Funds anticipate distress opportunities

Funds are gathering financial firepower to take advantage of the post-pandemic landscape, across the hotel landscape.  

While some have already picked off opportunities, there remains plenty of cash sitting on the sidelines, waiting for signs of distress as lockdowns and travel bans continue to choke the sector. 

Spanish fund manager Azora was early to the starting blocks, raising EUR680m by mid2020, that it aimed to leverage up to a EUR1.5bn spend through its European hotel and lodging fund. The fund had already lined up a portfolio of 10 holiday hotels in Spain, plus two in Ibiza and one in Sicily, managed by Spanish operators MedPlaya and Palladium. It also grabbed four city centre properties, in Madrid, Lisbon, Brussels and Bilbao.  

Waiting in the wings is Schroders, which has up to EUR700m of firepower ready in its European Operating Hotels Fund I. The investor raised the funds in the first half of 2020. Frederic de Brem, Head of Schroder Real Estate Hotels, is waiting for the right post-pandemic moment to spend: “With the fund’s three-year investment period, it’s time to be patient and deploy the cEUR700m of dry powder (including debt) very judiciously to create a high-quality diversified portfolio of hotels across some of Western Europe’s top business and leisure destinations.” 

Spanish investment manager Mazabi has decided now is the time to get investing in Spanish hotels, and has a publicly stated target of growing to EUR2bn of assets under management by the end of 2021.  

The company has already been buying this year. In February, it acquired a 22room historic hotel in Malaga, and a newly built 128room hotel in Menorca for EUR20m; it is now in discussions with operators to take on the latter. It also acquired an Iberostar hotel in Ibiza, paying EUR40m for the 230room property.   

Mazabi also controls a Socimi named Silicius, which it aims to grow to a EUR1bn portfolio of commercial properties, ahead of a market listing later this year.  

This year has seen Spanish alternative investor Meridia Capital adding three glamping sites to its Meridia IV fund, working in collaboration with operator WeCamp. February 2021 saw the purchase of a site in Cabo de Gata, with space for 200 units; in March it followed with a site in Girona, where the property has room for up to 500 units, and a similarly sized site in Cala Montgo 

The glamping properties join a mixed portfolio assembled for the fund, which includes office and industrial properties, and the Hesperia Barcelona del Mar, an 84room hotel which was acquired in early 2020.  

Also eyeing further Spanish opportunities is ActivumSG, which in January revealed it had raised EUR550m from investors to spend on European hotel opportunities. At the same time, it announced it had secured the Nobu hotel in Barcelona in an EUR80m deal, and also acquired Dutch hotel operator Odyssey Group, a strategic move to give it an in-house operating platform.  

Selenta, the Spanish hotel group which developed and sold the Nobu, is reportedly looking for a new owner. The company owns five remaining hotel assets in Barcelona, Valencia, Marbella and the Canary Islands.  

Blackstone, meanwhile, is working through the repositioning of its European portfolio held in its Hotel Investment Partners vehicle. The group has just signed a deal with Marriott to rebrand the former Grand Hotel on Corfu and list it under the Autograph Collection. HIP is investing over EUR13m to reposition the 218room property as a family-oriented resort, which will be operated by Ledra Hotels & Villas under the Domes Resorts banner.  

Domes is already working with HIP on a resort property in Zante, and has three resorts on Crete as well as the Miramare on Corfu. All of the properties are listed under Marriott’s collection brands, either Autograph or the Luxury Collection.  

HIP has continued to grow the portfolio, which now extends to 63 hotels with more than 18,700 keys, making the company Europe’s third largest hotel investor. Ahead of the pandemic, in January 2020, the first Portuguese hotel was added, with the acquisition from Oxy Capital of the Lake Spa Resort, a fivestar, 192room property in the bay of Vilamoura in the Algarve. 

Another fund was launched in December 2020 by Ott Ventures, the private equity arm and fund management platform of the family office of Orco Property Group, and MaMaison Hotels & Residences founder Ott Properties. The Velvet fund aims to spend around EUR500m on properties principally in Poland, Czech Republic, Hungary, Germany and Austria.  

