Starwood Capital has made its first substantial foray into the serviced apartment market, purchasing the property assets of Think apartments in a GBP206m deal. News of the deal came as the acquisitive private equity group also revealed it has purchased two Scottish boutique hotels.
The acquisition gives the investor four extended stay properties in London, with a total of close to 650 apartments. The deal with administrator Duff & Phelps also included a residential development in London’s Bermondsey area with the potential of more than 60 apartments to complete and sell on individually.
The four properties were handed to administrators last September, after the freehold owning company was put into administration; they are located at Tower Bridge, Bermondsey Street, Earls Court and London Bridge. The administrators then appointed established serviced apartment operator and developer Go Native, to manage the properties in the interim.
Guy Nixon, chief executive of Go Native, said the original temporary management agreement has now been extended with Starwood Capital. The two are now planning how best to maximise returns from the three star properties. “They’re in good locations, but they all require some investment,” he said.
The move left Think with just two London properties, which were not affected by the administration, to continue managing itself.
“We are excited to establish ourselves as a leading player in the extended-stay hotel/serviced apartment market, which we believe is one of the most promising and under-supplied real estate sectors in London today,” said Cody Bradshaw, a senior vice president at Starwood Capital, and head of European hotels.
The deal was highly unusual, as each of the four serviced apartment blocks were unfinished, having some floors complete and operating, while others were only ever finished to structural shell, as development funding ran out. Bradshaw said half of the value creation from the deal will be in finishing these units and operating them, and in completing the rental of ground floor retail units which are also still boarded up.
The Think properties came under the control of Ireland’s National Asset Management Agency, with whom Starwood Capital has previously traded, having bought a non-performing loan portfolio in 2013, secured against a range of Irish properties. Bradshaw said the offer to examine the Think deal was an interesting one, but because of the state of the buildings, had taken a long time to put together.
He said Starwood Capital is excited about being in the serviced apartment sector, particularly as it is far less well developed in the UK, compared with the US, where “in many ways, it’s a category killer”.
In Scotland, meanwhile, Starwood Capital has acquired the Town House Collection, paying an undisclosed sum for a two hotel group. In Glasgow, it gains the five star, 100 room Blythswood Square, while in Edinburgh the 49 room boutique Bonham hotel will also transfer ownership.
“We have become intimately familiar with the vitality and potential of Glasgow and Edinburgh through our management of the George, Roxburghe and Grand Central, and believe that this acquisition perfectly complements our strategy of purchasing prime hotel assets in the region’s top-performing markets,” said Bradshaw.
The deal was a result of Starwood approaching Scottish hotelier Peter Taylor, who set up the company in 1989 and said he had not been planning to sell. “The approach captured our attention, the deal was right, and the timing will allow me to focus on new challenges, knowing that the company and, most importantly, our team members will be in safe hands.”
HA Perspective [by Chris Bown]: Private equity players are making the most of the fact that established hotel investors have yet to get comfortable with the serviced apartment sector and mainstream investors are wary of entering a new niche that has few metrics.
One example is Oaktree Capital Management, which has been investing in the sector in the UK, and is promising to reveal its new brand at the Berlin conference in March.
And now into this space comes Starwood Capital with an adventurous play. It has a wide choice of options, and will see few downside risks in owning several blocks of apartments in central London. It could launch its own brand, or buy into one. Alternatively, there are a raft of branding opportunities for the properties, as the major chains have been struggling to find product on which to hoist a flag in the London serviced apartment market.
Marriott’s Residence Inn has yet to sign a site in England – but is faring strongly in Edinburgh: Adagio has signed to take two developments from Union Hanover, both in east London, but the first of those won’t open until 2016.
In Scotland, Starwood Capital has clearly picked off the Town House Collection properties as it sees the Glasgow and Edinburgh markets delivering solid medium term returns. It already owns the George and Roxburghe in Edinburgh, and Grand Central in Glasgow, via its Principal Hayley purchase. As recent results from other Scottish groups Apex and Macdonald demonstrate, the region is enjoying strong business there in city markets with little new supply. With the jitters of the independence campaign and vote out of the way, Scotland appears to be firing on all cylinders.