see more hotels coming onto the market, as the final straw for owners facing harsh reality or lenders responding to covenant breaches. In the US, such issues tend to wash out quickly, largely due to the transparent nature of the debt market there compared to the rather more opaque nature of the European debt market.
One trend which we expect to see continue is selling off one or two hotels within a portfolio to try and manage the increases in debt and operational costs. There had been expectations of a sudden free for all in the market, but this instead became selective sales to try and build liquidity. Owners were eager to stay in the hotel market – they had, after all, survived the pandemic, why quit now? – but had to do something to build their cash reserves.
This search for cash is also likely to creep into other areas of the sector. There will be demands for more skin in the game when developing hotels, possibly more key money from the brands, more sharing of risk and more participation by all to keep those pipelines and growth targets rolling along.
One message which we have heard repeated in recent years, and which will not be fading this year, is that the so-called “Wall of Money” must be deployed. Cash – for some – is sitting around and must be used. The issue that agents are reporting is that much of this cash is looking for distressed platforms which can be turned around, leading to profit for all, but those distressed platforms are rare and increasing interest rates correspondingly increase the likely cost of capital in terms of equity.
With so many buyers in the market, it will be hard to find that interesting price everyone is looking for among quality assets. We have been able to use our local knowledge to help a number of investors find the right asset in the right location. This is particularly relevant in Europe, where there are so many independent hotels which are still owned by families and require sensitive handling.
The rebound in hotel performance has given sellers ideas about their worth which is not in line with reality. These factors have led to a widening in the deal bid/offer spread. This may be the year that buyers come to terms with the realisation that the anticipated (or hoped for) level of distress is not just around the corner and that if they want to put their money to work, they are going to have to work with owners still carrying a high-value expectation to help narrow that bid/offer gap. Also, once secured, owners will likely need to work harder to secure returns. The challenges around day-to-day operations will remain, although it is hoped that inflation will start to ease off. A close eye will be needed on the bottom line if everyone’s aspirations are to be met, with the need for independent asset management ever-more pressing.
So this year has seen a cautious start in transactions, but the hotel sector is famed for its optimism – as one would expect from a business which looks to deliver memorable experiences – and we think this optimism will translate into deals. The closing half of the year is forecast to see a recovery for most economies, and a cut in inflation, freeing up money all around. Money which could do worse than find its way into our thriving industry.
