Deals volume recovers

Agents are weighing up a rise in hotel deal activity, ahead of the likely impact of government and market moves over coming months.  

According to figures from Savills, this year’s UK market transaction activity has already eclipsed the levels of last year’s depressed market. Elsewhere, transaction activity is rising as investors look past the hiccups of the current market and eye a return to growth in tourism, and largely anticipate a full recovery in business travel too.  

A recent sentiment survey from Cushman & Wakefield demonstrates broad confidence across the hotel space. Drawing together the views of 50 major investors, between them responsible for a quarter of European hotel transactions. More than a third expect to buy more hotels, while just 21% expect to reduce their exposure to the sector. 

Borivoj Vokrínek, head of hospitality research EMEA at C&W commented: “The eagerness to acquire more hotel real estate heavily suggests that investors are looking beyond the immediate impact of Covid on the sector to a point when travel limitations are lifted and the hospitality, leisure and tourism industries can fully reopen, recognising that they will prove a strong hedge against inflation.” 

Currently, resorts are the most in favour subset, with 70% of respondents favouring them despite their additional operational complexity. There is also growing interest in serviced apartments, mentioned by 60% of respondents as being attractive. Understandably, airport and conference hotels are currently less of interest.  

When asked about location, it appears few fundamentals have shifted. The investor audience put the UK & Ireland at the top of their list, ahead of Germany, the Iberian Peninsula, France and Benelux. When asked for most favoured city markets, Barcelona was named most often, ahead of London, Paris, Amsterdam and Munich. 

In a presentation to the Berlin hotel conference, Carine Bonnejean, head of hotels at Christie, noted that so far, transactions in 2021 have been dominated by two classes of buyer – institutional and private capital – as publicly traded Reits substantially reduced their activity compared with 2020.   

She noted five key trends: a lack of stock, the volume of capital waiting, patient lenders who are holding off from moves to create distress, the consequent limited reduction in pricing, and the rise of new, alternative debt sources.  

Looking back over a decade, Bonnejean said the story of the US real estate market recovery saw a “shock and triage” period of 6-9 months, followed by a similar length period of “price discovery”, with workouts taking place over the next two to three years.  

For the next year in the hotel sector, she said the issue of withdrawal of government support would likely lead to a moderate rise in distress, in the first two quarters of 2022; with the potential for an increase in stock leading to an adjustment in pricing.  

Throw into that mix the potential complications of an uneven market recovery, she said, while the cost and availability of debt is likely to continue to impact the sector. The pandemic has also taught hotel operators to be more lean in their business models, while a fresh issue will be the rise of the ESG agenda, impacting the desirability of assets from a new angle.  

Jonathan Hubbard, head of EMEA hospitality at Cushman & Wakefield, said that while investors have now shifted away from hopes of discounted distressed deals, appetite remains strong – as evidenced by the agent’s recent sentiment survey. “There were a high proportion that want to invest as much as before.”  

Instead, the focus has been on the pace of the recovery, and how that will impact returns. Hubbard said the market is leaning towards the expectation of business travel recovering to previous levels. “I think there’s a strong groundswell that once we get back to the office, we will see business return.” 

For those looking to invest, supply remains an issue. “There’s still not a lot of product out there, though there’s a few interesting things going on.”  

And Stephen McCall, CEO of acquisitive extended stay group Edyn, said he sees mainstream finance as being the current restriction, having taken soundings at the recent Berlin hotel conference. “The one thing that was abundantly clear is that few deals are being done – and a lot of that is down to funding.” 

According to market evidence gathered by Savills, this year’s UK transaction volumes could add up to something approaching the 10-year average, of GBP4.56bn per year. The 2019 total was marginally above the average, while 2020 saw deal volumes slashed to just GBP2.44bn. Already this year, however, Savills have added up GBP2.35bn of deals, boosted by the Bourne Leisure acquisition completing earlier this year.  

“With some of the big deals in play, I think we’ll be very close to the long-term average, this year,” said Stoyle. “Therefore, there is more evidence than you might have imagined.”  

The US market is showing similar signs of waking up. JLL’s James Stockdale, executive vice president, capital markets investment sales, recently reported after the Americas Lodging Investment Summit that private equity has led the revival of transaction volumes, accounting for nearly two thirds of deals in the first half of 2021. He said some investors are looking to capitalise on a change in consumer behaviour that favours leisure destinations, noting some recent deals “are bets on changing consumer travel patterns that values safe, domestic travel or high-growth markets that are adding jobs at an exceptional rate, or both.” 

HA Perspective [by Andrew Sangster]: The sheer weight of capital waiting to deploy in the sector is going to create outsized deal flows. According to data specialist Preqin, the value of Europe-focused real estate funds closed in 2020 stood at EUR40bn. The amount for 2019 was EUR41bn. 

Among the real estate funds, opportunistic and value add hold the largest amounts of dry powder. Preqin put this at USD30bn and USD17bn respectively as at July 2020. 

Preqin noted in its commentary for its just released report “Alternative Assets in Europe” that there has not been significant repricing during or after the pandemic. “Returns are unlikely to be easy to deliver. However, managers are likely to get increasingly creative in their strategies to drive returns. 

“Managers may also begin to move up the risk curve as they become more confident in the outlook for European real estate. Retail and hotel assets could be back on the radar as we progress through 2021 and into 2022.” 

Buyers expecting a repricing look set to be disappointed in the months ahead, even if the recovery proves bumpier than expected. 

The biggest uncertainty factors lie around inflation prospects and then interest rates. Right now, inflation has begun to spook some investors. CPIH hit 3.0% in the UK for the year to August, the highest rate since 2012. 

But nobody is sure whether this is transitory or lasting, and this will determine interest rate trends. A couple of years after the GFC, CPIH (which is consumer prices including housing) hit 4.5% in September 2011.  

Current levels are still below this and a long way from the series high of 9.2% in 1990 (the data only goes back to 1989 for CPIH). The Bank of England, along with the central banks in most other major economies, is adopting a doveish approach to inflation. There will need to be many months of above target inflation before banks are likely to start seriously tightening interest rates. 

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