At your leisure

Bigger and better. That's a pretty accurate way to describe the global leisure market. As continued global demand, rising incomes and a growing middle class in the emerging markets accelerate demand for leisure-related outlets, private equity real estate investors are eyeing bigger and better opportunities to capitalize on the trend.

Imagine skiing without having to brave the elements – that's what one Dublin-based private equity firm is proposing with its €600 million ($929 million) plan for the “world's first indoor winter sports resort” in the UK. Once completed, First Equity Group's new winter wonderland, SnOasis, will house Europe's largest indoor ski slope as well as a National Winter Sports Academy with 200-bed hostel, a 350-room four star hotel and 350 holiday village style ski lodges.

As the global leisure industry continues to scale new heights, GPs around the globe are looking to ride the wave of the world's new leisure craze. Private equity investors such as KSL Capital Partners, Angelo Gordon and GI Partners have all invested in the leisure property sector spanning the spectrum of investments from golf courses to theme parks to wineries and resorts and spas.

According to David Lynn, managing director for research and investment strategy at ING Clarion Partners Real Estate, the demand has been driven in large part by changing demographics – a global phenomenon, says Lynn. “Leisure, travel and tourism as a whole is the fastest growing industry in the world,” he says. “With a growing middle class and increasing household wealth people have more time to travel and pursue leisure activities.”

Growing efficiencies every year in travel and communication – what Lynn terms as the “collapse of space and time” – has also made leisure destinations more attainable to an increasingly jet-setting population. Despite the fact that rising oil prices are currently pushing up the cost of airline travel, Lynn says the long-term trend has been a dramatic decrease in the real cost of travel.

“Things have gotten cheaper and faster. There's been a collapse of space and time through technology as a general trend. Communications and the internet have all fostered the need and desire to travel more for business and for pleasure,” he says.

Coupled with an aging population in many parts of the world, demand for leisure is reaching new heights. The emerging baby boomer population is one trend that has been keenly observed by property investors around the world. “The sheer numbers of boomers approaching retirement is a huge demographic,” says Michael Crunkhorn, co-founder, vice president and chief strategic officer at Ontario-based Moncasa Capital, which recently unveiled its plans for a Caribbean-focused destination club. Its primary target, the firms says, is the boomer population.

“We're at the beginning of the curve,” says Crunkhorn. “As we look forward and look at worldwide stats, come 2020 there's going to be a global audience of close to 700 million retired people. It's an absolutely huge number.”

One-upmanship
Rising demand and rising income levels in the US, Europe and emerging markets has also resulted in much more focus on quality. “We're coming off of a very robust economic period,” says Lynn. “We had four or five good years of economic growth so a lot of wealth has been created globally, and not just in the US but in Europe, and especially in the emerging markets where there are a lot of wealthy and middle-class people.”

People are seeking a higher grade of environment and amenities, says Lynn. “That's driving the market to change – you're seeing much more luxury.” And indeed real estate projects in the leisure space are grander and developed on a much larger scale than in previous years. “There's a one-upping going on,” says Lynn. “If there's a good development – whether a leisure project or otherwise, people will benchmark off that more and more globally and they'll try to improve on that.”

From super-sized ski resorts to football – including the American kind – private equity real estate investors have been putting their investment dollars to work. KSL Capital Partners, owner of Clubcorp – which presides over a massive portfolio of nearly 170 golf courses, private clubs and resort properties in the US – is turning an eye on the luxury fitness sector. It recently invested in Western Athletic Clubs, owner and operator of luxury health, fitness and sports resorts in the US. Practice makes perfect, it seems, with such investments. Just before PERE went to press, the Sunday Times revealed that the Denver, Colorado-based private equity firm was among the bidders for UK luxury fitness club chain Esporta, valued at about £200 million ($391 million; €252 million) with property valued at another £250 million.

Sports-related investments are indeed gaining fans among private equity investors. In January, Colony Capital upped its stake in French soccer club Paris Saint-Germain, acquiring an additional 30 percent stake in the club. In addition to its cash-generating business, the draw of Paris Saint-Germain is simple: The club's Parc des Princes stadium, which seats 46,480, is the obvious real estate attraction.

Meanwhile in the US, Stephen Ross, head of New York-based private real estate development firm The Related Companies, recently paid $1.1 billion for a 50 percent stake in the Miami Dolphins American football franchise. The deal, which included a 50 percent stake in Dolphin Stadium, boasting a seating capacity of 75,000, also included a 50 percent stake in 110 acres of developable land surrounding the stadium.

A global nest
With more change in their pockets and the growing ease of travel (albeit costlier at the moment) consumers around the world are increasingly investing in second home purchases. This is especially the case in the emerging markets where the population has been getting wealthier, says Lynn. It is not a problem for a lot of middleclass households to have a second home in one of these countries.

Similar to other property sectors, globalization is changing the rules of the game in the leisure space. Retirees in many developed countries around the world, in the US for instance, are looking to emerging markets, and countries such as Latin America, where their dollar will stretch that little bit further.

