This article is sponsored by Azora
Although the covid-19 pandemic has created stresses for the hospitality sector, it has also presented new opportunities for investors. Shifts in demand, including those that have emerged as a result of the pandemic as well as those with deeper roots, are changing the nature of the industry’s recovery, not dampening it.
The Azora Group is a fully integrated investment and asset manager based in Spain and operating across Europe and the US. Specializing in several verticals (including the broad living sector, hospitality, logistics, offices and infrastructure), the Group recently raised €815 million of equity for its latest pan-European hospitality fund, Azora European Hotel & Lodging, FCR, substantially exceeding its original €600 million target. Senior partners Javier Arús and Cristina García-Peri share their experiences of fundraising during the pandemic, and their outlook for the industry’s continued recovery.
How did you overcome the challenges of the past two years?
Javier Arús: We may be experiencing the latter stages of the pandemic, but it remains a very dominant topic and it is clear that hospitality has been one of the most affected sectors. When the crisis first emerged, we took the decision to work very closely with our partners, the hotel operators, and collaborate with them to align our interests. I think we succeeded through regular interaction, very flexible frameworks and an agile decision-making process.
In many cases, we tried to balance short-term profitability issues against the medium- and long-term position of the assets. We had the added benefit that we were mostly – although not exclusively – exposed to the leisure segment. In the sun and beach segment, at least, demand seems to have been sustained. People wanted to travel. That gave us the assurance that if we opened our hotels and could adapt to mobility restrictions, business would recover.
Are you seeing increased demand for leisure hospitality investments as travel restrictions are easing?
JA: What we are witnessing today is that the current level of bookings coming in for the summer season is higher than what we had in 2019 at this time of the year. We are seeing this across multiple markets, while other investors and hotel operators are noticing the same trend of extremely strong demand. This is perhaps unsurprising given that tourists from the UK, which have a huge impact on the European travel market, were almost nonexistent in the 2020 and 2021 seasons, implying substantial pent-up demand.
The leisure sector will probably recover at a faster pace than anticipated. By 2023, if not this year, we should be almost at pre-covid levels of profitability within the hotel sector, whereas we had initially underwritten a recovery by 2024.
And how would you say this compares with the pre-covid landscape in terms of guest demand?
JA: People want to return to normality with fewer restrictions on their mobility. Even during the height of the pandemic, we saw that people were looking for places where they could enjoy a holiday in any way possible. As such, proximity destinations experienced strong performance last summer.
We saw the Baltic region and Alpine resorts enjoying record seasons because more mobility was permitted in these places. As restrictions continue to be eased in other markets, we expect to see a substantial boost for the 2022 summer season.
How has investors’ risk appetite evolved during the pandemic?
JA: Historically, hospitality has been an underrepresented sector in the portfolios of institutional investors across Europe. That trend was shifting prior to the pandemic, but paused briefly as investment managers assessed the market. Since then, however, the pandemic has actually contributed a significant push towards leisure versus other segments in hospitality.
Reality has shown that pandemic-related stress has been relatively limited in Europe, due to government support and the flexibility offered by the financial system. This, coupled with investors being increasingly comfortable with operationally intense asset classes (such as rented residential), has led to a change in the way they perceive hospitality investment.
Cristina García-Peri: It is worth pointing out that there have been quite a few newcomers investing in hospitality for the first time recently, but the reality is that this is a highly specialized asset class and there is a steep learning curve. Sometimes the locations are largely unknown to investors – owning a hotel in London is quite different to owning one in Ibiza or the Algarve.
In addition, the complexity of operating contracts can also be quite daunting, particularly when compared with traditional leasing contracts, and getting that wrong can substantially impair returns over the medium term for an investor.
Having said that, the pandemic has proven the resilience of leisure travel compared with business or other types of travel – people will want to take holidays one way or another – and we are seeing investors starting to acknowledge that reality.
How important is ESG to the tourism sector?
