News for the Hospitality Executive |
By Zachary
Schwartz March 2013 Investors See Upside: Lured by
continued distress, more realistic values and attractive trailing
twelve-month yields, hotel investors doing deals in Europe now stand to
benefit most. While most reports show that hotel transaction levels
dropped off during 2012, this was driven by outside factors and
influences such as lack of financing, lack of product, and economic
uncertainty, rather than a lack of desire to participate in steep
discounts to valuations from the last cycle peak. Of course,
availability of debt proved the greatest constraint in 2012. It is
expected that 2013 will show the greatest availability of new debt in
Europe since the last peak - even if it is not coming from traditional
sources like large banks - paving the way for higher transaction volume
but also stiffer competition for acquisitions. Well-capitalized players
should beat the curve, investing in Europe now to earn the most
attractive risk-adjusted returns.
The most important outside
influence is the economic uncertainty in Europe. Perceived market risk
- together with bank and owner distress – is putting downward pressure
on hotel values. At a minimum, it means there is more for sale now than
ever before. Often, the perceived risk is the debt behind the property
or portfolio of hotels, but this can still be a route to asset
ownership, or indeed, an investment opportunity in its own right. What
is clear is that many of these property opportunities are not being
promoted through traditional channels, e.g., brokers or agents. Rather,
acquisitions need to be coordinated directly with banks or their
affiliated parties. In this cycle, it is important for investors to
recognize that Europe is one to two years behind the US. The fact is
that while banks in North America were marking-to-market and
writing-off losses following this most recent downturn, European banks
were far less obliging. A “fire-sale” in Europe never happened, but
recent deal activity does show that European banks are more willing to
entertain deals now than anytime since the downturn began. Finding the
right banks and the right assets, then identifying the real decision
makers within those banks, is probably the greatest obstacle facing
willing investors.
Private equity, in particular,
is increasing its focus on Europe and also its acquisition pace in the
hotel space. According to a recent New York Times article, the
Blackstone Group, Lone Star Funds and Colony Capital have all been
beefing up their resources in Europe. Blackstone recently purchased
Dublin’s famed Burlington hotel, which signals confidence in a European
capital city that was one of the hardest hit by the recession.
Meanwhile, NH Hotels’ board reports to have received a purchase offer
from KKR, who also reported their intention to invest up to $500
million in European deals in the near term. Another major player,
Starwood Capital, recently announced a Q4 2012 IPO of its new European
property debt investment platform, estimated at around $500 million.
Institutional investors, such as REITS, have also begun to focus in on
Europe, a trend that is expected to continue in 2013. In late 2012, US
hotel REIT Host Hotels & Resorts acquired five European hotels for
€440 million from Goldman Sachs' Whitehall Real Estate Funds unit.
Despite the many negative
headlines about Europe’s economic woes, within the markets themselves
tourist arrivals and hotel performance are actually increasing. In many
markets, the drop-off in domestic travel has been replaced by leisure
demand (driven by new outbound markets), and to a lesser extent, a
return of corporate travel. A November 2012 UN World Tourism
Organization report indicates European tourist arrivals increased 3%
year-over-year. Good growth was recorded in core markets: Germany
(+7%), France (+5%) and the UK (+4%). The reality is that people are
still visiting Europe and will continue to do so. Hoteliers are
benefitting from the current environment in two ways, top line
performance increases and improving margins.
According to STR, European
RevPAR (in Euros) was up 5.1% through October 2012 versus the same
period last year. This was led by Northern and Eastern Europe, as both
areas boasted RevPAR improvements over 9%, but RevPAR also increased in
Southern (+1.3%) and Western European (+2.8%) through the first 10
months of the year. Figures show the increases were driven almost
entirely by improving average rate, and this has benefited hotel
margins. Naturally, the markets that suffered the most from the
downturn – Greece, Spain, Portugal and Ireland (Italy, to a lesser
extent) – now show the highest valuation discounts and greatest
potential for recovery. While RevPAR improvements are coming from a low
base, distressed acquisition opportunities in these markets are
plentiful. Years from now, analysts will regard the RevPAR peaks to
troughs of this cycle as once in a generation. To the right cash
investors, there is great upside potential.
While politicians across Europe
were implementing austerity measures over the last several years,
European hoteliers implemented their own set of austerity actions. Now
with improving top-line performance, hotels are benefiting from these
measures by showing higher EBITDA levels. Even if costs are also
returning, they are generally coming back at a lower rate than top-line
growth. This is a major factor for investors calculating investment
upside, and it may also only be true for deals happening in the near
term. The greatest proportion of the recovery can still be modeled into
current deal underwriting. However, as we move through 2013 and into
2014, the growth curve in many markets is likely to become far less
enticing. As debt financing also loosens, more investment players are
likely to enter the market, and it may be too late to really
capitalize. Sellers will become more robust in their value
expectations, and few real bargains will remain. Therefore, savvy
investors should be looking to take advantage now.
_____________________ i Pristin, Terry. “American Real Estate Investors Seek Opportunities in European Debt Crisis.” 19 Sep. 2012: B7. Print. ii Devin Banerjee and Cristina Alesci. “KKR Seeks to Invest at Least $500 Million in Europe Deals.” Bloomberg News 18 Jul. 2012. Zachary Schwartz is a leading European Hospitality
Consultant and Principal of Atlantico Hotel Advisors, a boutique consultancy
with offices in Dublin and Amsterdam. Zachary has held leadership roles
with brands, ownership groups and consulting firms in both Europe and
North America. His management background spans tenures with Marriott,
Host Hotels and PKF – ensuring a comprehensive understanding of the
brand, real estate and advisory perspectives. Prior to leading
Atlantico, Zachary was managing the due diligence and valuation process
for acquisition and disposition targets for the world’s largest
lodging-focused REIT, where he modeled approximately $2 Billion in
hotel real estate transactions. His areas of expertise include hotel
investment analysis, feasibility studies, valuations, due diligence,
asset management and vacation ownership/ resort mixed-use projects. He
holds a B.S. in Hotel Administration from Cornell University and a M.S.
in Real Estate from Johns Hopkins Carey Business School. He is a member
of Cayuga Hospitality Advisors.
Reprinted with permission from Cayuga Hospitality Review. All rights reserved. |
Contact:
Cayuga Hospitality Advisors |
To Learn More About Your News Being Published on Hotel-Online Inquire Here