Government support for the hotel sector meant that opportunity for investors was slow to come through, according to Questex’s fourth quarterly Investor Sentiment Assessment, in partnership with ABP Invest.
Vaccine-driven hopes of a recovery in the market saw investors return to the core hotel product, after having deviated into serviced apartments in the previous quarter.
The study found that investors in Europe held a higher allocation in dry powder; at 50% of capital, compared to 30% for Asia and UK, with Americas at the lower range of 20%.
The median amount of dry powder within investors’ hospitality allocation was 30%, with private equity groups, private property companies and institutional investors broadly in line with the median. Family offices had a lower allocation at 15%.
Across the regions surveyed, Europe stood out in terms of investors waiting for better opportunities to invest in the sector. The study reported anecdotal evidence to support the frustration by some investors within the European hospitality industry “as ample policy liquidity from the central bank and fiscal support through furlough schemes have reduced liquidity and maintained valuations high”.
The report’s authors expected the “unprecedented fiscal and monetary support” to remain supportive, in order to prevent an economic crisis turning to a socio-political crisis with more significant longer term effects.
Thanos Papasavvas, CFA, founder & CIO, ABP Invest, said: “The three biggest challenges the investors have identified for the Hotel industry over the ensuing 12 months are not surprising: economic slowdown, geopolitical uncertainty and oversupply. Yet in our view there is an up and coming development which is still low on investors’ radars: inflation. We believe the unprecedented magnitude of stimulus, the receding globalisation with elevated trade costs and higher fixed costs should see rising prices later in 2021.
“This, however, should be positive for real estate investments in general and hotels in particular as an ‘inflation hedge’ alongside commodities and other real assets. A further positive for the industry this time round is that unlike previous cycles where central banks rushed to raise rates and contain inflationary pressures, this time around central banks will be more patient keeping borrowing costs lower for longer.”
Alexi Khajavi, president, hospitality & travel, Questex, added: “The Investor Sentiment Assessment report has become a bellwether for the hospitality sector in a time of crisis and we couldn’t be more pleased in the prescience of starting this in Q1 of 2020 and the latest results from Q4 2020.
“The Q4 benchmark is particularly informative in showing how capital from different regions is impacted by government’s response to the economic crisis caused by the pandemic. European investors hold a higher allocation of capital in dry powder at 50% whilst investors in the US are holding only 20% of capital in dry powder.
“This is due in part to the EU having provided greater government support to owners and operators thereby reducing the distress whereas in the US we see a more fierce free market model with lenders particularly CMBS foreclosing and or forcing assets into administration which has translated to more transactions occurring in 2020.”
While the region itself had yet to see any significant transactions, as the report was released it was seen to be driving them, with Kasada Capital Management announcing the first transaction made through its debut fund, Kasada Hospitality Fund, acquiring a portfolio of Sub-Saharan African Hotels from AccorInvest for an undisclosed price.
AccorInvest was in the final stages of refinancing and speculation in the market suggested that a number of hotels, including many in the luxury segments, would be sold by the group as it shored up its position after a difficult trading period.
The assessment found that there had been a marked improvement in expectations of economic conditions for the ensuing 12 months, with 75% of investors expecting improved economic conditions, 7% stable and 18% deteriorating conditions. This marked a significant increase from the previous quarterly assessment and the highest since the inaugural assessment in March of last year.
Only 5% of investors expected a significant deterioration in economic conditions over the next 12 months compared to 17% of investors in the previous two surveys and 53% of investors in the inaugural assessment in the midst of the coronavirus pandemic in March last year.
The previous quarter’s assessment found that 53% of investors expected economic conditions to improve over the next 12 months, compared to 41% who expected them to deteriorate. At the extremes, 9% expected a significant improvement with 17% expecting a significant deterioration.
In the inaugural assessment in Q1, 80% of investors expected to be net buyers of hotels; this came down to 78% in the Q2 Assessment and dropped to 62% in Q3 and 61% for the most-recent quarter.
Illustrating the progress in keeping the virus under control, Asian and European investors were significantly more optimistic about the coming 12 months compared to investors in the UK and Americas. Ninety per cent Asian investors and 87% of European investors expected improved economic conditions against 58% and 53% for UK and Americas respectively.
Looking at the results by investor type, institutional investors and private equity firms were more optimistic with over 80% expecting improved economic conditions over the next 12 months, with family offices and private property companies at a more restrained 73% and 58% respectively.
As the mood improved, so did attitudes towards the core hotel product, with hotels coming back on top as the best investment opportunity, having been overtaken by serviced apartments in the previous quarter. Serviced apartments came in second, followed by extended stay.
Insight: And so all is right with the world and the core hotel product is back in favour, after some dalliances with the serviced apartment and extended stay sector. Don’t worry, we shan’t mention it, it will be our little secret.
While investors turned their eyes back to the meat and two veg of the sector, it seemed likely that all would not be the same and deals currently being done suggested that properties which could combine a number of different models would be back in favour. Investors weren’t quite ready to forget how quickly hotels can be closed - particularly when so many still were.
As for the blood on the floor? There hasn’t been the distress that many were expecting and hoping for. Yet. That government support which was causing much gnashing of private equity teeth is not universal - in the UK the government has yet to develop a taste for the market and the issue of rates and imminent rent has not been resolved. The rich picking grounds may yet appear.