High Net Worth Meets High Thread Counts In Europe’s Ritzy Hotel Deal Market

Consider it a “Grand Tour of Yields:” a string of high-dollar transactions involving deluxe hotel portfolios in the European market — many involving deep-pocketed buyers from abroad — has cast light on investor appetite for high-end hospitality properties across the continent.

Deal velocity has also been high. Last week it was announced that China’s Huazhu, the world’s fifth-largest hotel group by market capitalization, will acquire German luxury hotelier Deutsche Hospitality, the parent company of Steigenberger Hotels and Resorts, for nearly $800 million in cash.

On Monday it was confirmed that the German real estate investment partnership of Caleus Capital Investors and Singapore sovereign wealth fund GIC had bought Berlin’s 5-star Hotel de Rome, the long-ago headquarters of the East German central bank, from Commerz Real. Price and terms of the deal were not disclosed.

Earlier this fall, AXA IM, Europe’s leading asset manager in direct property, acquired a portfolio of 11 European city center hotels (most of them in Germany) valued at around $600 million (EUR 545 million) from pan-continental investor Principal Real Estate Europe.

Five-star trade

According to research from Preqin, more than $110 billion in private capital has been invested in the global hospitality sector since 2016, peaking at $28 billion in 2017. In recent years, median net internal rates of return for hospitality investments have outpaced those for industrial, residential, retail and diversified property funds — as was the case in 2011, 2013 and 2015 — while also outperforming public market benchmarks like the MSCI U.S. REIT Index.

North American-based funds currently account for 82% of the total investor class active in global hospitality real estate. This includes a large share of public pension funds such as the New York State Teachers’ Retirement System, which has 16 hospitality real estate commitments and an average commitment size of $78 million, and the Teacher Retirement System of Texas, which also has 16 commitments but whose average commitment size is $154 million.

The pension set is increasingly being joined by private, non-sovereign investors from markets further afield. New research from JLL found that in the first six months of 2019, Middle Eastern private investors, particularly from Lebanon, invested more than $1 billion in European real estate.

Abiding with the thirst for M&A is some concern that European commercial real estate might be overvalued in the global low-to-negative interest rate environment. A recent European hotel investment report from CBRE measured a 6.7% overall decline in sector investment for the 12 months ended October 31, 2019 — possibly pointing to investor fatigue in an overstretched market — but found transaction volumes rising in lower-valued southern markets, namely Italy and France.

While the U.K. and Germany still remained the continental region’s top two hotel investment markets in CBRE’s analysis, France’s third-place position was powered by 15 separate hotel acquisitions in the third quarter of 2019 alone, many outside the Paris metropolitan area. Nearly 80% of the investment volume in French hotel properties during the quarter involved nationwide or provincial portfolios.

Meanwhile, Europe’s hotel construction pipeline shows no sign of slowing. Recent data from Lodging Econometrics showed the number of European hotels in development hit a record high in the second quarter of this year, with more than 1,700 projects reflecting a 23% year-over-year increase. Four publicly listed companies account for just under half of the entire European hotel pipeline: French multinational AccorHotels, Marriott International, Hilton Worldwide, and InterContinental Group.

European vacation

While the rationale behind the hotel trade may be largely yield-driven and institutionally focused, a larger thematic play on the outlook for European tourism is also in evidence.

A survey of 110 senior figures from the global hospitality industry, including owners, lenders, developers and investors, in the most recent European Hotel Industry Survey released by Deloitte earlier this month, found 31% believe hotels “will remain the most attractive investment asset class in 2020,” citing both yield characteristics and demand fundamentals.

The most recent hotel industry forecast from British property firm Savills shows an upbeat sector forecast. Much of the demand has come from U.S. travelers, a segment that is expected to grow 22.3% annually from 2018–2023. Year-to-date arrivals as of the second quarter of this year showed U.S. arrivals to Spain alone up nearly 27% year-over-year.

A report in this week’s London’s Evening Standard, citing data from the law firm Boodle Hatfield, which advises high net worth clients, found that the U.K. hotel market has been one of few beneficiaries of the decline in the British pound, appealing to tourists, staycationers and overseas investors alike. With more than 200 hotels in development just in London, the law firm found nearly a quarter are concentrated in Westminster, traditionally one of the city’s wealthiest boroughs.

Grandest of them all

The supercharged market sets the stage for another sensational hotel spinoff. Market observers say London’s newly for-sale Ritz Hotel could fetch $1 billion, or a 70% premium to the price-per-room paid by Qatar’s Constellation Hotels to acquire Maybourne Hotel Group (which includes Claridge’s, a preferred hotel destination of crowned heads worldwide) from the Ritz’s longtime owners, reclusive billionaire twins David and Frederick Barclay.

According to Bloomberg’s reporting, the deal will be offered to a select list of sovereign wealth funds and high net-worth investors from the Middle East, Hong Kong and Singapore, and — surely Basil Fawlty would approve — a tiny clutch of super-affluent European and U.S. families. No riff-raff, indeed.

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Investable Universe

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A news site about the exciting world of real and alternative assets. Follow us on Twitter at @InvestableU. More stories at www.investableuniverse.com.

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