• Millenium builds momentum

Spanish investor Millenium Hotels Real Estate is making a major splash in the Spanish hotel market, demonstrating that the country still provides strong pickings for those seeking value-add opportunities.
The group, which listed as a SOCIMI (Spanish REIT) on the Spanish alternative market in July 2019, recently declared six-month figures with an ebitda of EUR1.3m. But the group’s pipeline is likely to deliver far more, as the aspirations of CEO Javier Illan Plaza are to drive the group to substantially larger scale.
Most recently, Millenium has announced a EUR400m capital increase, with two tranches of shares being issued to increase firepower for further acquisitions. The news comes as part of a busy last month, with the company agreeing to acquire the part-built W Canalejas hotel in Madrid in a EUR82m deal; and the Melia hotel in Bilbao, at a cost of EUR49.2m. The additions take the company’s portfolio to seven properties.
Back in 2017, the privately held Millenium made clear its plans to launch on the market, with an aspiration to take the vehicle up to ownership of around 30 hotels, combining urban and resort properties. The move into hotels was a change of direction for a group previously focused on luxury residential and commercial developments.
Illan has already publicly stated he wants to take Millenium from Spain’s alternative market, MAB, to the main market, in 2021 or 2022 – by which time he aims for a EUR1bn portfolio. Currently, the roll call of shareholders includes former Inditex CEO José María Castellano, and Leopoldo del Pino, brother of the president of Ferrovial. Ideally, Illan is seeking a mix of properties in the EUR30-50m range, with two or three more valuable trophy assets.
The W was sold by Asian investor Platinum Estates, which bought the project in 2014 for EUR35m. The 136 room project is work in progress, with Millenium likely to have to spend EUR25m to complete the build. The Melia was bought from the Riberas family via their Gestamp vehicle, with 50% of the funding provided by Kutxabank, and will continue to be operated by Melia. “This acquisition strengthens our portfolio and consolidates our presence in a city like Bilbao, which due to its location, cultural, gastronomic and business wealth makes it one of the cities in Spain with the greatest tourism potential,” said Illan. The group claims close connections with major luxury brand flags, and has so far been successful in spotting off-market opportunities.
Local media suggests Millenium is closing on two additional acquisitions in Andalusia, that will take its portfolio up to a value of EUR500m.
Madrid-based Philip Bacon of Horwath said that while Millenium appears late to the party, behind organisations such as Hispania, its timing is good. “There was a rush to create these funds, and the idea of a REIT became very fashionable. But there are still opportunities about.” Without the strict exit demands of private equity, longer timescale plays are an option.
In the case of the W deal, he noted the project had been on the market for some time, but faced issues due to complex ownership and, as with many Spanish hotel developments, a potential mismatch between seller expectations and buyer offers.
Bacon said that, with returns in the Spanish residential market now declining, “there’s a lot of money out there looking for a home.” Notably, investors from key central and South American markets view Spain as “having a country risk that’s low compared to home.”
While Barcelona has seen its hotel market populated by a strong mix of international brands, Madrid has long been in its shadow. “There’s a brand imbalance, and it’s been like that for many years,” said Bacon, not helped by a local culture of holding, rather than selling property assets. But the moratorium on new hotels in Barcelona is frustrating deal flow and development activity. And as Madrid sees a greater number of international visitors, so the brands are breaking through, in a country that still has a low penetration of international flags. The arrival of Mandarin Oriental in Madrid effectively broke a glass ceiling. “The city is evolving, and moving upmarket.”

HA Perspective [by Andrew Sangster]: The Spanish hotel investment market has been transformed in the past few years. Last year, investment volumes were (according to Real Capital Analytics) just shy of EUR5bn, second in Europe to the UK, just ahead of Germany and way ahead of the bigger economies of France or Italy.
The growth has been remarkable, from just EUR750m in 2010, which dipped further to just EUR519m in 2012, according to figures from Deloitte’s Spanish office. Change started coming in 2015 when investment volumes not only bust through the EUR1bn mark but almost hit EUR3bn.
The marquee event was the acquisition of the hotel, office and resi giant Hispania for EUR2bn in the summer of 2018. Blackstone swooped on the REIT, taking it out at EUR18.25 a share. And this of course raises the question of whether Millenium will become a target. But it does look as though its lower cost of capital compared to opportunity funds such as Blackstone gives it an edge. In any case, the PE funds seem to have moved further east along the Mediterranean coast.
Meanwhile, hotels have become the dominant asset class in the Spanish real estate market. Back in 2016, offices were 40% of the market, retail 35% and hotels 17%. Last year, hotels were 32% against 30% for offices and 28% for retail.
The growth has been on the back of big corporate deals, which of course was primarily Hispania. But the structural shift in the Spanish hotel market means that the momentum is likely to remain, even if volumes fall off slightly.
Deloitte points out that back in 2000, just 51% of Spanish hotel room were under the control of groups. Today, it is 73%. Most of the market, 61%, is still owner-operated. Lease has grown to 24% and management is just 11%. The share of franchising is small at 4% but is expected to grow significantly.
Given the tailwinds of ongoing strong growth in tourism which saw 82.7m arrivals last year and the (comparatively) fast growing Spanish economy, the Spanish hotel investment market looks set remain alongside the UK and Germany as one of the most active and liquid in Europe.

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