High investor sentiment in Italy leads to influx of hotel development

Despite ongoing economic and political uncertainty in Italy, hospitality developers and hotel brands are confident enough to invest in the country.

Consider Meininger Hotels, InterContinental Hotels Group and Plateno Group, all of which have announced plans to expand in Italy.

The news came as a report from EY said that investor interest in the country was high and expected to remain so, thanks to positive and solid market fundamentals, despite concerns over levels of debt.

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Germany's Meininger has signed an agreement with Italian property company Beni Stabili SIIQ for a 131-room hotel in Milan. The hotel will be the second for the group in Italy, with a site in Rome due to open next year.

Hannes Spanring, CEO of Meininger Hotels, said: “With its history and culture, Milan is an important tourism destination with people visiting from all over the world. Milan is a leading business hub and trade-fair city with a steady stream of traffic throughout the year.”

Plateno Group is opening its first 7 Days Premium hotel in Italy, in Venice, and developed by MTK Gruppe. The China-based group said that the mid-market brand was ideally suited to the area given its position as a growing market for Chinese tourists, which were up by 18 percent on the previous year.

Meanwhile, IHG announced the signing of Hotel Indigo Milan, the brand’s second Italian location, joining Hotel Indigo Rome, which opened in 2014.

Scheduled to open early in 2018 under a franchise agreement with Amapa Group, the historic palace building will be converted into a hotel featuring 55 rooms, a destination restaurant, courtyard and a leisure and fitness centre.

Hotel Indigo Milan is a conversion of a historical palace building.

Hylko Versteeg, IHG’s associate VP of development for Southern Europe, said: “Here in Europe our strategy is focused on growing in key urban centers and established destinations, which describes Milan perfectly. Amapa Group is already a partner of ours and we’re pleased to be extending our relationship with them to bring Hotel Indigo to Milan.”

Challenges and Opportunities

Like some other countries, Italy, from a hotel development and investment perspective, can be bifurcated into two separate parts: Milan and Rome. That's according to Edward Rohling, CEO of TRC Hotel Advisors, who said it's best to think of the country in that way. "Each has its strengths and weaknesses," he said. "Milan is more comfortable for New York and London private equity: Historical property info can be obtained; negotiations to secure vacant possession are openly discussed; there is enough major brand presence that repositioning expectations can be based on actual recent reflagging experiences; and property rights enforcement is predictable. It is a closer match to the recent private-equity experiences in the UK and Germany. But the opportunity may be reduced due to less new supply constraints.

“Rome is more challenging: Privacy desires restrict release of performance history; discussions of tenant and manager changes are cloaked in secrecy; valuation is often perceived to be only tangentially related to income potential; minimal international brand presence below five star in the urban core allows for few repositioning comps; and property owner rights are enforced patiently.

"However, room supply is the same today as 10 years ago. With little on the horizon, and a growing demand from travelers to the predictability of branded four-star hotels. But the quantity of required interactions to complete a transaction is a multiple of that in Milan, but persistence will pay off.”

Summation

Milan is one of the country’s strongest cities, with EY commenting in its market snapshot that it boasted the most established luxury supply in Italy, further enhanced by the recent opening of the Mandarin Oriental and the reopening of the Excelsior Gallia, Luxury Collection. Milan supply was, it said, particularly vibrant and some further 1,000 guestrooms are expected to enter in the market in the following years.

Overall, EY reported that investor interest in Italy improved in 2015 when investment volumes recovered to a pre-crisis level, marked by the sale of Gritti Palace in Venice to Qatar-based Nozul Hotels & Resorts.

Following an extremely positive 2015 when the transaction volume increased by more than 45 percent to reach €795 million, in 2016 the value of hotel assets traded is expected to exceed €1 billion, having reached €770 million by the end of third quarter.

Notable deals this year included the sale of Aldrovandi Palace in Rome to the Turkish-based Dogus Group and the sale of NHOW Milan by Blackstone to Finint SGR. Portfolio deals included the acquisition of the Royal Demeure Portfolio, including the Hotel d’Inghilterra in Rome and the Helvetia Bristol in Florence, by the Italian hotel group Starhotels and the sale of the Westin and St. Regis in Florence to Qatar-based Nozul Hotels & Resorts for €190 million.

EY said: “Sales of prime assets in Italy have been almost exclusively to international investors, with the investment market dominated by High Net Worth Individuals and Sovereign Funds seeking unique investment opportunity and trophy assets in the prime markets.

“In the last two years, the hotel investment market in Italy is significantly more liquid and increased its appeal to buyers. Additional investors such as value add investors, hotel operators and core investors are actively looking and investing in the Italian hotel market.

“Real estate developers returned to invest and a solid pipeline of office building conversions into hotels is running in the heart of Milan. The hotel investment market is also benefiting of a positive attitude from banks to finance hotel acquisitions and new developments.”

In 2015 cross-border investment volume reached a level of €622 million, mainly supported by Middle East investors. As at Q3 2016 the cross-border investment volume was €390 million as a result of the acquisition of the Starwood Florence Portfolio by the Qatari Nozul Hotels & Resorts.

EY said that international hotel operators, particularly from Asia, were looking at Rome, Milan, Florence and Venice with a strong preference for existing assets rather than developments. An increasing number of leisure operators have been looking at southern Italy, as a result of the geopolitical instability in other Mediterranean markets.

Andreas Scriven, international managing director & managing director for consultancy Christie & Co, said: “This is not just some brave souls looking at Italy, we have seen a shift from Spain. The buyers are people who have been priced out of other areas, the opportunity funds, private equity.

“The trend started around nine months ago when Spain started getting hotter. It’s a different kettle of fish to Spain, where the non-performing loans mean there is a pent-up time bomb waiting to happen. The problem is, even it you don’t buy something distressed, will you then be pulled down? Or is Italy going to keep its head stuck in the sand? If property prices go up, maybe they won’t call the loans in.

“The market is also super-fragmented and family-run. It’s very set in the old ways. Other than Milan, there is very little branding. It’s very challenging. People have avoided Italy, but now the yields aren’t there in Spain, Italy is the logical move for those who need to deploy capital.

“Compared to Spain there is not a huge amount of activity going on, but those who have dealt with Spain feel they might be able to replicate their successes.”

Philip Camble, director of Whitebridge Hospitality, told us that the group was currently marketing a resort in Sardinia, which was attracting interest from investors located in both the UK and Spain.

With other European markets recovering as travelers look to the sanctuary of the Mediterranean as North Africa and Turkey suffer geo-politically, investors who are looking to take a risk with the possibility of greater reward are heading for Italy.

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