Investors seek quality

Urban Living

Investors in the sector were looking to distress, but also to businesses which had strong models when deciding where to spend, according to the Urban Living webinar on investor sentiment.

Hotels remained popular, but student housing, coliving and hostels were also expected to attract interest.

Mai-Lan de Marcilly, director, real estate, KKR, said: “Securing financing for hospitality deals in the next few months is going to be more challenging. We are seeing a bifurcation in the market between businesses which will survive and not. There will be a run towards quality and towards covenants. We are going to continue looking at the sector, we will wait more than six months for distress, but we will continue to partner with groups which have the right model to grow.”

She added: “We will have a lot of fire power in the next few years. We will be looking at residential, student housing and hospitality. We want to create platforms in these granular sectors. We are also focusing on affordability, including in hostels, where we think there should be consolidation in the sector. Only 8% of the rooms are branded.

“We will also be looking at coliving, we believe in community, we think that people will not want to live on their own - it also offers affordability and we will be looking across Europe in this sector.”

Looking to the next phase in the pandemic, Michael Abel, partner, TPG, said: “The last few months have been highly unusual. There was a focus on the existing portfolio to make sure they were positioned in a way that meant they could weather the storm and we are in pretty good shape. In the last few years we have been net sellers - we were paranoid already around the cycle. Our most-recent acquisitions have been more downturn-resistant, such as student housing.

“The flip side is that we raised our last fund last year, where we have 80% not invested and I believe we are at the beginning of a major repricing, so the next few years could be very interesting. It takes time for opportunities to come through, but they do come.

“Most of the strategies we have in place will continue, but we will add a few new ones which might be more interesting than pre-Covid. The hospitality sector could become more interesting- we will have the opportunity to grow A&O Hostels more, but there are likely to be other opportunities out there.”

Commenting on the timing of potential distress, Abel said: “You will see some distress [in hotels] but I expect to see the cracks at the beginning of next year. It will depend on the geography - Germany is dealing with this crisis better than others - and it will depend on the type of product you have. The budget space is a bit more resilient because of the cost model. At A&O we have a much smaller  cost model - we have a breakeven occupancy of 30%. When travel is put on hold even 30% hurts, but we are more agile. There will be some interesting opportunities, you need to think about your differentiated angle.

“Generally banks don’t want restructuring cases on their table and are trying to differentiate generally healthy businesses. What we have seen is that banks have been constructive.”

Lissa Engle, founder & managing director, Berkeley Capital Group, added: “Thankfully in this market there is no distress yet. People are working together.”

Looking into the spaces around the edge of hotels, Christian Birrell, investment fund manager, Coliv Fund, DTZ Investors, said: “Over the last three or four weeks when people have come to grips with their portfolios, we’ve had a lot of interest from institutional investors. Across coliving we’ve have 94% rent collection and when you put that against retail and office it looks good. This pandemic has been an acceleration of trends - coliving everyone was already looking at, but its grabbing a lot of investors’ attention.

“A lot of opportunities have opened up which wouldn’t have been there. There’s not a lot of distress in the market yet, but a few weeks ago developers had access to capital which they don’t now and that makes us a lot more competitive.”

For Florian Schmitz, founder & CEO, Resonance Partners, there was caution to be had around hotels. He said: “Everybody was expecting a correction although not in this form. There is a risk of a second wave, which is a distinguishing factor in Europe, it’s too early to tell how this is play out in the short term. We have been staying away from hospitality because it is too cyclical, but coliving and student housing are doing relatively well here. We’re not just looking at the pandemic as a factor, we think that globalisation will also be a factor, with trends towards a more national approach. With protests and riots there are concerns that cities will be less attractive in the long term.”

 

Insight: The key difference between this downturn and downturns past for the sector is that it’s not its fault. Not in a whiny ‘why is the dog smeared with chocolate cake when you were meant to be watching it’ way, but in a bona fide, nothing we could have done way.

The hope had been that this would mean that businesses could just reopen and life continue as before, which, without a vaccine, was not going to happen. So for those looking to invest in the sector - and there are still many - the choice is waiting for distress or finding the angle. In the case of the former, it’s a’coming. For the latter, it’s been time to look at serviced apartments- which have fared well in social distancing - or hostels, which have low costs and, it is thought, more adventurous clientele.

Until then, support from governments and banks will be required until trading can move past breakeven. Banks don’t want to end up owning hotels, but the good - and bad news, depending on your angle - is that the famous wall of money is still eager to dive in.