In most western countries that already have well-established hotel infrastructures, growth of the supply slowed significantly since the end of the 1990s. By generally adopting an «Asset light» strategy that shifts the burden the investment to investor/owners and/or asset managers, hotel groups are no longer front line. They must seduce, support, and convince partners who will take the real financial risk and make arbitrages between the different investment alternatives before committing their capital. Who are today’s hotel development financers, what are the means, what levers do they have to produce new properties? Can the financial mechanisms used in other economic sectors also be implemented for hotel investment? After showing much generosity, have commercial banks definitively cut off the credit supply?

Mechanically, the financing of a new supply is tied to two series of indicators that will determine the amount of investment: the good health of the real estate market for existing hotel properties; and the level of hotel activity indicators. The first indicators justify a “dynamic” management of hotel assets. They allow the investor to estimate what the return on capital invested in the property will be when selling the asset. The new supply will be financed by “opportunistic” investors if they are confident in their ability find future buyers that want to strengthen their hotel property portfolio. The second series of indicators is more decisive for entrepreneur-operators who invest their own funds and mobilize credits to create a working tool. They thus determine the new property’s capacities to generate strong revenues and sufficient profitability to guarantee the loan payments.

As far as concerns the hotel real estate market, 2013 confirmed the rebound of activity, after a fairly solid 2012 driven particularly by trophy assets. In the European Union the volume of investments in existing assets surpassed 8.6 billion euros (source: MKG Hospitality database of hotel transactions). The United Kingdom traditionally holds 1st place on the podium with more than 2.5 billion euros in transactions, up over 2012, particularly thanks to the sale of a portfolio of 42 Marriott hotels for more than 800 million euros. France follows with more than 2 billion euros of investments, particularly through Starwood Capital’s sale of a former “Concorde” portfolio (hotels are now being operated by Hyatt) to a Qatari sovereign fund for 800 million euros. Global figures also depend most often on the realization of a few real estate operations and fairly disparate local situations.

And yet, several trends that have been observed over a number of years are being confirmed: investors are focusing on capitals; luxury assets benefit from good liquidity because of the strong demand of international investors; and, in Europe, Germany is attracting growing interest from hotel investors. For example, the Qatari fund Al Faisal Holdings acquired several upscale hotels in Berlin in 2013, while the Israeli group Fattal Hotels paid 300 million euros for a German portfolio of 20 hotels and 3,600 rooms, all of which are destined to be converted to its brand Leonardo Hotels. In addition to foreign investors, German real estate players traditionally present (Union Investment, Internos Real Investors) continue to be very active on their domestic market and are the primary actors on the market for economy and midscale segments. These actors’ dynamics allow Germany to gradually catch up to its Western European competitors in terms of volume of transactions.

It is noteworthy that after plunging in recent years in the aftermath of economic crises and hotel results, Southern Europe showed some movement in its volume of transactions in 2013. This could be felt first in the cities with the highest demand, such as in Barcelona where the W hotel was bought for 200 million euros in 2013; and through luxury complexes such as the Venus Golf Resort in Cyprus or the Asteras Hotel Vougliameni in Greece, purchased for 290 and 400 million euros respectively. These first revivals testify to renewed interest in Southern European markets by investment funds and other high-risk market players.

In the case of France, two thirds of the volume of transactions in recent years occurred in the Paris region, among which some are emblematic, such as Vinci Immobilier’s sale of a building under construction (or “VEFA” sale) in La Défense to the German Union Investment fund, Starwood Capital’s sale of the former Concorde Opéra to Blackstone, or the sale by the Accor group to the Bouygues group of the Pullman Rive Gauche (ex-Sofitel Sèvres) which is part of the “French Pentagon” urban plan. Nationally, the major institutional investors remain active, for example with the sale by ANF of a portfolio of B&B hotels, bought in 2012 by Predica, in association with Foncière des Murs and Assurances du Crédit Mutuel, for some 500 million euros.

