• Institutions eye hotels

Record revpar levels helped hotels in the UK deliver a 3.8% increase in profitability measure goppar in July, according to HotStats.

The news came as JLL strengthened its team targeting institutional investors, with EMEA hotels & hospitality CEO Philip Ward telling us that the institutions were increasingly flexible in their approach to the sector.

Revpar rose by 4.4% to reach GBP105.28 and exceed the previous high of GBP103.78 recorded in September 2016, helped by a 0.2 percentage point increase in room occupancy, to 85.3%, also a record for full-service hotels in the UK.

“Despite recent reports that more than 7,500 hotel rooms have opened in the UK since the beginning of 2017, the highest number of additions since 2012, market performance is going from strength to strength led by room occupancy levels which are giddily high,” said Pablo Alonso, CEO of HotStats.

As performance in the UK continued to rise, JLL said that institutional investors had been  increasing their capital allocation to the hotel sector, with transactional activity globally totalling approximately USD2bn in the first six months of 2017 compared to under USD1bn five years ago.

Institutional investors have been increasingly active in hotels across the Europe, Middle East and Africa region, investing EUR2.8bn in 2016, a 30% increase on 2015. Similar trends have been seen in the first six months of 2017, with institutions investing EUR800m, raising their share of total transactions to nearly 17%.

JLL announced the appointments of Karl Badstuber and Yves Marchal as senior client relationship managers. Badstuber joins from AXA IM – Real Assets and Marchal moves from a previous role at JLL within the hotels & hospitality group. Both will report into Ward.

Ward said: “We’re seeing institutional investor appetite for the hotels and hospitality sector gaining momentum, driven by the increasing volume of capital targeting real estate overall, and the potential for stable, high-yielding returns.

“Our team, including Karl and Yves, works closely with a rising tide of investors seeking to deploy their capital into hotels in thoughtful ways and across the capital stack, at the right time, and in the right locations.”

Ward told Hotel Analyst: “It’s been a principle at JLL that institutions should be a better targeted market than they have been in the past. We think institutions need to pay attention to real estate in general and hotels in particular. We’re talking not just about buying property, we’re looking at debt and equity, it’s that broad.

“What we’re doing is an education process – Karl has exactly the right background for this as he knows what they want, what they’re worried about and how to help them overcome their reluctance. What we’ll be pointing out is that, in a low interest environment they need to look at the yield on offer with hotels. They are also going to find it hard to get the long leases they want in offices, where they are now getting shorter and shorter all the time.

“You hear people say that hotels provide higher yields but that they come with a higher risk profile, but the IPD figures show that, over both short and long-term periods, hotels do see better returns.

“Not all of the institutions are looking for leases, we believe that there is some merit in explaining there are are other options out there, from leases to HMAs. Franchising is a possibility, with institutions buying into a lease agreement with a third party operator and in that way the US and EU markets are converging.”

Commenting on the role the falling pound has played in the UK transactions market, Ward said: “We have seen an attraction in the UK as a result, but the logic is more in the context of the UK’s business profile and Brexit profile. There is a higher yield as inflation is high, as is the case at the moment.

“There is more appetite for London at the moment, but we are seeing some assets and small portfolios in the regions, with interest from private equity and rich individuals. [As for the return of US private equity] they tend to realise that, ultimately, the geopolitical uncertainty will pass and that sense will prevail.”

HA Perspective [by Katherine Doggrell]: The UK transactions market has been, to take a leaf from Alonso, giddy, post Brexit, driven by the bargain hunters seeking cheap UK stock and swept along by overseas travellers equally giddy with the bounty afforded by their currencies.

The only thing holding back the boom appears to be a lack of stock, but with a number of portfolios due to come to market, this is unlikely to be a significant factor. What may slow the market is concern over a clean exit should the pound continue to malinger for the foreseeable.

There is a theory that the rising interest from the institutions could provide a tempering effect, sobering one and all with longer hold times. Ward said: “I don’t expect to see any change in the short term. There is a logic that it will change transactions in the medium term.”

As Ward notes, the role that institutions play in the sector is more nuanced than just buying property. This is good news for the global operators, who may not see the franchises they favour edged out.

For every investment with Dalata and Park Plaza there are those which don’t feature 35-year agreements. It is also worth noting that, although the institutions call to mind dusty, marble-lined corridors, with CEOs dozing in wing-backed chairs in the sun, things have moved on. Many of them have spirited shareholders who look to quarterly results with hunger in their eyes. The move from boom to doze is not a given.

Additional comment [by Andrew Sangster]: This time it was different. During previous recessions, hotels have come in for a kicking from investors as the perceived riskiness of the sector was seen as something to avoid. The past 10 years, however, has seen hotels gain in stature and the sector is now truly of institutional quality. The move by JLL thus makes a lot of sense and similar changes can be expected elsewhere in the advisory business.

Institutional appetite for hotels has moved from a cyclical play (everything else is either too expensive or too risky) to a structural play (this is a long-term bet). There are certainly cyclical factors at play of which the currency shift (with the cheap pound boosting UK demand) the biggest.

But the demand shift has not been huge.

The latest figures from the UN World Tourism Organisation show that UK arrivals are up 8.7% year-to-date. There are other European countries doing even better with Spain up 11.3% and France up 10.1% (although this reflects the post-terrorism recovery).

Nonetheless, the UK is now number six globally in terms of tourist arrivals, overtaking Turkey and Germany. It lies in spot number seven in terms of global receipts (Thailand, although having fewer arrivals, makes more out of each arrival on average).

Whether or not the UK can maintain its position in the league tables matters little to investors provided the country retains a profitable tourism product. Brexit looks likely to make it harder to make money in the medium term given the expected increase in labour costs. How bad these will be nobody has a clear fix but the leaked papers from the UK Home Office in early September caused a huge stir in the industry: the British Hospitality Association warned that implementing the proposals, which suggested an immediate end to free movement of labour on Brexit in March 2019, would be “catastrophic”.

In all likelihood, the immigration situation is going to be a lot more liberal than these initial proposals. But there is no certainty. The hotel industry has worked hard to build its reputation with institutional investors. Now it is the turn of those investors to repay the compliment and join with the hotel sector as it lobbies the UK government on Brexit.


Image: Karl Badstuber

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