The coronavirus crisis has hit the hotel market hard. So one may expect this to negatively affect the demand for hotel real estate as an investment. Nevertheless, Schroder Real Estate Hotels has raised more than €400 million for its first pan-European hotel fund.
The majority of the capital has so far been pledged by major European insurance companies. Robin Hubbard, head of Real Estate Capital at Schroders, declines name any of these, but he does see a common denominator among the institutional investors who have committed to the fund.
That is the fact that they are all underweight to within their allocation to commercial real estate, like most institutional investors in Europe. ‘Investors are generally overweight in offices, industrial logistics and retail and have some exposure to residential real estate. The exposure to hotels is very limited,’ he told Investment Officer in an interview.
With €425 million in capital commitments, the Schroder European Operating Hotels Fund I is on track to reach its target capital of EUR 500 million, says Hubbard. Institutional investors who like the prospect of a return of around 10% can still join if they invest at least €10 million.
The prospected return is higher than that of a traditional hotel property investment, which is explained by an important distinguishing feature of the fund. Hubbard emphasises that the fund itself owns and operates the hotels. This contrasts with traditional funds and managers who acquire real estate and then have it exploited by a hotel chain.
Bad outlook
This kind of operating model fits in with a trend outlined by Jan Steinebach, director of Hotels at real estate consultant CBRE. ‘The hotel real estate market is becoming a specialist market again. In recent years, investors have been attracted mainly by the prospect of making a stable, secure long-term investment,’ he says. ‘These players did not believe specific knowledge about the sector was required, and will now withdraw from the market, as we saw during the previous crisis. Market knowledge will therefore become more important again.’
However, Steinebach is less positive about the outlook for the hotel market. The hotel market is in heavy weather due to the corona crisis. Occupancy rates in April and May were below 10% and several hotels have already gone bankrupt. Now that tourism is picking up, it seems to be heading in the right direction again. However, occupancy rates won’t recover fully, because business travel will not come back for the time being.’
Real estate consultant Cushman & Wakefield notes that despite the lockdown, investment transactions are still taking place on the European hotel market. According to the advisor, there are wealthy investors who want to take advantage of the current opportunities in the hotel investment market, for example by restructuring financing. In the second half of March, 41% of European hotel investors were still active with advanced transactions or looking for distressed assets, research showed.
Steinebach also sees some interest at the European level, but he also notes investment committees are very reluctant at the moment. This is mainly due to the fact that it is very difficult to value operational real estate such as hotels at the moment.
Distressed assets
However, Frederic de Brem, head of Schroder Real Estate Hotels, maintains there are still opportunities in the hard-hit leisure and accommodation market. He refers, for example, to distressed assets, which in his view can be very attractive given the long-term prospects.
Hubbard adds: ‘In a market like this, when you invest in both real estate and the operation of the hotel business, you have to have real confidence in the people who do it. Because you have to be able to assess whether such a hotel can still recover. All kinds of factors play a role here: what kind of hotel is it, is it well occupied during the weekend or during the week and is the restaurant doing well?’
But it will take a long time for the hotel market to recover, according to Steinebach. ‘We are currently seeing an upturn in operations, but we are also expecting a sharp downturn in the last months of the year due to the absence of business guests and the absence of congresses and trade fairs,’ he says.
He concludes: ‘The course of the recovery is very strongly linked to the course of the pandemic. Once it is under control we will see more travel movements and a recovery of the market. Most insolvencies are expected to occur in the fourth quarter. In 2021 the market will slowly recover, which will continue in 2022. However, the course of the recovery differs per hotel operation and per hotel property. There will be sub-markets that recover faster or slower, depending on the composition of the market - in terms of the mix of leisure and business.’