As the recent list of major transactions shows, the origin of buyers in France has evolved over the past several years. It reveals a stronger presence of foreign actors. On the upscale & luxury segment, Qatari sovereign funds have been very active with the takeover of many properties, particularly through negotiations finalized in 2013 for four hotel industry icons: the Hôtel du Louvre and the Concorde Lafayette in Paris, the Martinez and the Palais de la Méditerranée on the French Riviera.

American funds are also careful to seize opportunities as shown by the different interventions by actors such as Blackstone. On the other hand, Asian funds are still not very present with exception to the Westin Paris property on rue de Castiglione by the Singaporean sovereign fund, GIC Real Estate, and the presence of the Singaporean Ascott in hotel residences. Private Indian fund prefers the British market, with which they have a privileged cultural exchange. At La Défense, in a neighborhood of Nanterre, the Hermitage Plaza project, 320 meter twin towers, financed by a consortium of Russian banks, including a 5-star hotel, a spa, restaurants, residences and apartments, was imagined by a Russian billionaire, Emin Iskenderov. This will be the first major real estate investment hailing from Russia, once it has cleared all the appeals filed against him by residents.

Operations involving prestigious or spectacular assets get strong media coverage, but they are just the tip of an iceberg whose core consists of less emblematic Parisian or regional properties that are being sold by hotel operators that are pursuing their asset light strategy. In 2012 and 2013, Accor continued the progressive sale of its properties to reduce its long-term debt (23 properties sold in 2013 for some 400 million euros, including 100 million for Sofitel Le Faubourg alone). With the arrival of Sébastien Bazin at the helm, the sell-off of properties will likely slow down out of a concern to stop setting asset disposal targets and especially out of a desire to keep subsidiary or leased properties in the portfolio when their commercial performances justify blocking capital. The majority of sales were realized with institutional bodies, land owners, insurance companies and foreign funds.

The second largest French group French group, Louvre Hotels, also reviewed its portfolio to keep only the most profitable assets and progressively sell the others to investor-operators that can closely control operating costs. Recently, a portfolio of 40 properties located in the provinces was sold to multiple buyers that were mostly operating franchisers and also institutional.

Anglo-saxons REITs, Europeans SIIC and Private Equity firms are coming strongly back on the market

It is clear that on this hotel real estate market, aside from sovereign funds, the most active investors are real estate funds, Anglo-Saxon REITs (Real Estate Investment Trusts), Belgian Sicafi, Dutch B.I. and European listed property investment companies. In France, these are SIIC (Sociétés d’Investissement Immobilier Cotées), companies that are listed on the Stock Exchange and under supervision of the AMF (Autorité des Marchés Financiers). These corporations buy, build and manage real estate on the behalf of their shareholders. A SIIC redistributes at least 85% of the rent received and 50% of the capital gains to its shareholders. In this way it is exempt from a corporate tax and only the shareholder is subject to tax on the dividends, at the usual tax rate for dividends. This investment vehicle is advancing, and in France alone there are fifty, a dozen of which have a European reach. The total of their assets under management is close to 80 billion euros, across all real estate investment categories. There is a strong growth margin considering that the hotel real estate represents only 5% of the total of investments.

In the hotel industry, Foncière des Murs, a subsidiary of the company Foncière des Régions, is the most active. This partner has become a must for the primary French groups, Accor, Louvre Hotels, B&B, as well as Pierre & Vacances. In terms of new supply, it is interesting to observe that Foncière des Murs financially supports new constructions by buying construction projects launched by real estate promoters.

While the Foncière des Murs regularly makes the headlines, several other SIICs are also fairly heavily involved in the tourism and hotel industry such as ANF, Icade, Unibail, Klépierre, Gecina, Altarea Cogedim or more recently Foncière Frey, a partner of the Accor group.

