• AXA makes Eur545m Principal purchase

AXA is to acquire 11 hotels in Europe from Principal Real Estate for Eur545m in an off-market deal.
Principal said that it would continue to invest in the sector, continuing to focus on city-centre hotels with the potential to add value.
The portfolio comprised seven hotels in Germany including the Mondial Hotel am Dom MGallery in Cologne, the NH Hotels in Duesseldorf and Cologne, two Mercure Hotels in Berlin and Hannover, the Intercity hotel in Leipzig and the Steigenberger hotel in Kiel as well as four hotels in other major European cities like the Hilton Danube hotel in Vienna; the Ibis hotel The Hague City centre, the Lux Hotel Lisboa Park, and the NH Hotel Turin Centre.
The transaction was expected to close during the fourth quarter.
The deal marked the disposal of the entire portfolio of Principal’s Europe’s first hotel real estate fund which first closed in 2012, acquired 16 hotels until 2016 and earlier started a disposal process including amongst other the sale of three hotels in Amsterdam, Frankfurt and Nuernberg in 2018.
Jochen Schäfer-Suren CEO, Principal’s hotel and leisure division, told Hotel Analyst: “The Axa deal and other recent sales of hotels we have pursued recently reflects the different strategies we pursue for different funds and assets at different stages in the investment cycle. Since 2012 we bought hotels for our first hotel fund we bought hotels until 2016, sometimes we renovated them, extended the leases and created value partially also due to better hotel markets or lower funding costs. Then seven to eight years later we sell the properties lto AXA as long-term stable-income generating centrally-located hotel assets.
“Now, with our second fund we are focusing even more on value add investments and have bought two hotels and are looking for more. In fact we have ca. Eur250m in equity and close to Eur500m in firepower in total to acquire hotels. But it is more and more difficult to buy at the moment across the EU. At present we don’t look at the UK, where Brexit means we don’t like to touch it until 2020 or beyond when we will see more clearly how bad the impact will be.”
Commenting on the off-market nature of the transaction, Schäfer-Suren said: “In an off-market deal it is difficult to negotiate the right price. We negotiated a price which we considered was a very good price at the current market level, which allowed us to exceed our investment returns and we also sold without risk, with an excellent buyer. AXA offered a good price which was competitive to ensure that we didn’t have to go to the market. We are institutional fund managers, so we aim to deliver reliable results and with institutional buyers like AXA our life is easier as the outcome and rewards for our investors are more reliable. It was a win win for both parties; they have open-ended retail funds and need to deploy that capital.
“Hotels have become more established as an asset class over the last five to 10 years, they used to be considered more specialist, but then came the negative interest rates and in those circumstances investors have discovered that hotels are long-term cashflow generating which in times of negative interest rates is very attractive. Add to that the growth in tourism, driven by the liberalism of airline travel, makes a compelling case for hotels.”
Discussing whether the group would look at alternative assets such as hostels, the CEO said: “Hotels are a combination of a trading business and real estate assets and the more you go to the lower end of the sector the more you find you are in out of the centre of the town locations. You may have a reliable trading asset, but not the most attractive real estate asset. You may generate great cashflow, but it’s a little light on real estate and the liquidity of the real estate is less reliable. You need to be clear in this market that the quality of the underlying real estate is less. They can be an interesting prospect, but more as a trading business than the real estate. In particular one must avoid paying multiples applicable to real estate assets when what you are buying is a trade asset.”
HA Perspective [by Katherine Doggrell]: The rise and rise of the institutional investors has been well documented in these pages and continues to be very much a real thing. As the movement of the sector into the mainstream continues apace, we are likely to see more off-market transactions as parties seek to get a good price without the hullaballoo and, as we saw with the Marriott/Starwood/HNA debacle, without getting caught up with buyers which are likely to turn out to be a waste of time. And deals which explode suddenly into half-a-billion of fireworks keep us all on our toes.
AXA was certainly as chipper as Principal, with John O’Driscoll, head of transactions Europe, happy with assets “leased on strong covenants and benefitting from the solid local economics” some, as we can see from markets such as Vienna, which are starting to attract those investors looking to avoid the kind of yield compression which is being seen in the more mature markets. Immature markets for mature investors. The taglines write themselves.

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