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Capital raising continues to shift to debt strategies

Capital raising continues for hotel-focused vehicles and diversified funds which invest in hotels - now increasingly focused toward debt

raffles hotel

In each of the last four years, $20.0 to $30.0 billion in closed-end private funds has been raised globally in both hotel-focused vehicles and diversified funds which invest in hotels.

The composition of this fundraising is shifting to debt strategies, with 21 percent comprised of debt funds in 2018, up from 17 percent in 2017. This presents an alternative way of accessing the sector, allowing investors to achieve favorable risk-adjusted return throughs loans secured by the underlying hotel real estate.

This strategy has become more attractive as the threat of rising interest rates becomes more real and property yields come under pressure. Investing through debt can also provide better protection against a potential fall in property values.

We’ve seen increased activity in the U.S. from foreign debt funds, including groups out of Korea and Israel. Additionally, debt funds are pursuing high quality assets with or without cashflow at spreads in the 200bps range and are more likely to offer higher leverage in the non-recourse construction lending space.

Looking ahead, we expect a greater allocation towards hotel real estate, given all the capital available to deploy.

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