European Hotel Bargain Portfolio Deals On Hold
Date: April 2022
Location: Mainly Europe
What Did They Say: Frustrated investors are still waiting with cash in hand to enter the European hotel market, as hopes of a raft of distressed opportunities fade.
Who They: Hotel Analyst
Main photo: One of the hotels within a Spanish portfolio recently put up for sale
Agents see little prospect of large portfolio deals in the immediate future, while attention is diverted by international affairs, not least of all the Russian atrocity on Ukraine, despite many European markets looking forward to the promise of eased covid restrictions and a travel bounceback.
According to an analysis by Carine Bonnejean, managing director of hotels at Christie & Co, just 2.5% of European hotel deals have been genuinely distressed positions. “Insolvency practitioners are quiet – but the big question is going to be around refinancing.”
Speaking at a webinar organised by Christie, Matthieu Dracs, deputy managing director at Extendam, opined: We’ve all been waiting for distressed opportunities, but nothing happened. I think the good occasions to buy are behind us. Owners were able to keep their assets for the last two years, so they were not forced to sell.”
And Daniel Roger, managing director of Fattal Hotels Europe & UK, who has just acquired a Spanish resort hotel, added: “Right now, there are no bargains – it depends on the banks.”
According to a new reckoning from consultants HVS, hotel values recovered in 2021, with an average 5% increase in valuations across the continent.
“Markets that saw stronger value recoveries in our research were gateway cities, which experienced increased demand from the summer of 2021 onwards, or those that were well placed to benefit from domestic leisure demand,” said report co-author Mathilde De Bona from HVS. Colleague Nikola Miljković added: “The case for hotel investing remains as strong as ever and while new challenges have emerged, it is comforting to see the hotel sector’s resilience in the face of these multiple obstacles.”
One of the largest recent deals in Europe was not a sale, but a change of leaseholder. In France, landlord Covivio has switched 31 hotels from Accor to rival B&B, in a move that will grow B&B’s French presence by around 10% at a stroke. The properties were previously leased to AccorInvest and branded Ibis, Novotel and Mercure.
Interestingly, Covivio has replaced the previous flexible leases with Accor, instead opting for fixed leases with the new tenant, with a 12-year term. Covivio says the rents agreed will deliver a superior return.
“We have several levers for supporting the hotel industry’s recovery in 2022: establishing the best operating model for our hotels, continuing to support brands in their development and investing in our hotels to match traveller expectations as closely as possible,” said Tugdual Millet, CEO hotels at Covivio. “This decisive transaction activates all three levers and helps further enhance the value of Covivio’s hotel portfolio.”
There have been some key changes in attitude, however, following the pandemic. Notwithstanding the Covivio lease deal, both landlords and tenants are talking more positively about flexible leases. “We prefer hybrid lease agreements, with a certain base – this is what we are heading for,” said Fattal’s Roger, speaking at the Christie webinar. “And we are also concentrating on purchasing hotels.” There was also movement at landlord Union Investment, where head of hospitality Andreas Löcher said: “We would structure in more variable rents – maybe 10%, that could be higher.” He also noted that the pandemic had changed the metrics: “We’re looking at the covenant strength, but also the coverage of the lease, which needs to be at a minimum level. We are probably seeking slightly higher coverage now.”
Both Fattal and Union are now keener on the leisure markets than previously. Fattal recently closed on a Spanish coastal hotel. “We saw an opportunity near Malaga, for a price that we thought was reasonable,” said Roger. “As we’re already so well established in major cities, we feel we can now look at resorts. In Israel, we’re very strong in resorts, and doing very well there.” And Locher added: “We think that now it’s really the time to get into resort hotels.”
For investors, finding value in an age of minimum distress means thinking differently, said Extendam’s Dracs. “We will improve profitability by a new way of operating and investing in hotels.” That could mean conversions from hotels into mixed use properties, for example, or making hotel lobby spaces more animated. “We’ll have to change our mindset, and our investment targets and strategies – we need a broader vision of the investment and to be more active and agile when we want to buy something.”
HA Perspective, by Andrew Sangster: Deal volumes in 2021 were about two-thirds of what they reached in 2019, according to consultants HVS. But this is much improved on the EUR8.6bn achieved in 2020, about a third of 2019 levels.
HVS’ 2022 European Hotel Valuation Index found that the average price per room increased by 15% in 2021 on 2020. And while there are myriad explanations for this statistical outcome, it fits the narrative of there being few bargains.
Since the start of the pandemic lockdown created trading crisis, Hotel Analyst has been forecasting that we will not see the distress witnessed during the 1990s. There is simply too much money waiting to be deployed.
The economic crash was a supply crisis not a demand crisis and financial institutions have emerged in robust health. Both debt and equity are available in abundance.
The recovery, however, has been knocked off course by the invasion of Ukraine. An already challenging cost environment has been supercharged with inflationary surges in energy and food inputs plus a post-pandemic lockdown employment landscape that is incredibly tight.
It is far from clear how long these inflationary pressures will last but early hopes we expressed on these pages prior to the Ukraine invasion that energy price pressures might subside towards the end of this year look forlorn.
We have an even more challenged operating environment which will make balance sheet repair for operating companies ever harder. Some, perhaps many, will not make it. A significant level of equity is going to be needed. How that is delivered is going to be critical.
During the first stages of the 2008 crash, into 2009 and 2010, it was not the basket case companies that went into administration. Rather the banks focused on those assets that were fundamentally robust businesses but that had breached technical covenants.
An example from the hotel sector is the City Inn/Mint portfolio that Blackstone acquired for GBP600m in late 2011. Controlling lender Lloyds (inheriting the portfolio via its Bank of Scotland takeover) sold the business to the frustration of the management team to yield cash to shore up its own balance sheet.
But this time around, banks do not need to offload good businesses. Equivalents to Mint today will find lenders far more willing to hang on to maximise value. Those businesses that are fundamentally broken (and there are a few chains in this bracket) are not going to attract interest from buyers. A big transaction boom does not look likely in the near term.
The next few years will determine where the broken businesses go. Interest rates will rise but, unless there is a dramatic shift in the environment, they will still be at historically low levels.
Some commentators believe we are about to enter the 1970s: high inflation being followed by rising interest rates and stagnating growth. I’m not so sure. There is a strong argument that the current environment is much more like the late 1940s.
If you want academic wonkishness to support my thesis, I will point to Russian economist Nikolai Kondratieff. His theory of “super-cycles”, lasting 40 to 60 years, suggests that we are in a period of prolonged low interest rates.
Interest rates peaked in 1860, 1920 and then again in 1981. They hit lows in 1899, 1946 and it looks clear: 2021 / 2022. Back in 1946, inflation hit almost 20% in the US (much lower in the war-ravaged economies of Europe but even in the UK it spiked a bit to hit 7%) but interest rates remain low for the following two or so decades.
It might be that we have a slightly delayed turn in the Kondratieff Cycle. What followed the 1940s was a golden period of economic growth for more than two decades. Perhaps that is now to come too.
THPT Comment: As always we are grateful to Andrew Sangster and his team at Hotel Analyst for his/their insightful views and comments
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