The European transactional market continues to be paralysed by the bid-ask spread between buyers and sellers for leisure-oriented hotels, according to a panel at the Resort & Residential Hospitality Forum in Lisbon.
Despite the higher inflation rates meaning that buyers are looking for value to justify acquisitions, the strong operational performance of many hotels means that sellers are not motivated to take lower prices.
In terms of refinancing opportunities, Cristina Hoyo, Southern Europe Director, Covivo, said that the company still “has appetite” for prime locations at the 5.5%-6% debt frate but she stressed that for those types of refinancing deals hotel locations would needs to be in the likes of Lisbon, Madrid, Barcelona or Paris.
“For other destinations, the rates go up,” she said. “Today there is an enormous gap [in value expectations], because the performance of the hotels is as good as ever so the owners don’t have any reason to sell and they are not motivated to sell. Now, with the higher interest rates, you cannot do a deal.”
Capucine Pedrazzini, Director Alternative Investments Europe, Invesco, added that she believed there are still good deals to be done, and said that the company has definitely noted a more active deal flow than at the start of the year.“But you need to be creative,” she said. Fortunately, we are in an asset class where that’s possible. ESG has also definitely impacted our leisure strategy. If you look at resorts you have swimming pools and golf courses, which are challenging. So we have looked at cities with a strong leisure component, like Malaga and Florence.”
Inflation Erodes Revenue RisesHowever, Dominic Seely, Vice President Acquisitions & Development, Westmont Hospitality Group, also stressed that despite the strong operational side of the hotel market, room rates increases and impressive returns needed to be seen against the rapid rise in inflation across Europe.
“It’s about inflation, hotels are a great inflation hedges and luxury hotels are an even better hedges as there is more inelasticity in what guests have to spend,” he said. “But you have to adjust your numbers for inflation, it’s one thing to look at RevPAR rising but when you adjust there are very few hotel markets that are outstripping the headline inflation rates, the two that are achieving that are Paris and Rome, which are double digit outperforming.”
He pointed to a market such as Germany, which is still underperforming compared with pre-pandemic when inflation is taken into account.
“Time will tell,” he said. “Luxury is strong but it can be very hard to cut costs in that market, but for a true picture I think we need to have this conversation in 12 months.”
In terms of where Westmont Hospitality Group might look for possible acquisitions, he said that the company tends to look at the level of brand penetration, citing Italy and Greece as strong target markets, plus Portugal.
“We like unloved, under-marketed, and hopefully under-priced assets, which we can take up or down [in terms of star rating],” he said.
He agreed with the rest of the panel that the transactional side remains extremely quiet and pointed out that the company had completed just one deal from around 120 possible acquisitions where it had signed NDAs before proceeding.
Low Conversion Rates“When we look at that first half of year, that means we had less than a one per cent conversion rate after signing NDAs. There are very low volumes compared with normal, because of all the things going on in the world, because the bid-ask is 20% or 30% off. There’s a lot of holding breath. Next year, we think we’re going to see a lot more activity as that gap narrows,” he added.
Union Investment Real Estate has also completed one deal in the first half of 2023 and Andre Pinto Gomes, Senior Investment Manager, said that the investor’s gradual move into the leisure hotel and resort market had been slow, as the market initially lacked the structure suitable for it to invest.
“It’s been a long process to go into the leisure sector. At Union we started many years ago to dig deeper into the leisure segment, however at the time the segment was more family owned without really an institutional structure and seasonality was quite high. As we are regulated, we are only able to do lease contracts, so that’s never easy with very seasonal products,” he explained.
“What we’ve seen over recent years is more and more new products, more large-scale investment volumes and more professionalism in the segment and the reliance on seasonality is declining. Also, the pandemic proved the resilience of the leisure segment and this was important to convince us,” he added of why the investor now sees leisure hotels as a core sector.