As travel and development climb, hotel assets find mainstream investment

IHIF 2018

BERLIN, Germany — Investors searching for yield are more inclined to consider hotel assets, as the travel industry continues to chug along at a brisk pace.

Executives gathered at the 21st annual International Hotel Investment Forum, which drew more than 2,300 delegates here at the InterContinental Berlin, pointed to a still-healthy industry, underpinned by such bellwethers as high occupancies and strong construction pipeline numbers, though conceding that elements out on the horizon could bring solid growth to a halt, including the specter of higher interest rates and operating costs that make it more difficult to flow top-line revenue to the bottom line.

Still, owning hotels, according to some, continues to draw attention from not just sector-specific investors, but generalist investors, too. "Now, alternative investments, including hotels, are becoming mainstream," said Chris Day, managing director at Christie + Co. Day's sentiment was echoed by George Nicholas, global head of hotels at Savills. The two were on stage during a panel discussion called "Follow the Money."


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Day continued that the shift to hotel investment has been partly driven by the weight of capital looking for real estate. "Retail investments," he said, for example, "are peripheral to institutional investors. The desirability of hotels is moving up the food chain and retail is falling down."

The same trendline is accompanying the office class, where, unless it's a prime location, Day argued, "it's less desirable" of an investment. "Offices in secondary and tertiary markets have challenges," Day said, exacerbated by the tendency of people to now work remotely, something that used to be anathema until the rise of work-sharing spaces like WeWork, and companies more inclined to allow employees to work from anywhere rather than a central office.

The one pronounced obstacle to investing in hotels, especially in Europe, is the availability of stock, particularly as sellers with non-performing loans move out, replaced by stabilized owners. "This creates a diminution of stock," Day said.

When assets are available, there, too, can be a gap between the expectations of sellers and buyers, and the "continuous competition from investors keep pricing levels high," Nicholas said.

Two things, Nicholas pointed to, are driving hotel deals: debt and yield. "Debt is the oil that primes the pump of liquidity and it's still relatively cheap," he said. "Second, [hotels] have an attractive yield premium over bonds." Nicholas singled out Amsterdam as having some of the choicest stock in all of Europe.

"There is continued demand for hotel investment at all levels," Day added.

Chinese capital, though in the interim having been clamped down upon by the Chinese government, is still looking for deals outside the country, and will continue to, argued Nicholas. He envisions investors from other industries buying hotels to get money out of the country. Nicholas envisaged the owner of a soy sauce business pouring money into hotel assets, for example.

Meanwhile, American funds, Day said, will still compete for global assets. He contended that tax breaks would allow American investors to be in a better position to compete. 

"They haven't gone away; they are looking opportunistically, but competing for acquisitions," Day said.

The overall investment picture is rosy because global travel continues to abound. According to the UNWTO, international tourist arrivals grew by 7 percent in 2017, to 1.3 billion. In 2018, that number is expected to grow as much as 5 percent. 

"More people are traveling," Day said, "so there is need for accommodations to increase."

Data Points

Robust travel is leading to strong RevPAR numbers, something Robin Rossmann, managing director at STR, explained to the audience. European hotels are at all-time highs and rising, with Rossmann calling it a "sea of positivity in Europe," where cities like Lisbon, Madrid, Amsterdam, Edinburgh and Istanbul all showed double-digit, year-over-year RevPAR growth in 2017. 

"The opportunity for Europe is it has the ability to yield up rate," Rossmann said, something the U.S. has more trouble with due, in part, to the strength of online travel agencies. 

Strong RevPAR is complemented by in line supply and demand ratios. Though the global construction pipeline of rooms is forecasted by Lodging Econometrics to be more than 2.2 million by the end of 2018, actual supply coming into the market is only growing at around 1 percent per year. "Demand has exceeded supply growth in Europe," Rossmann said.

Meanwhile, occupancies continue to be high, even higher than the previous peak in 2008. "Europe 2017 occupancies are now around 10-percent above previous peak," Rossmann said. "Hotels have never been fuller, allowing hotel markets to yield up more."

That's the global story; in the U.S., however, expectations are that supply growth will meet demand in 2018. But in regions like the Middle East, supply growth is having a withering impact on RevPAR, which was down 5.6 percent there in 2017. More than 100,000 rooms are coming into the Middle East and Dubai's pipeline alone stands at 60,000 rooms.