Schroders has made a big move into the hotel sector with the acquisition of Algonquin, for an undisclosed fee.
Algonquin founder Jean-Philippe Chomette told us that the deal would open the company up to greater interest from the institutions.
Chomette said: “It was the right time to sell Algonquin and move it onto a more ambitious path, with a big partner. It will give tremendous clout with the institutional investors. We had built up our own following with the institutions over the past 15 years, but this will take it beyond that.”
Chomette will remain as an advisor to the group and work with Schroders on investing private equity money into the hotel sector. “From being the majority owner, I will become a client,” he told us.
Algonquin began by investing in hotels with its own capital and directly managing them. The group currently manages assets across Europe, comprising more than 7,500 hotel rooms and representing EUR1.8bn-worth of assets. These hotels are primarily managed through Algonquin’s own brands or franchises including Sheraton, Marriott, Hyatt, Radisson and Sofitel.
Duncan Owen, global head of real estate, Schroders, said: “This acquisition complements Schroder Real Estate’s existing focus in sectors including offices, retail, logistics, self-storage and large multiple use sites. Our strategy has been to concentrate on what we define as winning cities which benefit from key structural themes of urbanisation, changing demographics, technological innovation, the shifting demand from Asia and strong infrastructure.
“Algonquin’s track record will complement our strong investment performance with over 85% of our AUMs outperforming over the last one, three and five years. Their client base includes some of Europe’s largest financial institutions and the quality and experience of its employees are some of the principal reasons why Schroders is acquiring the business.”
Frederic de Brem, current CEO of Algonquin who is set to join Schroders as head of Schroder real estate hotels, added: “We believe it is a large market supported by strong fundamentals of growing occupational demand and a sector offering strong income growth for investors.”
Chomette said that Primotel Europe, the fund launched in 2016 by Aviva Investors and Algonquin, aimed at institutional investors, would be unaffected by the deal. The fund was structurally agnostic, with Chomette telling us: “We have everything can be found in the deals we do, we have hotels which are branded, we have hotels with leases, we have hotels under our own brand. Every kind of structure we will do; it depends on the opportunity.”
The portfolio was composed of prime French and European city hotels from three to five stars, with a participation in either real estate only or both real estate and operations.
Primotel Europe said that it would “offer its investors an attractive diversification of assets (geographical diversification and segment diversification) in a very competitive European real estate market”. Algonquin was a minority equity investor and the operating partner of the fund.
The deal had echoes of the sale of Internos Global Investors at the end of last year, to PGI, the asset management arm of Principal Financial Group. Under the terms of the deal with Principal, Internos became part of its real estate investment division and provide a pan-European real estate platform. Principal’s real estate investment boutique is one of the top 10 real estate managers globally with USD74.9bn asset under management. Internos had USD3.25bn assets under management.
The rise of the institutional investors has become a feature of the hotel sector in recent years. This year’s Hotel Investment Outlook from JLL commented that institutional investors had been increasingly active in acquiring hotel properties, more than doubling market share since 2014. This, it said, reflected a growing trend of hotels being purchased by investors with portfolios involving multiple asset classes, as opposed to specialist hotel investors.
Fellow broker Savills agreed with the assessment, forecasting that institutions looking for strong covenants and fixed income assets would drive deals in 2018. The company said that the lack of supply of fixed income assets would lead institutional investors to look into opportunities outside the core hotel market in 2018, with interest in leased serviced apartments and branded hostel growing.
HA Perspective [by Katherine Doggrell]: The interest of the institutions began with single assets and now, with the consumption of Algonquin (with rumours of the price on such a spread as to suggest that NDAs really do mean something, no matter what happens to Donald Trump’s) the trend is becoming more of a permanent reality. From a hotel in Berlin to a pan-European platform, the institutions are here to stay.
And, as Chomette said, the arrival of one will beget more. For the hotel sector, the institutions have been a good thing thus far, bringing money which has had no appetite to interfere and, in some cases, been unable to even if it wanted to, in many jurisdictions. They have driven a revival in leases and slotted into the bricks, brain, brawns split effortlessly.
But what influence will they wield? We understand that the bidding for Algonquin was competitive, there is eager cash out there to gain a slice of the sector, cash which is largely agnostic as to structure and brand. The shift from private equity’s short-term interest of the past few years to a longer play is good news for those brands which can make their case. For now the institutions are learning, but as with most investors, they are liable to want to make their mark. Change is likely to follow for the sector and, with the chunks of cash at their disposal, its influence, when it comes, is likely to be broadly felt.
Additional comment [by Andrew Sangster]: Schroders has been quietly eyeing up the hotel sector for a number of years. Towards the end of 2015 it created the role of investment manager focused on retail and leisure.
While the bulk of the cash was put into large shopping centre schemes, money also found its way into leased hotels such as the Premier Inn at the redeveloped Arndale House office block in Leeds which opened this year.
But the Algonquin deal ramps up Assets Under Management that are hotels considerably. As at the end of last year, AUM in real estate was GBP13bn but with Algonquin, hotels will now account for more than 12% of the total.
It is also signals a sea-change in the attitude of institutional investors: they are prepared to take on operating risk and no longer insist on fixed leases.
The push by institutional investors into so-called alternatives, which range from student housing to data centres, is hugely benefitting the hotel sector right now. It is putting pressure on yields and raising asset prices.
Arguably, hotels are now too mainstream to be described as alternative: hotels comfortably sit alongside the established commercial real estate segments of office, industrial and retail. With hotel property yields now comparable to those in retail, it is not unreasonable to ask how much further there is to run. Hotels might just start getting as boring as offices. And from an investment perspective, that is no bad thing.