Private real estate capital markets have seen a meaningful upswing in preference by institutional investors for particular asset class strategies. Single asset class strategies accounted for 31 percent of the world’s total available capital, up 55 percent over the past three years, according to the latest iteration of global property advisory firm Cushman & Wakefield’s flagship report The Great Wall of Money.
While multifamily residential continues to be the primary pick outside of property’s staple food groups, hotels and ‘other’ strategies, including leisure-oriented property types, accounted for 20 percent collectively, a proportion that has steadily grown as greater numbers of investors have become comfortable with diversifying their property exposures.
Why do these investors back these assets? There are both push and pull reasons for this. With abundant capital allocated to private real estate investment strategies – $435 billion, according to the report – traditionally prime markets today face record low cap rates, forcing investors to seek higher returns (and accept higher risks) in non-prime markets, geographically, but also via non-mainstream asset classes. However, hotels and other leisure properties are also increasingly being recognized as able to match the recurring liabilities many institutional investors must meet.
The hotels sector is facing plenty of headwinds, however, particularly the high end of the sector. This is calling into question the long-term sustainability of cashflows from such properties. Terrorist attacks have impacted the attractiveness of French luxury hotels, for example. According to French government statistics, in the wake of the 2015 attack on a Paris concert venue, occupancy rates in the city for the half year fell from 77 percent to 32 percent; in the weeks after the lorry attack on a main road in Nice months later, revenues reported by the city’s hotels dropped 45 percent.
Meanwhile, the rising popularity of home-sharing technology such as Airbnb in countries like the US has become a mounting threat to hotel performance, both at the luxury and affordable ends. Airbnb has seen its guests rise from just 21,000 in 2009 to more than 80 million last year and its use trajectory shows no signs of abating. Hotels in Manhattan, for example, saw revenue per available room drop from 2014 from $180 to around $160 in 2016.
Regardless, where there are headwinds, there is also opportunity. In the following articles, which appeared in our Investing in Hotels special report in April, both aspects will be examined: