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Pro-invest turns to distressed hotels for its new A$500m fund

The firm acquired a five-star hotel in Sydney from Chinese developer Greenland last month for around 30% below replacement value.

Pro-invest Group, a Sydney-based hospitality developer-operator-manager, has launched a fund to invest in distressed hotel assets.

With a A$500 million ($387 million; €325 million) fundraising target, Pro-invest Asia-Pacific Distressed Hospitality Fund is the third hospitality vehicle launched by the manager. But unlike its predecessors that focused mainly on a development strategy, the latest fund will invest in luxury and full-service hotels at a discount, both on the equity and debt side. With Fund III, Pro-invest will also expand its geographic focus outside of Australia and New Zealand, with plans to deploy up to 20 percent of its fund capital in other Asia markets such as Singapore, Japan, South Korea and Thailand.

Sabine Shaffer, managing partner at Pro-invest, told PERE that the current market environment leads to favorable pricing for standing assets while delivering attractive risk-adjusted returns. Similar to Fund I and II, Fund III will also target a net internal rate of return in the mid-to-high teens.

“In addition to the ‘classical’ distressed hotel owner, many families and corporates in Asia have exposure to hotels as their non-core business,” Shaffer explained to PERE. “But with the impact of the pandemic, these owners are looking to offload their assets for liquidity and to re-focus on their core business, given the operational expertise to run a hotel is high.”

The firm acquired the five-star Primus Hotel on Pitt Street in Sydney from Chinese developer Greenland last month for A$132 million – a price that was 25 to 30 percent below replacement value. Local media reported that the opportunity came to Pro-invest after Greenland’s original plan to sell the asset to Qatar Airways for A$140 million fell through.

Pro-invest closed the A$300 million Fund II in October last year and has deployed 75 percent of the fund to date. Fund II is expected to be 20 percent invested in the repositioning of existing assets and 80 percent in development. For development, the firm is focused on the expansion of its Holiday Inn Express footprint in Australia and New Zealand, as well as tapping into the upper mid-scale segment with hospitality group IHG’s lifestyle brand voco.

The group has not been immune from the impact of covid-related lockdowns and travel restrictions on the hotel sector. The firm had planned to sell a portfolio from Fund I at the beginning of last year but the transaction was postponed due to the pandemic. The five-year fund is understood to have been extended for at least a year until the market improves.

Shaffer told PERE that the downturn in the hospitality sector is “cyclical” but not “structural” like the other asset classes such as the retail sector. “I am confident that the market will return to normalcy once we have walked out from the pandemic. And because of this, many investors are trying to take advantage of the discount in hotels right now, especially those who didn’t invest before the pandemic.”

With $2 billion in AUM, Pro-invest also manages separate accounts for Commerz Real and Deutsche Bank. The firm remained active during the pandemic last year when it opened Holiday Inn Express at Sydney Airport alongside other hotels in Brisbane and Macquarie Park. This year, the firm is reportedly opening five new hotels including Holiday Inn Express hotels in Melbourne, Parramatta and Auckland.