Other investment vehicles for savings also animate the hotel real estate transactions market: OPCI, SCPI, SCI, and other unlisted entities that only do individual acquisitions that are identifiable by shareholders. The group Maranatha, founded in Marseille by a former accountant, Olivier Carvin, uses these tools to collect savings to create a large portfolio of properties, positioned on the Marseille, Lyon, Paris axis with incursions into the French Alps and Montpellier. Little by little, he laid the foundations for a group owning real estate and business enterprises, operated by a dedicated firm that is able to play on the synergy of critical size to improve its operating revenue. After mounting “club deals” for wealthy investors, he moved to the next level with the creation of the fund Finotel Premium. Approved by the AMF, this fund is intended to collect 35 million euros, and invest some 60 million euros thanks to the leverage effect of some 25 million in bank loans. The economic model relies on the takeover of properties located in town centers that are put back on the market after heavy investments in renovations to valorize the property and stimulate the average daily rate. Operating revenues make it possible to reimburse loans while the sale of properties at the end of seven years offers around 8% in return on investments.

Other funds function more or less the same way by collecting individual savings lacking defensive investment opportunities or investments that are eligible for tax exemptions, particularly to avoid wealth taxes or taxes on capital gains upon the sale of corporations: mutual funds, such as Turenne Capital, Novaxia Immo Club, and others.

Simultaneously, “family offices” developed. These private managers of family fortunes are particularly interested in the hotel sector. Their development was reinforced by the fiscal system in which capital gains from sales of assets are exonerated from taxes when revenues are reinvested in the productive economy. In this regard, the hotel industry presents the double advantage of cumulating an activity that generates revenues and potential profit, and a safe haven real estate investment when the property is well located. This characteristic naturally gives assets located downtown in busy cities, such as Paris, a considerable advantage.

A new generation of investors and operators well aware of Revenue management

On the real estate transaction market involving existing assets, a new generation of players is growing bigger. For the most part these are hotel professionals who were trained in major hotel groups; know operations and revenue management and one day decide to take off on their own. They achieve this more easily thanks to groups asset disposals of under-performing properties and their experience on local markets where they can readily take over operations and apply modern management methods and connect hotels to a network or chain to develop worldwide sales. Jean-Charles Denis, ex-director of operations InterContinental Hotel Group for France, examplifies this new wave. He raised an investment fund, Wilburys Hotel Investment, with another industry professional, Samuel Thomas, former head of development at RMH Hotels Balladins. Today they are at the head of 7 properties, all of which are under the Holiday Inn banner and operated by their company.

Another example is the Naos Groupe, which was launched in 2008 by a lover of charming hotels, Pascal Lemarchand. Together with his partners, including the fund 123 Venture, he first acquired ten or so “classic” branded hotels from hotel groups that were selling off properties, such as the Accor group. Already at the head of properties valued at about a hundred million euros, he reoriented his group toward properties with a history. This strategy is illustrated by the takeover of the Regina Biarritz Hôtel & Spa, with the launch of an important renovation to restore the former splendor of this characteristic hotel. The hotel will stand out thanks to its strong identity and the new customer experiences it will offer. The group was selected in a call for tender for a former post office building and is keeping a careful watch on a former prison located in the heart of a city. Pascal Lemarchand announces the tripling of his investments in the next five years with the creation of a new atypical offer.

These investors who specialize in taking over existing properties are growing in numbers and are increasingly organized. Driven by the market and the observation of a shortage in city centers, they are now tempted to participate in the creation of new supply through conversions. The group Maranatha Hotels also recognizes that the shortage of properties is pushing it to study the conversion of well-located buildings.

The new supply relies on promotors and investors-operators

The financing of new hotel supply continues to rely mostly on two types of investors that are complimentary for the size of the projects they carry: hotel franchisees, who broaden their scope by playing entrepreneurs-investors; and developers who launch large-size hotel projects. These are usually part of larger city planning projects and may be refinanced by selling them as a project under construction.

