In an industry that continues to attract significant investor interest, strategic foresight is a necessity in order to stay ahead of the pack. Speaking with Hospitality Investor, Josh Cleveland, partner & head of EMEA real estate at Stepstone Group shares insights on opportunities in the hotel sector and how the company navigates markets complexities.
Hospitality Investor: Tell us a little bit about Stepstone.
Josh Cleveland: Stepstone is a private markets investment manager and advisor focused on corporate private equity, infrastructure and real estate. My partners and I formed the real estate business about ten years ago. As an investment business, we invest on behalf of our clients both in an allocation business like funds where we’re picking market, strategy and manager and allocating that capital to them with discretion. We also have capital that we invest directly into transactions or projects alongside a number of those managers. In the last 24 months, on the allocation side, we allocated $30 billion of capital to 100 real estate private equity funds. On the transactional side, we invested close to $4 billion of equity over that period in about 50 different investments.
HI: Where do hotels and hospitality fit in that spectrum?
JC: Hospitality has always been a large part of my partners and I do. On average, on the transactional side of the business, it has been anywhere from 10 to 20 per cent year-on-year of total activity. We try to keep it capped at about 15 to 20 per cent just from a diversification perspective. On the allocation side, if I think of our value-add and opportunity funds, more than half of them are very active in hospitality, with 10, 20 or 30 per cent of their portfolios being hospitality. So we have interest in hospitality through the funds that we invest in as well as directly through specific projects and transactions that we do.
HI: You obviously have a view across the whole spectrum of real estate. How does hospitality sit compared to others. Is it better or worse at the moment?
JC: It’s more fun! One thing about hospitality is that it is an economically cyclical sector and one needs to be aware of that as one thinks of cycles. If you look over the long periods, we’ve seen that hospitality has outperformed all the other asset classes within real estate albeit with higher volatility. And so I think that as long as you have staying power and perspective and liquidity, hospitality in the long term is a very sound component of the portfolio. And we see that a lot with our larger institutional clients, sovereign wealth funds, large pensions - you see them pretty active in that space moreso than some of the mid-sized clients.
HI: When you’re doing more direct investing into hospitality, what are you looking at in terms of locations and types of assets?
JC: We’re just a capital partner investing alongside of management teams or GPs that are executing on the strategy itself. So first thing for us is always quality of the partner. But when you get into the actual physical properties and the service offering, we look across the spectrum and implement a barbell approach. On one end, we focus on a high-end leisure driven aspect of the market – so 5 or 6 stars, a truly differentiated product. For example, we were very close on a transaction that has $4,000 a night ADR. So that’s a very specific target market but one that has a pretty high disposable discretionary income. On the other end of the spectrum, we look at the budget segment – we recently closed a hostels investment in Germany with a €40 ADR - it’s literally the last place you can get a room or a bed before you decide not to travel at all. And due to current economic conditions, people are adjusting a little bit the amount of money they’re spending on a hotel – you may be a 5-star person that goes down to 4-star or a 4-star person that goes to 3-star but ultimately as you move down the rungs, a lot gathers at the bottom end when you’re in a downturn because people will stay at less expensive places before they stop travelling.
HI: It’d be interesting to get your view on the economic situation. We’ve had mixed signals from the US in terms of inflation recently, Europe is different. Where are you seeing things going?
JC: My personal view and the house view is that rates will stay higher for longer and that’s going to cause more economic consequences in Europe than it will in the US given the inflationary impact and economic growth. That could lead Europe to lead the way on rate cuts. I think the next 24 months will be interesting to watch but I would anticipate rates staying higher for longer and that needs to really be incorporated into one’s perspective and underwriting. In our hotels, we haven’t yet found a cap on where we can push ADR nor have we been able to keeps cost down especially with food, labour and power.
HI: Finally, it would be great to get your view on trends. What are those things you’re looking for in consumer spending, in economics and geopolitics? What are you paying the most attention to at the moment, in terms of travel and leisure?
JC: People want experiences, oftentimes something that’s new, unique and outside of their day-to-day. And I think the consumer is becoming much more sophisticated at distilling down those service offerings and finding what’s most suitable for their tastes or their needs. And so I think that we’re continuing to see that market evolve and being much more defined in regards to the segment that it’s looking to approach and the consumer it’s looking to attract. And we think that’s extremely important. Run-of-the-mill, cookie-cutter type of options are maybe okay for the business traveller but not in the leisure segment.