How institutional investors are reshaping Europe’s hotel industry

Institutional investors are becoming increasingly involved in the operational side of Europe’s hotels as they plough more capital into the sector.

Institutional investment in the region’s hotel sector soared by 80 percent last year, with €7.5 billion of acquisitions. In contrast, institutional investors only sold €3 billion of assets during the year, giving them a growing presence in the sector.

As ownership shifts towards longer-term institutional investors – and they become more familiar with the sector - their approach is getting increasingly flexible, explains Romain Gowhari, head of hotels & hospitality transactions at JLL France.

“The long-held label of the buy-and-hold investor being content to sit back and simply enjoy the income is quickly becoming outdated,” he says. “Institutional investors today are getting smarter and making decisions at a faster pace.”

Evolving strategies

Multi-asset investment managers are adapting particularly quickly; Swiss Life and Invesco, which last year invested part of its €1.5 billion European hotels fund in Italy, have respectively recruited senior management from hospitality giants Accor and IHG.

“Such moves allow for a deeper understanding of the sector and that’s impacting investment decisions,” Gowhari says. “They’re now able to enter into a wider range of ownership structures rather than just the traditional agreements with AAA international operators.”

Variable lease agreements, opco/propco structures, as well as the minimum lease combined with a percentage of turnover – which now accounts for around five percent of investment routes, are becoming more popular among institutional investors.

While leased hotels, regarded as the lowest risk operating model, last year doubled to account for around 40 percent of transactions, the entry point for investors is increasingly via vacant possession, Gowhari explains.

“It’s the main route into the market for investors and one which requires interaction with operators, developers and in some cases, white label management companies who can handle staffing and the day-to-day running.”

Capital flows in

Last year, a third of overall hotel investment in Europe came from institutional capital. 

Private equity investors, in contrast, accounted for 25 percent of activity.

“Compared to leverage buyers, institutional investors’ lower cost of capital makes them a competitive force when bidding for assets,” says Jessica Jahns, head of European hotel & hospitality research at JLL.

“At the same time, their search for scale means investments are typically coming in the €100 million to €200 million range.” Some are bigger still; AXA Investment Managers’ Real Assets bought 11 hotels in Europe from Principal Real Estate Europe’s hotel real estate fund in a €545 million deal, while nine Hilton properties in the UK were sold by Alix Partners to VIVION Investment in a €310 million deal. 

Checking out

As some of Europe’s sector-specific hotel investment funds mature, more assets could come onto the market this year – and potentially lead the region’s listed REITs to readjust their portfolios. However, reinvestment of that capital is likely to take place in less mature locations and markets, says Gowhari.

While European capitals and major cities, and resort destinations from the Alps to the Mediterranean, remain popular, Central and Eastern European countries are growing in stature.

“Selling to then reinvest elsewhere makes sense for some of the large investment houses who take a global view and can see the opportunities in newer markets – be that outside Europe or in less established locations,” says Gowhari.

“Second tier cities, from Bilbao and Seville to Bordeaux and Lyon are often underestimated due to their lower RevPAR and offer prospects for growth. That’s also in part being driven by their own improving commercial real estate markets, which cross-border, multi-asset institutional capital will be already well-aware of.”

Jahns also highlights opportunities to invest at the top end of Europe’s hotel market, where sovereign wealth funds, keen buyers in recent years, may look to divest.

“Their investment largely came at an earlier point in the current cycle so it would seem logical that some now look to exit the luxury end of the market with what will be attractive capital gains,” she says.

While the full extent of coronavirus on visitor numbers to Europe is yet to be assessed, investor interest in European hotels is focused more on its long-term prospects.

“The prospects for growth are there, given Europe’s stability as a tourist destination,” says Jahns. “Depth of market knowledge – particularly among institutional investors, will lead to more liquidity for the wider market.”