Franchisees, who partner directly with hotel groups, must face the problem of bank financing. The actual delivery of their projects relies on their local network and their knowledge of local markets, accumulated through experience and often handed over from a generation to the next. Traditionally loyal to a single hotel group and tapping into its brand portfolio, they have been driven by market changes to consider multi-group franchising. A recent example of such a trend can be seen in the opening of a Holiday Inn Express unit in Dijon that joins the local portfolio of the Jacquier family, comprised of Accor branded hotels. Major franchisers play a key role in the creation of new supply: Boissée Finances recently laid the foundations for an AC Hotel by Marriott that will be built next to the Porte Maillot in Paris; meanwhile, in Lyon the Giroud Group and the Imberton family’s SCSP Group are key partners of the Louvre Hotels Group –Philippe Imberton recently built the Golden Tulip brand in Saint-Priest in France, while Stephan André’s Immoparts built a new property in the East of France. There are numerous such examples that could lead observers to believe in some sort of supply creation dynamics, yet the CEOs of these groups acknowledge that achieving the financing phase of these projects takes longer and longer, while uncertainty about taxation weighs on their mid-term business plans. In France, the role of public financing appears to be gearing up, as the BPI (Public Investment Bank) merges formerly separate agencies (Oséo, the FSI, CDC Enteprises) to invite banks to complete financing rounds. However, credit creation remains insufficient with respect to what is necessary to actually foster hotel investment. Through guarantees and credits, and with the leverage effect brought by commercial banks, the BPI boasts it generated about €1 billion in tourism-related investments in 2012. Still, at least 4 to 5 times would probably be needed to help reduce the deficit in new supply especially in areas where it severely lacking. A recent survey of commercial banks suggested their willingness to raise the volume of credits granted. The hotel industry’s economics are currently better than those of housing, office and retail. Even if 2013 was no remarkable year in terms of hotel performances, the hotel industry remains resilient with solid long-term growth prospects, driven in particular by the rise in international tourism.

Major developers are even more aware of those trends and oversee major urban projects. They are the ones who deliver the ambitions of major cities to redevelop and enhance their urban environment. Paris, Lyons or Marseilles regularly communicate on their ambition to create several thousand new rooms by freeing up the use of land areas. This is the case northeast of Paris and in La Défense, in the “Confluence” area in Lyons, and in the “Euroméditerranée” area of Marseilles. Initiated by the Vinci Group in partnership with Melia Hotels International as the operator, a 20-storey new building with 370 rooms that is currently under construction has been sold to Union Investment. Designed by Vasconi architects and decorated by Jean-Philippe Nuel, the hotel will open its doors this autumn. Shortly before, Vinci Immobilier made another sale for a 4-star hotel under construction in Marseilles. It also reinforced its partnership with Foncière des Murs, which now steps in earlier by financing constructions. In 2012, the French real estate investment trust bought a 265-room Hotel in Paris’ Porte des Lilas neighborhood, that will be a B&B Hotel once delivered. Similarly, Foncière des Murs currently holds a building under construction in Ivry-sur-Seine that will be rented to B&B Hotels and is set to open in October 2015. In Marseilles, Foncière des Murs partnered with Crédit Agricole Assurances to build a 210-room Golden Tulip Hotel planned for delivery in 2016 in the heart of the “Euromed” area.

Major developers like Bouygues, Eiffage or Vinci and their real estate departments are also backing the birth of new concepts, for instance by building the first hotels under the Okko brand, whose development is overseen by Olivier Devys and that was designed with Paul Dubrule, one of Accor’s founding fathers. Their 138-room unit in Grenoble has been sold under construction to Arkéa Crédit Bail and Natixis Bail. Vinci also announced the sale to Okko’s financial partners of the hotel next to the train station in Cannes. Nexity has also sold a hotel under construction in Strasbourg, in the Heyritz district, to a group of local investors. Bouygues Immobilier, meanwhile, sold a four-star hotel project being constructed in Saint-Denis to the financier Teychené.

This mixed-use project will also comprises offices, retail and about fifty housing units. The 156-room property will be branded as a Novotel unit.

Such elements are encouraging and highlight the need for a harmonious relationship between developers and real estate investment funds. The former are launching projects but need them to be quickly refinanced; the latter invest in new assets when their return on capital employed justifies investing though equity and debt financing. As they are listed companies, their assets will be under close watch by market analysts. The current risk for a virtuous circle that is just burgeoning is the worsening of profit & loss accounts linked to ever heavier and more unpredictable taxation.