Nicolas Horky of Ott told Hotel Analyst: “We can’t really see signs of market distress now – we have reviewed numerous hotel investment opportunities over the last few months and only a limited number show discounted prices. This strong pricing is most probably due to the abundance of cash on the market and limited offerings. I would not be surprised if this is still the case in Q2, thus affecting liquidity.” 

But it is not just in Europe that funds are preparing to pounce. In Australia, Pro-invest has launched its third fund, unashamedly aimed at buying distressed assets. “We are going through a period of significant economic and social disruption, but we remain confident that this is a temporary ‘bump in the road’ for the hospitality sector,” said Pro-invest managing partner Dr Sabine Schaffer. “We see considerable repositioning potential – particularly for distressed assets in the full-service hotels segments – and Pro-invest is well positioned to optimise these opportunities.” 

Pro-invest is aiming to draw in AUD500m from professional investors, to spend on assets “primarily in luxury, upper-upscale and upscale full-service hotels in Australia and New Zealand”. But the remit could also expand to spot opportunities elsewhere in the region, with the company talking of “opportunistic investment targets specifically in Singapore, Japan, South Korea and Thailand”. 

Pro-invest already has more than USD2bn of hospitality assets under management in the Asia Pacific region, and as IHG’s development partner in Australia and New Zealand, has a growing portfolio of hotels under Holiday Inn Express, Voco and Indigo flags.  

HA Perspective [by Andrew Sangster]: This is a mixed time to be a hospitality real estate fund. Invested assets have been clobbered but future opportunities look compelling. There remains the tricky manoeuvre of exiting the bad investments before jumping onto the attractive new opportunities. 

It could be worse. If you are a retail specialist, you not only have bombed out assets but bombed out assets nobody wants. At least in hospitality everybody wants to be your pal. 

The overall picture for real estate is a healthy one. According to data company Prequinthere was, at January 2021, more than a thousand real estate funds collectively targeting USD314bn. During 2020 283 private real estate funds closed, raising USD118bn. The overall pie of global private real estate assets under management stood at USD1.09 trillion at June 2020. 

These big numbers provide some relief to those holding distressed assets: there is capital out there and the competition is such that good prices will be paid. That does not mean that it will be a comfortable journey to rebuild balance sheetsmainly where there are complex structures like ground rents or CMBS. 

The deal action is anticipated to start in earnest in the second half of this year, according to Prequin’s investor survey. If you are looking for a bargain, that is probably a bit late. While hospitality assets are currently suffering as badly as retail on conventional valuation metrics, sellers and buyers are looking at 2019 numbers as a better guide on the belief that things will recover quickly.  

This is good news for funds that can postpone realising any assets, but open-ended funds, many of which face redemption calls, are having to bring assets to market. It could well be that some prime assets are brought to market in the hope that these will fetch a better price than those in more stressedout segments that are taking longer to recover. 

While industrial has had a good pandemic, it does not offer the array of opportunities available in hospitality or even offices. In the latter, prime assets are looking as strong as ever, but secondary assets are set for repositioning. Investment is required for more meeting spaces and other facilities that can provide increased flexibility. 

The net bullishness on pricing is forcing investors and fund managers to accept lower returns targets. Prequin said the median annualised net return of private real estate funds in the three years to June 2020 was 5.7%.  

The opportunities thrown up by the pandemic does not look likely to move this into growth given the competitive environment for new deals and the potential for interest rate rises to dent returns. 

Prequin said there was a divergence of views between investors and fund managers. The former fear the long-term risks of inflation while the latter remain focused on the short-term of finding deals and exits.  

About 20% of investors expect returns to deteriorate in the next 12 months, a larger proportion than in any other alternative asset class such as hedge funds, private equity or infrastructure. 

With more opportunities but more competition, the next few years looks set to separate funds between winners and losers like never before. Having an edge, particularly a focused skill set of experience and understanding in niche segments, will be critical. 

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