The high deal multiples which are currently being seen in the sector are being attributed to more lenders and a positive sentiment, attendees of BLP’s Annual Hotels Conference in London heard.
There was an air of caution at the event, with speakers at the end of September event identifying a mismatch between what sellers expected and the reality of the market.
Andreas Scriven, international managing director and head of consultancy, Christie & Co, reported that buyers who could offer all cash were still a differentiator for getting deals done. He said that UK buyers were still dominating outside London and that sovereign wealth funds were not as interested in the sector as the press implied.
Scriven added: “You can do all the due diligence you like, there’s still a leap of faith needed to do the deal.” He said that there was some expectation amongst sellers that the recent increase in deals meant a return to the kind of deals done in the run-up to 2007 was not the case, commenting: “The idea that there are new entrants waiting on the sidelines with a suitcase of cash to do silly deals is not true.”
Shane Law, COO, Patron Capital Partners agreed, adding that the higher multiples were attributable to more lenders and positive sentiment. He said that they were probably sustainable “for a while”.
Delegates were given the chance to vote live on a number of issues throughout the event, with 54% forecasting that funding would be lead by private equity in the coming year.
The operators were equally unconvinced of a slew of new players in the sector, with Felicity Back-Roberts, senior director, development, western Europe, Starwood Hotels & Resorts Worldwide telling the audience that the “usual suspects” were doing deals although there had been “some newcomers” coming into the market. Philippe Bijaoui, vice president, development, Europe, InterContinental Hotels Group added that the majority of the group’s growth was coming from the “usual partners”.
There were some concerns ahead. Scrivens talked about the “potential risk as mothballed hotel projects start to come online”. In addition to more supply, there was also likely to be an increase in properties coming up for sale. Scriven pointed to “at least” three regional portfolios due to market in the next few months, priced at GBP150m to GBP250m.
It was expected that an increase in property coming to the market could affect pricing. There was some anticipation ahead of the bank asset quality reviews, due in October, and what that would mean for those assets. Law asked whether failing stress tests would lead to banks selling assets and acknowledged that the results “will set where investors focus”.
Law concluded, however, that hotels remained a “massively attractive sector”.
HA Perspective [by Chris Bown]: Private equity players love hotels, and they have plenty of funds to invest; several have also put together management platforms in the expectation of winning a number of bids. Visit the De Vere Venues website to see how a platform play works – Starwood Capital will pitch you meeting venues from its De Vere, Principal Hayley and Four Pillars group purchases all together on the same page. With a few exceptions, such as property company Topland, the equity guys have the market to themselves.
For some, those management platforms are sitting twiddling their thumbs, still waiting to land the big portfolios that will give their teams some assets to actively manage, having been outbid on some recent large deals. Kew Green scooped the IHG regional portfolio of Holiday Inn properties, while the owners of the Travelodge business made the top bid for a major portfolio of their own properties.
Lloyds has made substantial headway in offloading its hotel encumbrances, and will shortly announce the winning bidder for the De Vere Village portfolio. Back in April, RBS bought back five Akkeron hotels to put under its Jupiter management company, which now manages 32 properties – how long will it hold onto those? And across the Irish channel, NAMA and Ulster Bank are placing more property on the market.
Of course, for an investor, the purchase price is not the only consideration. Out of the back of a period operating in recession, many hotel properties put up for sale will need substantial further investment to replace tired fixtures and fittings.