Extended stay bet

Investors and operators are searching for clues as to how the pandemic will effect permanent changes to the travel landscape. And some are already making their initial bets.  

In the US, private equity investor KSL has created a new company, Mission Hill, to specifically concentrate on acquiring assets in select service and extended stay, which are said to account for a third of current market transaction volume.  

Mission Hill Hospitality has officially launched by acquiring a dozen properties. “Mission Hill Hospitality was created as a platform to focus on select-service and extended-stay properties and development opportunities in markets with strong long-term fundamentals and the potential to add value,” said John Ege, partner at KSL. 

Greg Kennealey, an internal appointee as the division’s new CEO, commented: “We are building an experienced, dedicated select-service team that can leverage relationships with owners, managers, brands and developers, allowing Mission Hill Hospitality to create the highest quality portfolio of hand-picked assets.”  

The move signals a change of direction for KSL, which to date has concentrated on full service hotel investments. In the UK, its interests include the Village hotel chain, while in 2019 it acquired Les Hôtels d’en Haut, a portfolio of five French boutique hotels.  

And following the private equity players into Europe’s hotel markets in search of opportunity is Schroders Capital. The company has around EUR850m to spend, having seen its planned pan-European hotels fund oversubscribed by insurance companies and a Middle Eastern sovereign wealth fund. Schroders initially talked about a EUR300m fundraising target, then EUR500m, and finally stopped taking cash in, having reached EUR525m.  

“We’re not a private equity player looking to generate out-sized returns by making large, risky recovery plays on distressed assets in average locations,” said Frederic de Brem, head of real estate hotels, Schroders Capital. “We’re focused on securing off-market deals offering deal security to sellers of high-quality assets in great locations that can benefit from further asset management optimisation.” 

The fund’s first deal was to pick up the Grand Hotel Central in Barcelona for EUR93m. The 146-room property was bought from Unico Hotels, who will continue to manage it; the property has recently undergone a refurbishment.  

In the UK, first half hotel investment volumes were up 135% on the previous quarter at GBP1.7bn, according to agent Savills. The bounce back is still some way behind the five year average of GBP2.43bn but emphasises an encouraging return. Savills counted 59 deals, with regional UK properties accounting for just over half of volume, and 78% of transactions. The largest single deal was Blackstone’s acquisition of holiday park operator Bourne Leisure.  

“The outlook for the remainder of the year is particularly promising,” said Tim Stoyle, head of UK hotels at Savills. “Regional assets continue to perform exceptionally well underlining the ongoing confidence in the recovery of the staycation segment. Additionally, demand for London assets remains strong, with ongoing investor appetite for prime assets as investors remain positive about a return to international travel over the short to medium term.” 

Agent Christie & Co also saw a busy first half, and its sentiment survey saw more than half of respondents expecting to see hotel values rise this year. “On the transactional front, we are seeing unprecedented investor appetite at all levels supporting hotel values,” said Carine Bonnejean, managing director of hotels. “But we are unlikely to see a massive shift in stock levels until the later part of the 2021, once summer trade benefited cash flows and government support measures are phased out.” 

For operators, the challenge is in navigating an uneven recovering market, in a world where simply hiring the right staff has become a new challenge. The first of a series of thought papers from Knight Frank explores the issues of culture and credibility, suggesting “a new strategic vision is required to embrace the ever-evolving operating environment”.  

This may be the point at which hoteliers rediscover how to deliver great service to guests, in a way that also empowers their teams. But, warn Knight Frank, the need is to move fast: “The goodwill crafted from the sector’s staff, communities and stakeholders during the height of the pandemic, could soon evaporate if the ability to adapt, engage, communicate, direct and innovate is not actively seized upon during the recovery phase. How businesses respond in this next phase will ultimately determine their long-term existence.”  

HA Perspective [by Andrew Sangster]: There are both short-term and long-term winners from the lockdowns implemented during the pandemic. It is not always easy to disentangle the two. 

Extended stay, serviced apartments or aparthotels are one of the segments that fit both categories of short-term and long-term. There was a pre-existing long-term above market growth for this sort of accommodation pre-pandemic and the relative outperformance during lockdowns has further boosted this shift. 

Covid has proved once again to be an accelerant of an existing trend, rather than act as a change agent. But will the acceleration lead to a deceleration once restrictions are fully lifted? And will this catch out investors who might overpay for in-favour segments? 

Investors who are seeking to buy low and sell high look set for disappointment. Pricing has not come-off and if anything is looking particularly robust for segments that have shown resilience during lockdowns. 

The winners are likely to be those investors prepared to do the heavy lifting of creating a viable long-term business that can then be exited profitably in the medium-term (if desired). Hotel investment has historically outperformed other mainstream real estate investments when it has been done over a 10-to-20-year time horizon. Less than this, and only the shrewdest deals succeed. In a market with more buyers than sellers, only the brave (or foolish) will attempt the shorter-term. 

 

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