Last week International Hospitality Media (publisher of Serviced Apartment News and Boutique Hotel News) and AHV Associates LLP (the leading investment banking boutique in the sector) hosted a business breakfast discussion and presentation at The Reform Club, Pall Mall, London on 'investment opportunities in uncertain times' - who's buying, selling and investing in millennial, boutique and serviced accommodation?
Attendees included representatives from IHG; Malmaison; Veeve; Vision Asset Management; CampbellGray Hotels; Howard Kennedy; Horeca Investment Partners; Puccini Group; Your Welcome; Munro Asset Management; Urban Stay; Three Points Advisory; Hatters Hostels; Hotel Solutions Partnership; Hotel La Tour; London Central Portfolio; Qbic Hotels; The Hideaways Club; Clarendon Apartments; Herald Hotels; Zeal Projects and Grange Hotels.
After a brief welcome from Piers Brown of IHM, Andrew Harrington of AHV Associates highlighted that "traditionally, the vast bulk of institutional investment in the hospitality sector has gone into mainstream sectors - hotels / resorts and pubs & bars/restaurants."
"Over the last 15 years, the sector has diversified and a number of subsectors have emerged which are not yet mainstream but have in principle very attractive investment characteristics. There has been increasing institutional investment and M&A activity in alternative hospitality ranging from mixed use resorts to student accommodation," said Harrington, "This has been driven by a shift in consumption patterns after the economic crisis, growing millennial travel and the growth of the sharing economy which has led to a rise in demand for non-conventional accommodation."
Emerging accommodation investment activity
In recent years once untouched and undesirable emerging accommodation sub markets such as hostels and serviced apartments are now attracting investors attention, as evidenced by the growing public and private investments taking place in these areas. Harrington explained that the company has been actively involved in over 50 transactions for private companies to date including recent equity investment by Turnberry Investments into Safestay Hostels, and the sale of CLC's European hotel and resort management business to Florida based Interval Leisure Group for $130 million.
Hotel ownership structures and trends
After a brief overview of hospitality market dynamics, Harrington drilled down on the trend towards separating hotel ownership from operations and the rise of franchise agreements and hybrid leases from third party management agreements. The benefits of third party management agreements and acquisitions in the USA and European markets were discussed with Harrington highlighting the recent transaction environment in Europe driven by HK CTS Hotels Co (Hong Kong) acquiring Kew Green Hotels and Kohlberg and Companies (USA) buying Interstate Hotels and Resorts, suggesting a period of expansion and consolidation to capitalize on market growth. "Furthermore, recent hotel management transactions demonstrate a good mix of trade acquisitions, joint ventures, investments and institutional buyouts" said Harrington. The trend towards asset-light balance sheets with the growth of specialist hotel management companies like Bespoke Hotels and asset-light serviced apartment and aparthotel brands like Staycity continues.
An increasingly mobile workforce that is driving business travel and relocation has resulted in the growing demand, and there is currently an undersupply of serviced apartments in Europe. The fact that demand exceeds supply puts upward pressure on occupancy levels. Given these high occupancy rates, "it is no surprise that more hotel investors like Schroders, Starwood Capital, Oman Investment Fund, Qatar Investment Authority and Oaktree Capital are entering the market. "Together with recently launched consumer facing brands like Zoku and Locke to capitalise on the millennial mindset of the corporate and leisure traveller" said Harrington
European Serviced Apartments - investor awareness
Despite the fact Europe is the second largest global region for the serviced apartment sector, it is still relatively fragmented with supply largely dominated by local providers. Continuous focus on development, particularly driven by major national and international brands of the sector, will result in increased brand penetration. "We will see large US brands expand their European portfolio" added Harrington, which begs the question whether Hilton is planning to launch the Home2 Suites brand in Europe anytime soon.
Improving investment awareness has helped to boost transactional volumes in the serviced apartment sector. European transaction volumes were up 32.9 per cent in 2015 on the previous year to €416m. Since 2008 investment volumes in the UK have grown from £7.3 million to £325 million in 2015. JLL predicts that transaction volumes will grow as a result of the attractive yields compared to other asset classes, and state they are currently working on a transaction book of over £1 billion.
Boutique hotel investment snapshot
AHV Associates' view is that there is limited transactional activity in the European boutique hotel space with the market is picking up. Although not common, there are some example where mainstream Hospitality PE-backed groups are moving from bars/restaurants to boutique hotels. Latterly, Graphite-owned Corbin & King, which owns Wolseley, opened The Beaumont Hotel for instance.
Along with debt providers, equity investors-both private equity and Real Estate Investment Trusts (REITs)-are becoming more active participants in the independent hotelsphere. According to JF Capital Advisors, over the last seven years ,public REITs have acquired more independent than branded hotels- 98 versus 92 properties, respectively. Furthermore, REITs paid more per key for boutique hotels - $400,000 versus $309,000 per key for branded hotels. Among the REITs, the most active buyers of boutique hotels include Pebblebrook Hotel Trust and LaSalle Hotel Properties.
The Kimpton boutique hotel brand was purchased by IHG for $430 million USD in November 2014, and private equity players active in the boutique space include groups such as KHP Capital Partners, Sydell Group, and KSL Capital Partners. Capital sources for these groups consist for the most part of institutional investors (95 per cent), with five per cent coming from high-net-worth individuals. While some private-equity investors build hotels from the ground up, most create value by acquiring existing hotels and converting them to lifestyle and boutique properties in urban markets.
With the international hotel entering into the boutique hotel market in addition to the already well‐ established independent boutique hotels and operators, the sector has started to become a more competitive market with future potential for development. Harrington made an interesting comparison of the ownership structure of a small privately owned boutique hotel group (Nadler Hotels) and a branded Hotel indigo boutique hotel, owned by Maven Capital and operated by IHG.
In conclusion Harrington compared a selection of alternative hospitality markets and where they sit in the investment cycle, highlighting how he believes there is a big opportunity for early stage institutional interest in hostels and European serviced apartments.