As he opened his panel “Buyers and Sellers: The Global Picture on Hotel Transaction Trends” at the first day of the International Hotel Investment Forum, Chris Day, global managing director at Christie & Co., recalled last year’s conference, when he discussed how far hotel investment had moved in the past 20 years. “Historically, hotel investment was driven either by owner-operators or owners looking to work with a branded hotel-management company,” he said, noting that in 2000, it was almost impossible to persuade institutional investors to consider hotel investment.
“How things have changed,” he quipped. Now, transaction trends over the past year confirm that hotels are now mainstream and yields are competing with other types of real estate.
“This is one of the most exciting developments in the 22-year history of IHIF," he said. "Hotel assets are now seen by many institutions as a serious asset class generating prime real estate investment yields.” While this is great news for sellers, he cautioned, it isn’t as good for buyers as prices continue to rise. “This interest from capital markets undoubtedly makes the sector more desirable and will attract serious capital inflows over the coming years and will reverberate positively through all levels of the market.”
Segments, Sectors, CapEx and Yield
As investors worry about the ramifications of technology and changing habits in the core real estate sectors (particularly retail and offices), Day noted that alternative investments—including hotels—have become more firmly established. “Yields are sharpening for hotel fixed-income and management contracts,” he told the attendees.
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Investors, said Day, are focused on perceived higher-yielding options, with billions of capital to deploy. “And the buyer pool is widening,” he cautioned. “Fixed-income assets are reflecting this interest and yields are significantly lower than they were five years ago. Management contract yields are also hardening as the buyer pool expands and asset management will become increasingly important in our markets.”
More than that, nontraditional hotel segments also are attracting interest from developers and investors. “International operators are pushing the boundaries of their portfolios to include lifestyle, boutique and hostels within their brands,” he said. Serviced apartments and hostels are generating greater interest as investors seek leaner, more cost-effective business models.
Some investors have shifted their focus to quality assets in secondary markets. “We are likely to see increased investor focus on secondary and tertiary cities as higher returns are sought,” Day predicted. “There will be increased demand also for [operating company/property company] structures and we will also see an increasing appetite for leaner business models.”
The availability and the low cost of financing are having a positive impact on the industry as a whole, said Day. “Banks have a better understanding of the asset class with specialists deployed. Funding is readily available with an increasing number of challenger banks focused on the sector and ground lease transactions are fueling the release of equity.” Hotels in prime locations will continue to see low yields, he cautioned, but this leaves hotels in secondary cities to see strong levels of return.
Most importantly, Day emphasized focusing on capital expenditure spending. “CapEx will significantly enhance medium to long-term returns, but a lack of CapEx will diminish competitiveness and lead to reduced returns,” he told the attendees. “Beware the cliff edge. Returns from assets starved of CapEx can rapidly decline. Failure to address CapEx will ultimately result in significantly lower values.”
While Spain was once struggling to emerge from the global financial crisis, Day called the country the “major winner” in Europe’s hotel sector for 2018, with investment volumes overtaking Germany for the first time.
In the U.K., investors were not discouraged by the looming threat of Brexit, he added. “Transaction volumes rose by 20 percent compared to 2017,” he said. “This indicates the underlying confidence in the long-term future of the market.” Nevertheless, he cautioned, the U.K. hospitality market has softened since mid-December. “Deals are still being agreed at good levels, but the closing of many of these deals is dependent on the Brexit deal being agreed before the 29th of March.” Some overseas buyers, particularly from Asia, have temporarily withdrawn from the market, Day added. While Christie & Co. expects those buyers to return, the U.K. could face an extended period of uncertainty if politicians “kick the can down the road” or if the country leaves the European Union with no deal in place.
“The good news is that many respected political commentators are still predicting a deal will be done and voted through Parliament,” Day said. “If this is the case, then we expect to see increased activity, particularly in the U.K., and a surge in overseas investment activity.”
Coming of Age
In all, Day was optimistic about the state of the industry. “We continue to see demand at all levels for generic portfolios, quality single assets and peripheral high-yielding assets,” he said. “Since last year, underlying demand appears to be even stronger despite the short-term political shocks we continue to encounter. The market is robust and in good health. We are operating in a highly competitive and significant and sophisticated investment market that is competing head-to-head for global capital with core real estate markets—and increasingly, we're seeing sophisticated institutional investors divesting in core real estate markets of retail and offices. These markets have been disruptive while hotel real estate is playing an ever-increasing part in diversified real estate portfolios.”
Last year, Day said that he thought the hotel investment market was becoming mainstream. “This year, I close by saying that savvy investors already see the hotel market as mainstream,” he said at the end of the session. “Demand for quality assets in our market is continuing to grow. The hotel investment market has come of age.”
IHIF is presented by Questex, the parent company of Hotel Management Magazine.