As real estate values rise, institutional investors turn to hotels for yield

Hampton by Hilton London Stansted Airport

Just as a study from BrickVest found that 34 percent of institutional investors felt that the hotel and hospitality industry would present the best opportunities for commercial real estate over the next 12 months, developer Urban & Civic sold the Hampton by Hilton at Stansted Airport for £48.3 million to Legal & General Investment Management Real Assets

The sale price represented a projected yield on forward three years earnings of 6.75 percent and was 15-percent higher than the valuation of the completed asset at the end of March. 

“The fundamentals of this hotel speak for themselves—being the closest hotel to Stansted airport’s security gate, it offers absolute convenience to its guests," Tom Roberts, head of strategic investment and regeneration at LGIM Real Assets, said. “The high quality of the new development and the Hampton by Hilton brand, under which the hotel operates, were also major factors in our investment considerations. Since its opening a few months ago, the occupancy figures have been very encouraging and we strongly believe this asset will prove to be an attractive addition to our portfolio.” 

LGIM joins a number of other institutions looking to the sector, most recently Patrizia Immobilien which was chosen by a German pension fund to build and manage a €200-million pan-European value-add real estate portfolio, which will target hotel, residential and office assets.  

Rumors suggest that the institutions are also looking at taking a stake in AccorHotel’s HotelInvest, with investors looking to buy at least 51 percent of HotelInvest due to submit their letters of intent this October, according to the French press.  

The brokers have also taken note, with JLL announcing the appointments of Karl Badstuber and Yves Marchal as senior client relationship managers, the former joining from AXA IM – Real Assets. 

“We’re seeing institutional investor appetite for the hotels and hospitality sector gaining momentum, driven by the increasing volume of capital targeting real estate overall, and the potential for stable, high-yielding returns," Philip Ward, JLL’s EMEA hotels & hospitality CEO, said. "Our team works closely with a rising tide of investors seeking to deploy their capital into hotels in thoughtful ways and across the capital stack, at the right time, and in the right locations.” 

As Ward noted, investors are looking to different options than straight real estate, as the PPHE sale and leaseback of the Park Plaza London Waterloo for £161.5 million, in which it took a lease of 199 years, illustrated. 

A unit trust created on behalf of several clients of CBRE Global Investors acquired the hotel’s freehold, with the initial rent of £5.6 million per year having annual inflation adjustments subject to a cap and a collar.   

“This bespoke deal has been created as a club deal to suit the specific requirements of 10 of our pension fund clients," Michael Ness, head of UK, CBRE Global Investors said. "These clients are seeking long-term investments with inflation-linked income derived from prime assets, and we would expect this to be held long-term.” 

The Brexit Effect

In the UK, this could yet be stymied, with BrickVest reporting that Brexit was likely to have an impact on offices. “We expect to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK may put decisions on hold over their long-term office space requirements," Emmanuel Lumineau, CEO, BrickVest, said. "If the UK no longer gives businesses access to the European market they may need to spread their staff across multiple locations, to more efficiently access both the UK and European market.” 

The UK’s hotel sector will have to wait and see whether this uncertainty spreads, but for mainland Europe, the picture is strong.  

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.