COMMENT The European hotel investment market has started surprisingly briskly in 2021, despite bid/ask spreads persisting on many deals and the availability of traditional debt continuing to be scarce.
With European hotel investment levels down from €25bn (£21bn) in 2019 to €10bn in 2020, there is expectation of higher volumes in 2021. Deals that have transacted so far this year include going concern single assets, leased assets, portfolios, operating companies, and redevelopment projects. Pent-up demand from investors is leading to competitive bidding for hotel assets, which in some cases is at, or in excess of, asking prices.
Hotel owners that are agnostic about the sector and which naturally recycle assets will surely be concluding that Q1 2021 presents the best window to be selling hotels, given the billions of pounds of equity that is lined up for hotel acquisitions in the UK and Europe. As we head deeper into the year, sellers might still be outnumbered by buyers – but the buyer/seller ratio won’t favour the seller as much as it does today.
Pros and cons
The benefit of the hotel investment sector over more keenly priced real estate sectors such as industrial, biomed, data centres, student, PRS etc, is that hotels are widely acknowledged as a ‘recovery’ sector. While it is difficult to predict the recovery of sectors like retail, hotels have much greater certainty of recovery through confidence in vaccination programmes which will re-energise corporate and leisure travel. Ergo, hotel demand will rise.
That said, it will take a few years for hotel trading performance to get close to 2019 levels, so the hotel investor in this cycle is one that assumes higher risk but in return captures much higher rewards. This is why there is a wall of competing private equity capital waiting for the dams to burst on larger single asset hotel transactions and portfolios. At the other end, private investors are sizing up smaller deals, and while they see opportunities with less competition, they face completion challenges with a dearth of acquisition debt.
Competitive process
An example of the pent-up demand for hotels is in an ongoing sale of a mid-sized UK portfolio, amid the absence of any other similar portfolios currently in the market. Multiple bidders have been selected for a final bidding round, and through this competitive process the seller is likely to be extremely well-placed to optimise both exit price and certainty. The ultimate selling price may perhaps reflect only a small discount, despite market expectations of larger discounts for hotel investments today.
Of course it is not as straightforward as this. Acquiring hotels is not just about the cash flow and recovery, but first and foremost it is about real estate. The more under-invested the real estate, the greater the chance that pricing will reverse during due diligence and the sharper discount applied. During 2020, there was competitive bidding on a large hotel portfolio that ultimately led to second round price reductions to reflect deferred capital expenditure requirements. The valuation threshold was not met, the buyer/seller gap persisted, and ultimately the assets were withdrawn from the market.
This all points to those hotels that have been historically well-operated and occupy good quality, well-maintained real estate in solid locations as being best placed for a successful sale.
And, arguably, that time is now – for the seller that needs to sell.
Tom Oakden is managing director of Hilltop Hospitality Advisors
