Private equity real estate professionals haven’t just been staying in Europe’s hotels as they scout investments. Lately, they have been buying them.
In a noticeable pattern, Patron Capital, Mountgrange Investment Management, Starwood Capital Group, Morgan Stanley Real Estate Investing (MSREI) and Angelo, Gordon & Co have each made investments this past year, just to name a few.
This shouldn’t surprise anyone in the hotel trade. Although hotels clearly suffered over the past three years, there were clear signs of rejuvenation in 2010.
Jos Short, founder of Internos Real Investors, which recently created a European hotel division, said there obviously had been a decline in travel in 2009, but travellers were “on the move again” in 2010. He pointed to the branded hotel sector, which accounts for just 20 to 25 percent of all hotels in Europe, as being of particular interest to investors.
“Within the branded hotel market, the most stable sector is the mid-market: the three-star and four-star hotels,” Short said. “They are not immune from recession, but they are positioned to benefit from a less volatile clientele. This will be our focus.”
While there have been some pan-European deals – for example, MSREI purchased a €150 million mezzanine loan secured by a portfolio of European hotels owned by The Blackstone Group in December – the majority of the private equity real estate activity surrounding hotels seems to be concentrated in London.
Last July, New York-based investment firm Angelo, Gordon & Co bought the four-star St. Ermin’s in Westminster for €65 million from NH Hotels. It is now nearing the end of a £30 million (€35 million; $48 million) refurbishment programme for the property, which includes the complete redesign of 331 rooms, and will soon re-open its doors to the public.
Anuj Mittal, head of European transactions at Angelo Gordon, said the firm expects the investment to perform well. He pointed out that recent research showed the industry benchmark, revenue per available room (RevPAR), had increased significantly in London in 2010.
According to hotel advisory firm STR Global, an affiliate of accountancy firm Deloitte, RevPAR in London rose 11.9 percent to £112 in the 12 months to 31 December, while average room rates were up £12 to £136. Hotels in UK provinces also increased, but not as strongly.
Andrew Little, group head of hotels at law firm Berwin Leighton Paisner, said international property investors always have been keen on London hotels, even more so as prime London offices have started to look “expensive”.
Last year, Greenwich, Connecticut-based Starwood Capital bought the four-star Cumberland hotel in London’s West End for around £215 million pounds (€253 million; $324 million). Perhaps tellingly, it bought a prime London office the year before.
Among others to be investing in hotels is London’s Mountgrange, which is backing a plan to build a chain of budget hotels in London under a franchise agreement with Tune Hotels. Tune was started by Malaysian entrepreneur Tony Fernandes in 2007 and operates 11 sites in Asia.
The new venture, Raag Hotels, will develop 15 properties with 1,500 beds in London by 2017. The concept is based on providing economical room prices to customers that book well in advance, a model running along similar lines to low-cost airlines. That plan was disclosed towards the end of last year.
More recently still, Patron Capital has agreed with Australian shopping centre developer Westfield to acquire the long-term leasehold and subsequently enter into a turnkey development agreement for the delivery of a Holiday Inn and Staybridge Suites at the site of the London Olympics, according to the Financial Times.
As for the long-range prospects of investment activity in the sector, look no further than the firms forming dedicated vehicles. Dallas-based Invesco Real Estate is out raising its second European hotel fund, while hotel specialist Azure Properties said in September it was in discussions with major private equity groups and commercial real estate funds on a joint venture to acquire up to £1 billion (€1.17 billion; $1.6 billion) of European hospitality assets. Indeed, as long as the global economy stays on track, there is every reason to expect more hotel deals soon.