Schroders Capital, the private asset arm of Schroders, managing more than €20 billion of real estate, saw the expansion of its hospitality strategy overlap with the pandemic outbreak, but still prove a timely bet.
Schroders unveiled the first closing of its debut pan-European operating hotels fund with €300 million of equity commitments from European institutions and family offices in January 2020, just 10 days before the World Health Organization (WHO) declared the COVID-19 outbreak a public health emergency of international concern.
Yet as lockdowns spread across Europe and hotels were shuttered around the world, capital commitments continued to roll in. The firm exceeded a €500 million hard cap target with the fund’s final close at €525 million in August 2021, boosted by further European sums, and a sizeable pot from a Middle East sovereign wealth fund. The Zurich-headquartered closed-ended fund, which focuses on hotels and resorts in Europe, started doing deals as hotel owners eyed over 12 months of lost income and an incipient staffing crisis.
COVID-19 dealmaking
Its first deal, for the five-star Grand Hotel Central in Barcelona, was struck in July 2021 and “exemplified the fund’s strategy”, according to Frederic de Brem, head of real estate hotels, Schroders Capital. He said at the time of the deal: “COVID-19 has been a massive learning experience, even for our highly experienced team. Our cost management skills have been carefully honed over the last year on the 50+ hotels currently managed by the team and we believe this will enable us to be even more effective in our new deal underwriting.
“We’re not a private equity player looking to generate out-sized returns by making large, risky recovery plays on distressed assets in average locations; we’re focused on securing off-market deals offering deal security to sellers of high-quality assets in great locations that can benefit from further asset management optimisation.”
That strategy subsequently played out with a triple deal in Berlin just a month later for the Holiday Inn Hotel, the Indigo Hotel and the One80° Hostel, totalling 527 rooms and located at the landmark Alexanderplatz. The acquisition also involved Capital France Hotel, a hotel investment vehicle managed by Schroders Capital’s real estate hotels team.
While the two hotels were earmarked for renovation and leased long-term to Premier Inn, there were different plans for the hostel. This property was initially to be operated by the seller under a long-term agreement. However, in January 2023, Schroders revealed that it had struck a deal with Queensgate Investment’s Generator Hostels in a rare third-party management agreement for the latter.
The hostel became Generator’s 17th address in Europe as of 1 January 2023, and its first third-party management agreement in Europe, as part of a new venture for the hostels group which typically owns the real estate it operates. The agreement followed another third-party deal in September 2022, when it took over management of The Paramount Times Square in New York.
Operational interest
Schroders also likes the operational side of hotels, according to James MacNamara, head of operational real estate strategies for Schroders Capital, although it pivots across a variety of management models.
In an interview in April of last year that touched on the 55 hotels it owned across nine European countries at the time, MacNamara told PERE: ““For many of these hotels, we’re responsible for the day-to-day operations, i.e. we’re both landlord and tenant. One of the benefits of being in this position is that we have greater flexibility to adapt the property in order to maximise returns from the business within the property.”
MacNamara said this had translated into key “opportunities”, such as “converting hotel rooftops into trendy food and beverage locations, converting basement space into private cinemas and using hotel common areas for co-working spaces that leverage other services, such as internet connections and food and beverage services”.
For Schroders Capital’s global head of real estate, Sophie van Oosterom, this aspect is a key differentiator for the firm’s skillset as a whole. “We believe these operational skills are becoming increasingly important even in the wider real estate market,” she noted at the final close of the hotels fund.
“Adopting this hospitality mindset that our team displays with respect to customer service, resource optimisation, and account management, is key to securing sustainable income and unlocking value for our investors. This does not apply exclusively to the hotel space but to all real estate asset classes.”
Added MacNamara: “Operating hotels is not just about making the physical space more efficient. It’s also about providing an experience and connecting on an emotional level with the guests, using interior design, staff, taste, branding, marketing, associations with musicians and artists etc. Creating and providing these experiences requires a hospitality mindset that complements purely looking at the physical real estate.”
2023 exploits
So far in 2023, the fund has struck another three times as it exploits a changed dealmaking environment once again. While transaction volumes may be down overall in real estate, however, Schroders Capital is targeting assets in strongly performing locations that have largely proved resilient in recent times. The year kicked off with the acquisition of two Hoxton hotels, one in Amsterdam and one in Paris, for a reported €260 million. Under the deal, both hotels will still be run by Ennismore, the joint venture with Accor.
Following that, Schroders Capital acquired The Standard Hotel in Ibiza for an undisclosed sum in mid-January. The recently built 67-room hotel has a central location in Ibiza old town and includes street-level restaurant Jara on the ground floor, a rooftop pool, and views of the marina and the old town.
Benjamin Chiche, investment director, real estate hotels, Schroders Capital, said of the deal: “We were attracted by the combination of a newly-built property in an excellent location with the power of The Standard brand behind it.”
The acquisition brings Schroders shopping spree in the European luxury-lifestyle sector to four hotels in around 12 months. Chiche underlined that the firm’s expertise was making it easier to buy hotels at pace: “This depth of experience in operating real estate makes Schroders Capital a preferred buyer for sellers of such assets, and in this instance allowed the transaction to complete within four weeks.”