Spanish confidence improves

The reopening of inbound travel into Spain has boosted sentiment in a market previously braced for a raft of distressed asset sales. As a result, investors may soon need to start looking at alternative options.  

Deal volume in Spain has risen in recent months, and still more cash is being mandated for hotel investment in the country. Investment manager FREO is the latest to join the fray, having been given an investor mandate to spend up to EUR400m over the next three years. The group is looking at opportunities to acquire and upgrade both city centre hotels, and resort properties on the coast, the Canaries and Balearics.  

FREO has been active in Spain since 2015, and has had a hand in around EUR750m of transactions. Andrew Hunter, FREO’s MD and head of hotels commented: “Covid has provided a significant temporary disruption to hospitality but we are long-term believers in the sector. The current surplus of investment capital and support packages for hotels means that we must do more than ride the cycle and our strategy is very targeted, looking only at quality locations with strong upgrade potential to provide a sound investment basis.” 

FREO’s move follow Brookfield’s successful EUR440m bid for the Selenta Group, which gave it a clutch of four prime hotel assets with more than 2,200 rooms. That deal was close behind the EUR670m transaction announced between Riu and TUI, which saw the former buy out its partner’s 49% stake in a hotel joint venture.  

Others are being creative in the way they deploy capital. At the end of July, US investor Castlelake launched a major move into the Spanish hotel market, acquiring 49.9% of Spanish listed hotel company Milennium Hotels Real Estate. The move, via a capital expansion, will see Castlelake subscribe for up to EUR180m of shares, and give it three seats on the Millenium board. 

“We aim to enable Castlelake’s investors to obtain exposure to high quality assets in prime Spanish locations while opportunistically participating in the tourism sector’s recovery from the COVID-19 pandemic,” said Evan Carruthers, managing artner and chief investment officer of Castlelake. 

Millenium’s portfolio includes ten assets in Madrid, Alicante, Sevilla, Bilbao, Córdoba, Alcaidesa and San Sabastian. Castlelake reckons the portfolio has a fully developed value of around EUR500m. Currently, four hotels – including the Melia in Bilbao – are in operation with a further six being refurbished. The company said in a statement it has a further pipeline of identified opportunities worth up to EUR1bn. 

Castlelake is no stranger to Spain, having previously established a major housebuilder in the country, Aedas Homes, which delivers close to 2,000 new homes a year.  

Core Martin, head of investment for Spain and Portugal at Christie & Co, told Hotel Analyst that many of the hotels traded so far this year in Spain have been prime assets, rather than the value-add opportunities that private equity might prefer. “Capital is frustrated at the moment.”  

“The summer has not been that bad, and hoteliers are in a positive mood. The liquidity that is coming in now will help.”  

Martin said that investors in cities such as Madrid and Barcelona are paying pre-covid prices, and he has seen some prime hotels sell for more than the initial asking price. “There is such high competition,” and that is driving direct deals as buyers chase down opportunities.  

Despite news that there are a large number of hotels in Spain listed for sale, Martin said many were family owned, and not of a quality that will interest serious investors in search of assets that can be upgraded and branded.  

Some of those prime assets traded recently include sale and manageback deals from Spanish chain operators NH and Melia, as they look to rebalance their challenged balance sheets. NH pulled in EUR125.5m selling its NH Collection Barcelona Gran Hotel Calderón to LaSalle Investment Management. The company was able to structure the lease so that it has a post-covid initial discount, and after a strong first round of initial bids, was able to sell the property on a 4.14% yield, measured against the year three stabilised rent.  

Spanish peer Melia has offloaded eight hotel assets into a new vehicle, Victoria Hotels, selling 92.5% of the portfolio to clients of Bankinter, in a deal that valued the package at EUR203.9m. Crucially, the deal includes a commitment to undertake EUR125m of refurbishments. Martin said the move solves the short-term issue in the market of finding finance for refurbishments, “and you need to be a sophisticated owner to do this.”  

HA Perspective [by Andrew Sangster]: Market consensus is that leisure has rebounded while business travel lags. But the reality for leisure hotels in Southern Europe is that even 2022 will not necessarily see a full rebound. 

The leisure recovery is thus geography dependent. For Northern Europe, where outbound visitation has historically exceeded inbound, there has been a staycation boom as holidaymakers avoid overseas travel. 

But even this analysis is too broad a sweep. There are segments in Southern Europe, such as some luxury resorts, that have boomed, with reports of villa rental companies doing particularly well. 

In aggregate, however, owners and operators in Southern Europe have fared worse than their Northern peers. Buyers are smelling opportunity and circling as a result. 

A more sophisticated market is rapidly evolving, with under-capitalised, often family-owned businesses, seeking an exit to be replaced by financially stronger institutional-quality owners intent on repositioning. 

Existing large-scale players are having a traumatic time but are able, in most cases, to find new capital to engage in this same repositioning. A new, more heavily branded and professionalised resort market is set to emerge from the pandemic. Opportunities abound for the astute. 

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