Investors seeking exposure to the international hotel marketplace continue to enjoy an ever-broader choice of where to place their cash. The funds continue to make their mark, picking off-plan deals in a bid to ensure decent returns.
Now Schroders Real Estate has launched a new fund, promising a more hands-on approach to value-add investment, by actively managing the properties its fund acquires. The move seems to have gained approval, with Schroders announcing it is well on the way to achieving its EUR500m target for its new owning and operating hotel fund.
EUR300m has already been committed, it announced, from backers including European institutional investors and family offices. With additional borrowings in place, the fund’s managers expect to have a total of EUR800 to spend.
“At a time when yields are at an all-time low across many property sectors we believe that this segment of the hotel market has the capacity to generate attractive, risk-adjusted returns for investors looking for alternative, non-mainstream investment opportunities,” said Georg Wunderlin, Global Head of Private Assets at Schroders.
Within an expected eight-year cycle, the fund intends to acquire 10 to 15 hotels across Europe, with a broad target from three to five star. It will be looking to take on both the real estate, and the operating business, and has set a target of three years within which to seek out the assets. Value will then be enhanced through “refurbishment and operational improvement” of the undermanaged, or underinvested assets.
Schroder says it may manage the hotels directly, or could work with an operator, under either franchise or management agreements.
But it won’t have the market to itself. The challenge of finding suitable fund assets can mean purchasing off plan, as Principal Real Estate Europe did recently, paying EUR40.5m for a Barcelona hotel, having agreed the deal ahead of the property’s completion. The three-star Ona Hotel Terra will be held in the group’s Hotel Real Estate Fund II.
The Principal fund is a more traditional asset play, with the property leased on completion to the family-owned Spanish Ona group, to add to its operating portfolio of 40 hotels across Spain and North Africa.
Jochen Schaefer-Suren, CEO of Principal’s hotel and leisure division commented of the acquisition: “This is a very attractive value-add opportunity in particular as the hotel development moratorium in Barcelona should constrain supply and provide a unique opportunity to benefit from future demand growth to all existing hotels.”
At the end of 2019, Principal successfully closed out its first hotel fund, selling the balance of the portfolio it had gathered to AXA IM-Real Assets in a EUR545m deal. The disposal included eleven properties in seven German cities, plus Vienna, Lisbon, Turin and The Hague. The fund closed to investors in 2012, and acquired a total of 16 assets during its lifetime. Principal said the performance “consistently exceeded annual distribution targets and based on the disposal proceeds from the sale of the entire hotel portfolio including this latest portfolio transaction far exceeded its IRR targets.” Value enhancement included limited refurbishments and the negotiation of lease extensions.
Almost all of the investors in the first fund have returned for a stake in the new fund, giving the fund managers firepower of EUR400m to spend over the next year or two.
HA Perspective [by Chris Bown]: Having acquired Algonquin Management Partners, Schroders now has a team and a platform that keeps close tabs on 48 hotels in Europe, with a total value of more than EUR2.1bn. That close attention to running properties gives it sight of the opportunities from running hotels more efficiently – and if others can enable it to do so on a larger scale, happy days.
But the big challenge in the short term may be finding suitable assets to buy, as investors of all sorts buy into the hotel marketplace. Wait a little, however, and some distressed owners may start to appear, notably in Europe’s city markets heading for oversupply, most likely in some big urban German locations.