With fixed leases in shorter supply, investment strategies for annuity funds are evolving to match a changing landscape. From dynamic leasing models to alternative investment avenues, how is institutional capital navigating this shift and its impact on the operator and investment landscape?
A sunny outlook for the hotel sector
The outlook seems to be positive for both hotel performance and investment for the rest of 2024, with CBRE expecting revenue per available room (revpar) growth to improve in the second half of 2024 and confidence among investors about the resilience of hotels as an asset class post-pandemic.
Andreas Löcher, head of department investment management operational, for Union Investment Real Estate GmbH, says that hotels have been “strongly proven” in recent years and is “definitely” one of the asset classes Union has its eye on for its future investments.
“Of course it depends on the hotel, but on average, the increase of revpar since 2019 is higher than the inflation in Europe and most of the hotels [have] managed to hedge the inflation of the cost through increasing the average price,” says Elsa Tobelem, deputy CEO of Hova Hospitality and CEO of Petra.
As a result, more than half of hotel investors surveyed by CBRE Hotels Research said they intended to buy more in 2024 than in 2023, while Savills has also predicted that 2024 investment volumes for European hotels will be significantly ahead of last year.
Deka Immobilien, for example, has approximately 90 hotels in its portfolio. The proportion of hotel assets under management within its portfolio has increased to 10% in recent years, and Frank Hildwein, head of hotel acquisitions and sales, sees this increasing further over the next year.
“Hotels are more popular than ever with our investors and fund managers,” he says, describing the segment as “in good shape”, with “really good” operational numbers and proving itself as “crisis resistant”.
“It's a good asset classes, it's sustainable, and that's why it's on top of the list, for the next years at least,” he adds.
Louise Burney, operational real estate sector lead with Legal & General Investment Management (LGIM), says she has already seen “an accelerated demand” for operational real estate. She suggests hotels are particularly attractive given the maturity of the hotel management agreement format and that hotels will be a “target sector” for several funds. LGIM is looking to increase the operational/alternative weighting of it’s Managed Fund (which includes hotels) by around 5-10%, translating into about £150-300 million to invest over the next two to three years.
Stimulating investment
However, the way that investors approach deals has changed post-pandemic. Burney says that Covid-19 has led to increased operational scrutiny and less ‘weight’ on the covenant. Hildwein agrees that Deka wants “full transparency” on operational numbers these days, including earnings before interest, tax, depreciation and amortisation (EBITDA). “Some are more reluctant than others to disclose the numbers, but this is what we want,” he says.
Burney highlights a shift towards lease structures that share the risk or reward with the operator, for example turnover or variable profit-based leases.
And market conditions are still not ideal for stimulating investment – while the intention is there, the stock or pricing may not be yet. Löcher is eagerly anticipating rates coming down, for example, which is hoped to happen in the second half of the year. Hildwein, meanwhile, says that the spread between yields and interest needs to widen further: “If the interest doesn't go down, then the yields have to go up,” he says.
Market conditions, particularly around debt and lack of distressed stock, are subsequently driving investor interest in conversion opportunities, although that’s not to say development is a no-go, says Burney.
Assets also need to be meeting environmental standards and legislation as investors come under increased scrutiny in this area. “Everything we want to buy today should be better than the average we have,” says Hildwein. “That's a big hurdle for us in acquisitions, that we need to buy stuff which is accretive to our carbon footprint.”
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: Beyond the Lease: Evolving Investment Strategies for Institutional Investors.