CGP: ESG is really at the core of Azora’s strategy as a hotel investor. We have targets in terms of decarbonization for all our portfolios and in our hospitality fund we have very specific ESG criteria and targets. Of course, each asset class is different, but we are always seeking improvement in this area. We start with the building, looking at its materials and energy efficiency, and then try to maximize the use of renewable energies. I think for the guests, this is something that they are becoming more and more sensitive to (as are other stakeholders).
There’s also an important social aspect to our ESG-related goals. A hotel can become a crucial part of the community. In remote locations, for example, hotels tend to be large employers – particularly of less skilled workers. The impact that a hotel can have by using local suppliers is extremely important. As investors, we tend to receive major support from local governments and other authorities due to this impact.
JA: Sustainability will likely have a substantial effect on corporate travel, leading some companies to impose their own restrictions. MICE trips (meetings, incentives, conferences and exhibitions), however, are quite efficient in terms of sustainability; a single trip can be used to meet with many clients, colleagues or advisers. So that can complement traditional corporate travel.
More generally, there is a high degree of sensitivity towards ESG issues being shown by most hotel operators today. And there is also pressure from guests and investors too. All stakeholders are committed to it.
What can operators do to demonstrate their ESG credentials to investors?
CGP: Greenhouse gas emissions are seen as the industry standard – measuring and reducing these is perhaps the main way to convince investors of your ESG credentials. However, I think the hotel industry has the added challenge of dealing with both the owner and the operator of the venues. Some of the emissions are controlled by the owners, some by the operator.
Nevertheless, you see a lot of investment in renewable energy and energy efficiency around the major hotel and leisure destinations. The industry standard is halving emissions by 2030 and reaching net zero by 2050. At the COP26 summit, there was a declaration regarding climate action in tourism, which not only looks at how the industry impacts the environment, but also at how climate change is impacting tourist destinations through extreme events like flooding or hurricanes.
We are increasingly seeing the ‘hotelization’ of other property types. How can operators continue to add value to leisure assets?
CGP: In terms of other asset classes, there has been a noticeable addition of hotel-like features in many residential spaces. This is also visible in the world of senior living, where some of these senior villages have aspects that resemble a hotel, with eating facilities and other common services on offer. Elsewhere, co-working facilities are starting to create offices-as-a-service. All of this is providing a great new opportunity for the sector, with hotels becoming places where leisure and business can mix.
JA: Hotels are becoming community hotspots. They are places where locals can mix with travelers, and we are seeing this across all segments, not just five-star luxury venues. On the other hand, for hotels to be sustainable and profitable in the long run, they also need the support of the local community. If you want a top restaurant, a top sports facility or a premium spa, you need to cater to local demand, too. Hotels are becoming hybrid places where you rely on both your guests and the local community.
Azora European Hotel & Lodging closed on €815 million last year. Has covid affected the investment strategy for this fund?
JA: We have been working on raising this fund since 2019, so we had to factor in the impact of covid-19. The major disruption has been to the pacing of the investment. Some of our LPs advised us not to rush in with deploying the capital, suggesting that we define an investment pace first. That was a guideline, but they didn’t put any restrictions in place in terms of geography or asset class.
Our vision of how we should be exposed to the sector has not changed. To some extent, the pandemic has even reinforced our pre-existing view in terms of the resilience and strength of the leisure sector.
Where do you see the biggest opportunities for leisure properties in the medium to long term?
JA: Europe is a huge market, highly fragmented, and still at a very early stage of development as an industry. This makes it very labor-intensive to grow and difficult to make large portfolio transactions, but it offers a significant opportunity in the medium and long term because the industry will undoubtedly keep growing. The underlying growth trend is strong.
The Mediterranean is likely to remain a key market, but there are also emerging opportunities in Central Europe. Different forms of leisure will present themselves – not just sun and beach activities. Proximity destinations will be increasingly attractive due to the growing importance of sustainability, as will secondary cities as the industry continues to mature. There is a range of different trends happening across Europe that continue to keep things interesting in the hospitality space.