Investors are holding back on investment decisions, as the market reacts to the consequences of the covid-19 lockdown across Europe.
There is also evidence that, out of this downturn, lenders will apply a different strategy to previously, depriving private equity and vulture investors the opportunity to grab bargains in the accommodation space.
The coronavirus has not only depressed investment activity, it has also reduced the volume of cross-regional business, as investors stick closer to home. Reviewing the first half of 2020, agents Cushman & Wakefield suggest European investment volumes were down 55% year on year, at EUR5.7bn. Of the total, 78% was accounted for by European investors deploying capital within their home region.
While more than three quarters of the reported volume related to deals initiated before the coronavirus lockdown, C&W said a creditable EUR1.2bn of transactions were started during lockdown, demonstrating market confidence in the longer term prospects for the asset class. Institutional investors accounted for 48% of the volume, being generally focused on medium term returns.
Notable deals counted in the figures include a Qatari buyer agreeing the purchase of the Ritz in London, and the acquisition of the nhow hotel in Berlin, by Swiss investor Eastern Property Holdings.
A greater focus on prime assets – with a concurrent reduction of lower ticket hotels transacted – led to a 26% increase in the average room price of hotels bought and sold, which rose to EUR239,000 from the EUR189,000 average across all of 2019.
There were contrasting fortunes in the top three European markets, with the UK still leading, though down in volume, contrasting with the Spanish market which came in third, after Germany, though volume was up 52% – boosted by the EUR220m sale of the Madrid Edition.
Rising in the rankings was Greece, where two major deals helped drive up the total. Henderson Park and Hines bought a five-strong portfolio of hotels in Crete, and Belterra investment paid more than EUR200m for the 990-room Porto Carras resort on the Halkidiki central peninsula.
“Investor sentiment for the sector remains positive for the medium term and the transactions that have occurred demonstrate this confidence,” said Jonathan Hubbard, head of hospitality EMEA at Cushman & Wakefield. “Nonetheless, with a very uncertain trading outlook in the short term, many well capitalised investors are holding out for pricing adjustments or some distressed sellers to unlock more upside in their acquisitions and this is likely to be a feature of the market in H2 2020.”
An indication that banks will behave differently this time, comes from the recent demise of the Shearings group. After the Lone Star-backed opco Specialist Leisure Group fell into administration, the related hotel asset-owning vehicle also defaulted on loans, sending a portfolio of 40 hotels into the hands of a consortium of banks.
Haydn Fentum, CEO of third-party manager Bespoke, told Hotel Analyst that the banks had appointed his company to manage the properties on a five-year contract: “They’ve been quite clear on a medium term commitment.” While banks tend not to like to be long term owners of assets, he said the feeling is one of wanting to benefit from the upside over the timescale, rather than look for a sale that is simply measured against recovery of the outstanding debt.
Elsewhere, the consequences of coronavirus are being felt across other asset classes, both traditional and alternative.
According to a European cross-sector analysis by Savills, multifamily is one of the so-called alternatives attracting strong investor interest – with the German market in particular seeing lots of activity. First half investment in this class totalled EUR20.2bn, up 32% year on year. Of this, Germany accounted for EUR12.5bn, or 62% of the total. “We expect investors’ allocation for the sector will continue to rise for the next 12 months,” said the agents.
In contrast, the traditional institutional investment classes remain under pressure. First half investment volumes in offices were down 15% at EUR39.3bn. Nevertheless, the agents predicting offices “will remain a prime asset class for some more years”, despite worries over the medium-term growth over increased working from home.
At EUR13.3bn, volumes were down just 8% in logistics, a result described as “relatively robust”, with large portfolio deals completed in the UK, Netherlands, Sweden, Germany, France, Poland and Spain. Savills suggest deal volume would have been higher, had more assets been available on the market – with investors keen to move into a sector that was boosted by locked-down shoppers buying online.
The sale of a major shopping centre portfolio in France boosted overall volumes for retail, up 1% year on year at EUR18.3bn. But Savills warn that yields on retail property are moving out, reflecting concerns about the medium-term health of assets in this sector.
HA Perspective [by Andrew Sangster]: This time will be different. Five words that have cost investors a lot of money in the past. While it is true that the scale and nature of this downturn is a whole quantum worse than in previous downcycles, is it realistic to expect lenders to change their behaviour? I would not bet on it.
Firstly, let’s look at the scale of the downturn. HotStats provided Hotel Analyst with some interesting numbers showing the scale of the current collapse in demand. Looking at their dataset of global hotels (mostly chain properties), 9/11 saw a 25% drop in profitability (GOPPAR). The Iraq war two years later led to a drop of 22% and the 2008 to 2009 Global Financial Crisis caused a 27% drop in profitability at the unit level, excluding finance and other central overheads. But this time it has been a quantum different. A whopping 122% drop in GOPPAR.
There may – or may not – be a V-shape recovery following this cataclysmic decline but whatever the shape, capital structures are going to be under extreme stress. New capital is needed to repair balance sheets.
In the short-term, it does indeed look likely that banks will be forbearing. With ultra-low interest rates, the pain for not moving on capital tied-up in zombie firms is muted. In addition, governments, including the UK, are discouraging lenders from taking an aggressive approach.
Factor in other government interference, such as the UK Government’s current ban on evicting tenants (mooted to be extended) and it is easy to see why banks want to be cautious.
This has not been a financial crash and banks themselves are in a robust position (less so for a number of continental European lenders). It is not (yet) an imperative for banks to shore-up their own balance sheets.
But this may not last. A recession, possibly a depression is coming, and banks will be under stress. This will provide the motivation to move zombie assets, even at a loss, if it means capital can be repurposed.
The key difference in this cycle is the amount of money chasing assets, particularly any assets that might generate a yield. And this is where it gets interesting.
Given the demand for assets, the scale of discounts do not look likely to be big. Buyers are going to have to be prepared to pay prices that are not too far from what they might have paid pre-Covid.
There will be some bargains – assets in segments out of favour – but where there is widespread consensus about opportunities, pricing looks set to remain keen. The winners coming out of this crisis will be those investors prepared to used imagination and creativity to spot opportunities.