• Internos aims EUR400m at Europe

Internos Global Investors had announced the first closing of its second hotel real estate fund with initial equity of EUR133m from seven German institutional investors, giving it EUR260m to deploy at an LTV of 50%.

Internos told us that together with other existing hotel investment mandate it had in total ca. EUR400m to invest in hotels across Europe, targeting three- to four-star city centre business hotels, working with hotel groups willing to participate in risk.

Internos said that several hotels fitting its new second hotel fund’s investment strategy were already under exclusivity or in advanced discussions so that it expected to deploy its initial capital over the next 12 to 18 months. Thereafter it expected committed equity to increase “significantly” to allow further investments so that the Hotel Fund II’s assets under management similar to its first hotel fund should also reach EUR500m by late 2019/2020.

Jochen Schaefer-Suren, partner managing Internos’ Hotel and Leisure division, said: “Hotel Fund II provides investors with access to value-add opportunities at a point in the cycle where many hotels with long-term fixed income are fully valued in many markets, yet may face rising interest rates and resulting potential value impact over the coming years.

“In such markets, the new strategy focuses on creating value at the individual asset and market level, which can be achieved in any general market context. This highlights the need for a very experienced specialist hotel real estate fund management team to design and implement the value-add strategy at the asset level.”

Commenting on the current transactions market in Europe, Schaefer-Suren told us: “It’s more difficult than a few years ago to make attractive hotel investments but possible. We are mostly competing with other institutional fund managers,  Reits, other institutional investors and family offices.”

When asked about the rise of Asian investors, Schaefer-Suren said that, other than Anbang’s purchase of the Doubletree in Amsterdam, as reported elsewhere in this issue, their role in the sector had so far been growing but in Europe was still limited.

He added: “The UK has no real appeal at all at present. The UK government appears in denial about Brexit and its consequence so we are not looking at hotel investments in the UK and certainly not London as it is overpriced”. Schaefer-Suren said that the regions had held some appeal prior to the Brexit vote “but now the fall out of Brexit especially a hard Brexit which seemed more and more likely make investments here for the next 24 months of little interest”.

Regulatory requirements mean that the fund will continue to pursue leases. Schaefer-Suren said: “We are an institutional hotel real estate fund manager. Ever since I set this up we have had more capital to invest that I have opportunities. Right now we have EUR400m to invest, but the market is more difficult.”

A study from CBRE last month reported that demand for prime locations in Germany was driving investment in forward purchasing of hotel projects, as well as ground leases. Armin Bruckmeier, head of investment properties Germany & CEE, CBRE Hotels, Germany, said: “The buyers of forward deals are typically German institutional funds who need leases. They are long-term investors and the only advantage to them of forward purchasing is that they can secure the investment at an early point, not so they can exit once it is completed.”

Schaefer-Suren said that, regarding forward projects: “We are in the business of generating returns or our investors so forward purchase especially 24-36 months out is not meeting our investors objectives” In regard to ground leases “it depends on the terms and it does have some liquidity and value implications”.

The fund continues to work with numerous hotel groups. Schaefer-Suren said: “We want to work with hotel groups with brands, but the concept of the brands has changed. We don’t have to have a major brands what is key to us is that we have a hotel group that has a brand with at least national recognition is a credible experienced hotel operator with a good management team and balance sheet have good hotel concepts, sign leases takes some risk and participate in renovation or other works. Today many major global hotel groups want to be just brands and avoid risk if they take any”.

The fund follows Hotel Fund I, a core fund which was launched in 2012 and has reached EUR500m in assets under management, achieving a 14% IRR to date and returning 8% cash dividends annually.

HA Perspective [by Katherine Doggrell]: The Internos fund is the embodiment of the ‘wall of money’ which is so often described as building over Europe, ready to break and, what, sweep away all in its wake, tsunami-style? It’s a flawed metaphor, but one which is powerful nonetheless and, as Schaefer-Suren points out, no longer includes the UK. Not for those hunting yield, in any case.

Schaefer-Suren and Pandox’s Anders Nissen have been birds of a feather in recent years when it comes to the brands, looking for participation in terms of leases and hard cash. This has led both to work with AccorHotels and one wonders how they are viewing the French group’s HotelInvest sell-off, which is coming to a conclusion as we speak.

Both Internos and Pandox have proven the power of ‘cash is king’ when it comes to deals. As yet, the competition described by CBRE’s Bruckmeier has not affected them. With this week being ‘Asia-Pacific news week’ at HA, we wonder how long this will continue.

Additional comment [by Andrew Sangster]: Germany continues to be the darling of hotel investors looking to Europe. This is not surprising given the strong fundamentals: Europe’s largest economy and amongst the fastest growing. One might describe it as strong and stable. The UK by contrast looks to be going through a distinct weak and wobbly phase.

The other attraction of Germany is its long history of leases. For institutional investors this is more appealing than the management contracts that dominate in the UK. The big domestic brands and operators in Germany are happy to sign leases while in the UK similar players are more reluctant.

It had been thought that the lack of appetite for leases among the global operators might stall the growth of leased properties in Germany. But rather than institutions adopting different property structures they have preferred to switch into operators prepared to take on leases, even if they do not have a global reach.

Are there pitfalls ahead? Possibly. Leases remain controversial and as well as the cyclical challenges there might be some major structural issues. In particular, the rise and rise of the sharing economy or platform models of accommodation distribution are likely to impact German hotels particularly.

Sharing economy platforms are particularly impactful during periods of peak pricing and much of the German hotel industry is reliant on a few weeks a year of peak demand during conventions, exhibitions and the like. The super profits generated during these periods support other phases of much weaker demand.

If sharing economy platforms do begin to soak up some of the peak demand then significant pain lies ahead for parts of the German hotel industry.

A decade ago, German hotels were stuck in the doldrums of unsustainable leases. If the market for sharing economy platforms evolves in the wrong way, a similar situation could again occur.

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