In June, real estate services and investment firm CBRE Hotels officially named Miguel Casas head of hotel investment properties for continental Europe, putting him in charge of managing and expanding that business throughout the region. In the ensuing weeks, Casas has been learning about the different markets in his bailiwick, which stretches from Portugal to Poland.
“There are a lot of cities and a lot of new markets for me,” he told Hotel Management during a phone call from his Madrid office. “It’s a learning curve, which everyone needs to have.”
Market to Market
These opportunities and challenges vary from market to market, Casas acknowledged, although scarcity of “transactionable” product seems to be consistent. “The private equity firms that acquired a lot of bad debt and underperforming assets five years ago have sold 70 percent to 80 percent of their stock already,” he said, indicating the biggest challenge in divesting the remaining 20 percent is determining the pricing level.
“We have seen in the past five years a very big change in the way investors are seeing real estate markets,” he said, noting an “influx of capital” into hotel real estate. He credits this influx to prices that reached all-time highs and yields that reached record lows in many cities. “The pricing of hotel assets is a difficulty right now for some of my teams.”
With insufficient stock available for investment, Casas has seen an uptick in deals geared for adaptive reuse, particularly in Germany and Eastern Europe. “That could be a challenge in the next [few] years for the trading and operations of hotels in those cities.”
At the same time, this is where Casas sees opportunities for CBRE to prove its value. “The European hotel sector—in comparison with the U.S. sector—is pretty segmented, and it still brings opportunities when you are investing in the right product and positioning with the right brand,” he said. “We are helping our investors identify a hotel trading under 4 cap versus the asking price that, with the appropriate asset tools, can be converted to 6 or 7 cap in a few years time,” he said.
Stretching Across Europe
When he accepted his position, Casas said that he wanted CBRE to have “the widest geographical coverage of any real estate consultancy firm” in Europe. His goal, he said later, was to build the largest network of hospitality real estate consultants, and to have that network constantly connected and operating as a single team. The company is opening offices and building teams in markets where it did not have a presence before, reaching new countries and new cities.
“Currently, my focus is basically in Eastern Europe,” Casas said, singling out the Czech Republic, Hungary, Poland and Austria as markets that should get more consultants soon. Western Europe is still going strong, and Casas expects to “reinforce” the teams that oversee Portugal, Italy, Spain, France and Germany. “We want to basically double our profits and revenue in the coming two years,” he said. “For that, we’ll incorporate new team members that can provide greater coverage—and not only in capital cities. We are pretty covered there. We want to gain a wider view of each of the countries; for that, not only will we incorporate hotel people, but we will team up with the capital market teams.” With capital market activity “pretty strong” in those markets, Casas wants to take advantage of the network to bring more opportunities to CBRE’s clients.
Apart from that, CBRE also is strengthening its cross-border team of London-based consultants who cover all of Europe, including the U.K. and Ireland. “This team is focused on pan-European portfolios and large deals within [one] country,” he explained. By growing new teams in underserved markets and strengthening the cross-border team, Casas expects CBRE to have the best of both worlds: “A very wide geographical spread together with a team that can act on a pan-European basis when diversified portfolios—in terms of geography—appear, so that we can be acting in a coordinated manner.”
Different Needs for Different Markets
In recent years, Casas has seen Germany and France top the markets in mainland Europe in terms of deals, while Spain came in second behind the U.K. last year in terms of activity. A lot of the deals have been in resort markets, he said—not exclusively in seaside communities, but destinations with good golf options, plenty of leisure activities and quality spas.
While much of CBRE’s focus in mainland Europe has been on primary cities and resort markets, Casas has noted growing activity in the “regions” of the U.K., which he credits to increased tourism in these markets. Still, London leads the country in terms of transaction activity, although the regions “have a lot to say” when it comes to the final volume. “The U.K. is normally the most liquid market in terms of transaction volume,” he said.
As interest from developers moves continually east, there is a notable shift in the number of branded hotels in favor of independent ones. “This is definitely an opportunity for development of brands within these countries and many of these developments get executed through transactions,” Casas said, emphasizing that CBRE is keeping an eye on markets with lower brand penetration. The difference in branded and independent stock also means that U.K. transactions often involve a management or franchise agreement, while mainland Europe—particularly France, Germany and Spain—have more leased transactions. “There are probably more vacant-possession opportunities coming up in Europe because of the nature of the market and it being much less branded than in the U.K.,” he added.
Casas also sees opportunities for transactions of hotel platforms—“hotel operators who already have some real estate assets [on] their balance sheets or [in] portfolios in which you acquire not only the real estate, but the operations of that real estate.” Acquiring a platform, he said, an investor can reshape the operations or reflag the asset as desired. “Those deals normally have a pan-European nature,” Casas noted, adding CBRE’s teams already are working on some transactions along those lines that will soon be made public.
In recent years, Casas has seen “a massive influx of money” coming into Italy, Greece and destinations along the Adriatic Sea. “[Investors are] still looking to deploy capital there in large amounts,” he said. “This has had a tremendous pressure on cap rates as there’s been much more tension in competitive processes to acquire hotel assets.” He estimates the shift has driven cap rates down 200 basis points in five years, "which is pretty spectacular if you think about where we were five years ago. We are going to see, by the end of the year, some transactions that will see record lows in terms of yield in Greece and the Adriatic.”
Casas expects similar shifts in the rest of Eastern Europe by the end of this year and into the beginning of 2020.
Three Resort Difficulties
The financing of resort deals is more difficult, both from the equity and the debt side, he said, citing three reasons.
The first is the increased complexity of the operations behind the resort. “There is more variety of departments—and income-producing departments—within the hotel,” he said, which means that the revenue streams are more diverse. At the same time, the revenue streams come from a wider range of nationalities, so the operational component is more complex as a start.
The second difficulty is that institutional funds “are still not all totally savvy on this sort of transaction,” Casas said, due to the relative newness of large-scale resorts becoming available for global companies to acquire.
Third, resort sellers are normally not institutional funds. “The sellers are normally private owners, which are institutionalizing the product so a core or core-plus fund can acquire the asset,” he explained. “The experience these sellers have when transacting to an institutional fund is much lower.” This, he added, gives CBRE an edge when handling deals. “We’ve been able to act as a translator of the asset class, educating the market [to better understand] this asset class.”
But as the market has become increasingly institutionalized, CBRE has seen fund managers who would previously not have considered a resort now make the larger assets a priority when it comes to deals. Casas cites Blackstone's acquisition of Spanish REIT Hispania Activos Inmobiliarios last year for an estimated €2 billion as an example of this shift. “[Blackstone has] added resorts as one of the main asset classes within real estate in Europe,” he said. “We are not seeing resorts as an alternative. We are seeing them as one of the main real estate classes which actually institutional investors are looking at in Europe.”
After weeks of listening and learning what different teams on the ground had to say, Casas expects CBRE Hotels to begin “a new era” in which the company is able to provide “more coordinated and faster solutions to meet our clients needs.” Ultimately, he said, he wants to emphasize that CBRE is the largest real estate consulting firm in the world. “We should make that reflect in our hotel transaction activity.”