Hotel investment is changing its tune

Opportunities in Leisure: Investing in R&R Real Estate
Opportunities in Leisure: Investing in R&R Real Estate panel discussion. (Simon Callaghan)

Insight Comment
Private capital investors in both equity and credit - are rebuilding the pathways back to financial stability for many leisure hotel operators, especially those hard pressed by the stresses of the pandemic. They appear to be more alert, and braver, as the fogs of pandemic lift. Private equity specialists also seem attuned to changes in customer needs and preferences.

Financial relationships in the hotel industry have undergone fundamental change during the pandemic. That was one of the main messages to emerge from the ‘Opportunities in Leisure’ panel session at the Resort & Residential Hospitality Forum 2021. 

Banks withdrew finance from the sector as fears grew about the impact of Covid-19 but private capital operators – providing both equity and debt – are filling many of the gaps.

The shift in business activity away from city centre hotels toward resorts, meanwhile, exposed a knowledge deficit among many of the larger institutions who have traditionally invested heavily in hotels. Tina Yu, principal of KSL Capital Partners, said: “There’s more to investing in hotels than square box rooms in big city centres.”

Benjamin Habbel, founder and CEO of Limestone Capital, an integrated investment firm specialising in hospitality sector, said: “There is an abundance of capital and a big opportunity in interesting projects which are not necessary understood by traditional investors.”

Habbel illustrated his point suggesting that an institution might struggle to understand the sense in having a “700 square foot gym” where it could be used to generate room revenues. Expanding on the point he explained how much post-Covid hotel guests value “yoga, pilates and meditation.”Another message to emerge centred around the speed of recovery. Investors and operators alike are keen for authorities to work quickly to end measures made necessary by the pandemic. Health and safety practices remain a top priority for business leaders but there’s palpable frustration at the way authorities are handling the re-opening process. 

Habbel said that the changes in attitude went further than the kind of service offered by hotels. Visitors increasingly want assurance that the people behind the reception desk run the businesses in a responsible way.

“There’s a desire for authenticity and credibility. Consumers today see through marketing nonsense,” he said. 

The bigger investors may well return, however, according to Tina Yu, once hotel assets have been reinvigorated by private equity owners. Institutions, she observed, typically work around lower cost of capital numbers and can therefore see value in hotels whose fortunes have bounced and prospective investment returns are consequently lower.

This, she added, was good news for private capital looking to exit investments that started out in the distressed category.

Yu’s firm, KSL Capital Partners, invests in travel and leisure businesses. Since 2005, it has raised four private equity funds and two credit funds with approximately $9 billion in equity commitments. Its investments range across travel and leisure businesses, such as hotels and resorts, clubs, fitness, family entertainment, skiing and resort real estate.

Jorge Ruiz, head of hotels in Spain and Portugal for CBRE, the real estate consulting and services company, hosted the session. 

Joining Ruiz was Pedro Seabra, senior partner at Explorer Investments, and Javier Arús, managing partner for hotels at Azora Capital. Explorer Investments is one of Portugal’s leading independent management firms. It currently manages and advises on Euros 1.3 billion in assets across private equity, growth capital, real estate and tourism. 

Azora Capital is an independent asset manager. It has more than €4.3 billion in assets under management. It has traditionally focused on residential, hotels, offices, and renewable energy, and is currently developing new investment themes in logistics, senior living, agribusiness and infrastructure.

The Resort & Residential Hospitality Forum 2021 event was orgainsed by Questex and took place at the Tivoli Marina Vilamoura Algarve Resort in Portugal.