From inventive negotiation strategies to out-of-the-box problem-solving, creative approaches are evolving to navigate challenges, uncover opportunities, and facilitate transactions for hospitality investors, shaping the future of brokerage and advisory services.
Market challenges and closing the gap
While there’s nothing new about the bid-ask spread, it has been particularly acute in recent years. However, this tension may be starting to ease.
“Everybody's starting to play their part in that gap,” suggests Jeremy Jones, head of brokerage – hotels with Christie & Co. Frederic Le Fichoux, head of hotel transactions, continental Europe, for Cushman & Wakefield, suggests the gap is narrowing due to increased certainty in both lending and performance.
Ana Ivanovic, executive vice president at JLL Hotels & Hospitality Group, stresses the importance of managing expectations by providing a realistic Broker Opinion of Value (BOV), identifying what is driving the gap and providing appropriate support.
“If it's more projections-led, then try and give them as much comfort on the cash flows, [perhaps] through benchmarking case studies. If it's debt, then all companies have respected teams that can advise them on that,” she says.
Another challenge, according to Rob Seabrook, executive director of hotels at CBRE, has been a lack of comparatives. Although investment volumes in Europe are expected to be up significantly on last year, the transaction environment remains sluggish.
Paul Kapiris, senior vice president of Eastdil Secured, adds that this has been particularly palpable in the mid-market, although deals like Deka Immobilien’s acquisition of the Hotel Ruby Zoe in London’s Notting Hill have helped in understanding where yields are now.
Finding certainty in an uncertain market
An uncertain market has in some cases resulted in a reliance on trusted investors. “This is part of the reason why we've seen these really well-known and trusted investors having so much of the deal flow, because when you see it's a GIC or an Archer or Fattal or these groups that have been prolific purchasers, people have faith that they're going to execute. They've seen them buying in the last six months. I think it's actually quite a challenging time for new investors in the market,” says Kapiris.
An even higher level of due diligence is also being sought to mitigate re-trading or scaring off buyers, while using creative pricing structures to bridge the bid-ask gap. The days of getting a purchaser and seller to ‘meet in the middle’ are “far behind us”, says Kapiris.
“We're looking at recaps, continuation vehicles. We have vendors willing to stay in for 10% or 20%, earnouts, vendor financing. All of these structured deals are so important to get a deal across the line today,” he explains. While vendor loans are more common in the US than Europe, there are other options, such as preferred equity.
CMS’ European M&A Study 2024 noted a decrease in earnouts, but innovative structuring is visible, for example Travelodge acquiring 66 of its branded hotels and Starwood Capital Group’s plans for a public listing via a merger.
Meanwhile, brands also “need to be part of that solution team to get deals done”, says Jones. In the main, he says brands have been very cooperative, with the big brands' focus on conversions “super helpful for transactions”. Although, assumptions about the condition of older hotels in the UK, for example, may be “somewhere ahead of the reality”.
Ignore ESG ‘at your peril’
Environmental regulation is also starting to affect the market, with some investors, particularly core investors, starting to demand assets with ‘very good’ or ‘excellent’ ratings.
“Ignore it at your peril,” says Seabrook. “This time next year, everyone will have a plan with regard to their property because they'll need to if they're getting financing.”
Ivanovic agrees that, if an asset does not have environmental certification, investors may want to know the route to certification, how much it will cost and how long it will take. “If we're not including [that] in the IM, then we need to know how to address that question,” she adds.
The buyer pool has changed too, and while private equity was previously very active in this space, Seabrook says this group has moved into a different position within the capital stack. “I think they will come back into the market over the course of the next five years in an equity play,” he says. He also expects to see more international investors looking at Europe, particularly from Asia, but also the US.
All those quoted in the article appeared on stage at the International Hospitality Investment Forum Europe, the Middle East and Africa (IHIF EMEA), held in Berlin between April 15 and 17 2024, in a session called: Brokers and Advisers Talk Strategy- Pioneering Creative Approaches for Successful Deal-Making.