Despite ongoing macro-economic concerns, the southern Mediterranean’s fractured ownership of hotel assets means that value add opportunities remain, while the fundamentals continue to support leisure, according to a panel of investors speaking at the Resort and Residential Hospitality Forum in Lisbon.
Discussing the host market, Javier Arus, partner, Azora said that Portugal had “done a fantastic job” as a country in terms of attracting visitors and despite a slowdown in transactional activity, he predicted that investors would continue to seek opportunities across the country.
“It’s been a very safe environment in which to invest and I would rank the Portuguese market in terms of interest as high as anywhere,” said Arus. “We have seen a lot of interest but limited transactions, plus a very strong operating performance, but also a significant gap in terms of valuation. But it’s still a market which offers a lot of opportunities and will still be on the radar of investors in the coming years.”
He added that there were “some myths” around leisure investment concerning seasonality and cycles, but said that for cash flow motivated investors that “don’t care whether the income is driven in six months or 12 months” it was an attractive opportunity.
He pointed out: “The leisure sector has recovered quicker than the corporate market and is more resilient. As those myths have come down and investors have become more educated, they are starting to understand the market much better. Now they are probably doing it for their value-add strategies but I see them starting to think more long term. I am a strong believer that the capital that was looking pre-Covid will be coming back soon.”
Fractured ownership opportunities
The fractured ownership that remains prevalent across many southern European countries, which continue to feature many family-owned hotels, means that there are still sizable opportunities for experienced investors added Brian Betel, Head of Direct Assets, Activum.
“There are a lot of improvements that can be made on family-owned assets. It is tough to be competitive with the high interest rate market, looking at the exit strategy, which gives us a bit of pause. But it’s hard to price to perfection,” he said. “We continue to be very excited about southern Europe, particularly southern Italy, and feel that it has a lot of legs in luxury. We’re a little concerned about the three-star market but feel there are specific value-add opportunities.” He said that although more sources of investment were entering the market, the operational-intensive nature of the hospitality sector meant that it was not a suitable real estate asset class for everyone.
“For long term investors, if they are looking hotels that have been operating for a while then they have quite predictable performance,” he said. “However, capital raised to seek opportunities [post-pandemic] has struggled to find assets available at the right prices and the risk to return equation means that there is a lot of money that has not been invested.”
Challenge to find assets
That point was taken up by Rob Mangan, director, Bain Capital, who said that the investor had traditionally looked to acquire mature assets with the infrastructure and staffing already in place. Despite the challenge of finding suitable assets, he remained positive about the Italian market.
“Rome is having a record year, we’re also developing a hotel with Marriott on Lake Como, so continually looking for opportunities but it can be very hard to find them. The cost of financing is going up and we look for assets we can improve and the costs are going up and up,” he said.
“Hotels offer a lot of operational opportunities [in terms of adding value] and a lot of institutional funds see that. I don’t see them getting into under-invested, value add assets but as a seller as well as buyer, I believe there will be more buyers out there.”
Li Zhang, Senior Vice President. Brookfield Asset Management, said that he was also seeing new capital players moving into Spain but said that pricing remains a challenge in terms of value. He said that Brookfield’s focus is to “get into the nitty gritty” of operational turnaround, stressed that there is “always something to be done with these assets”.
He added: “Given the relatively fractional ownership in these markets, we continue to find these opportunities. It’s about creating he right strategy and there is always something you can do to optimise the space.”
Looking at the US as an indicator in terms of European capital flow trends, he noted that a number of REITs in the US had come into the leisure space and had become “comfortable in terms of value in the leisure space” and said that he was hopeful that the same could happen in Europe.