Mexico in particular has been gaining in popularity as a retirement haven, according to Lynn. The country is becoming “much less foreign, much more familiar.” The second home market there is booming in large part due to aging baby boomers who want more bang for their buck and who want a lower cost of living and a more favorable climate. It is a phenomenon that will happen more and more in countries like Argentina, Panama and parts of Asia, says Lynn. “Americans and Europeans are becoming less provincial when they retire.”

The proximity of countries like Panama and Costa Rica to the US has also been one of the driving forces behind the increasing number of North American retirees who are flocking to the region. It is a similar line of reasoning for Canada-based Moncasa Capital, which is looking to capitalize on the rapidly growing second home market in the Caribbean with its plans to develop 80 destination properties in the region.

“We've seen more people wanting to purchase second homes,” says Crunkhorn. “The second home scenario is gathering a greater following. The American Real Estate Association recently published their figures for house sales and, even though there is some impact on the American real estate industry with the subprime mortgage issues, the reality is still that one-in-three purchases by Americans are second homes. The second home phenomenon is going to stay with us for quite a while.”

It will most likely continue to stay with the projected 700 million global retirees in the coming 12 years. For Moncasa – as with the Latin America story – location is once again a key driving factor. “We're big fans of the Caribbean,” Crunkhorn says. “Its closeness to the 160 million people that are living on the Eastern seaboard and the myriad of airports makes it very easy for our investors and members to get down there. In real estate it's always ‘location, location, location’ we think the Caribbean gives us the exotic feel, uniqueness, and it's still really close to home.”

The second home market will continue to gather steam in the next few years according to Crunkhorn: “Last year the American Realty Association suggested the size of the market was $2.3 billion. We anticipate from what we can gather through the rest of our peer group that we would be somewhere between $2 billion to $3 billion as a marketplace globally this time around.”

Libations and merriment
Leisure outlets such as theme parks and wineries have also been on the radar of GPs looking to invest in the leisure market a bit closer to home. Private equity firm GI Partners made an investment in the Duckhorn Wine Company last year, comprising a portfolio of wineries in Northern California's Napa Valley and Anderson Valley. On the other side of the Atlantic, the private equity firm, operating out of Menlo Park, California and London, owns more than 300 pubs in the UK through its Orchid Pub Group.

Leisure investments require their own unique blend of investment management, says Rick Magnuson, executive managing director at GI Partners. “The leisure industry tends to be asset intensive with geographically diverse operations. So you have asset intensity which requires some level of real estate knowledge and operational complexity which requires private equity skills. It's a very unique blend that your traditional private equity groups haven't had and your traditional real estate opportunity funds haven't developed.”

Within the leisure sector, there are sub-sectors that each have their own investment strategies. Leisure is a broad category, adds Magnuson, and the strategy for each sub-sector is very different. Some sub-sectors have greater barriers to entry than others.

The wine industry for example is heavily regulated with some “significant barriers to entry.” It is a very similar scenario to gaming, says Magnuson. “There are only a couple of private equity firms and one real estate group invested in gaming because the regulatory hurdles are so significant. And the same is true with the production of spirits – wine, beer, alcohol. We took the time to get our approvals across the US which is a huge barrier to entry.”

New players are also entering the wineries space. In April, San Anselmo, California-based Vinum Capital Management launched its first private equity fund, Vinum Capital Partners I, a $250 million vehicle focused solely on acquiring and operating wine properties in the US, primarily in California, Oregon and Washington. With an eye on increasing demand from the emerging markets, it has also begun to turn its attention to wineries in China.

Another sector GPs have been looking at are amusement parks and theme parks, investment opportunities which on top of the cash-generating portions of the business also have significant underlying asset value.

One such investor is alternative investment firm Angelo, Gordon & Co., which acquires and develops amusement parks and water parks in the US through its dedicated entertainment subsidiary, Adrenaline Family Entertainment. These investments are more “recession-resistant” relative to other leisure-related investments, says Dan Bonoff, managing director at Angelo Gordon.

“You're able to buy assets at reasonable valuations from a pure asset value perspective, but these are businesses – and while nothing is recession-proof – they're more recession-resistant. When the consumer is having a tough go of it, as they currently are, a trip to the local regional amusement park sometimes takes the place of a family vacation. This is more of a one-day escape.”

It is a similar thesis to gaming investments such as casinos, says Bonoff. Casinos and similar investments offer a “shorter, more local adventure or escape.”

Even in the world of amusement parks, bigger and better is the name of the game. Early this year private equity firms Colony Capital and KanAm, the investors behind the development of the $2 billion Meadowlands Xanadu entertainment complex in New Jersey, revealed that the development will open in November and will be home to a 287-foot tall Pepsi-branded Ferris wheel, Pepsi Globe, described as the largest Ferris wheel in the US. The wheel, featuring Pepsi's familiar red, white and blue colors, will have 26 glass-enclosed pods and take 25-minutes to complete one revolution.

Meadowlands, once completed, will be the third largest retail and entertainment complex in the world – and the largest in the US – providing 4.8 million square feet of leisure, office, retail and hotel space. The sponsors hope the Pepsi Globe will be as iconic as the UK's London Eye and Seattle's Space Needle.

Global investors in leisureA selection of private investors around the globe who have been jumping on leisure-related property investments in the past year.