Hotel investors in Europe are now accepting more risk for the same return
Current risk levels for buying hotels seem to indicate a downturn is around the corner, yet investors say those risks don’t outweigh the rewards, at least not in the booming European market, where conditions are ripe for underwriting, analysis and monitoring trends
The thinking of hotel investors in Europe is shifting toward the acute end of the risk-reward spectrum, according to experts in the hospitality space, who added investing behind the macro themes will occupy more of their time going forward.
One recent trend is investors are taking more risk for the same return as mature markets have become more institutionalized. In fact, while speaking at a panel titled “Investing in the opportunities of tomorrow” at Deloitte’s 30th European Hotel Investment Conference, Coley Brenan, partner at KSL Capital Partners, said there is one big question occupying investors’ time.
“Are you being compensated for investing in the U.K.?” Brenan asked. “We cannot quantify what that risk is, and we continue to be positive, even bullish, about the U.K. as we see opportunity to add value.”
Brenan’s fellow panelists echoed that sentiment and voiced additional concerns.
“There is potential upside, but we, too, debate all the time as to whether we are being paid for the risk, but that is true across all of Europe,” said Keith Evans, SVP of European hotel acquisitions for Starwood Capital. “Everything needs to be incorporated into our underwriting, and there is more sensitivity that needs to be ticked. We are already seeing some of the risks of Brexit.”
Brenan said no one knows what Brexit will ultimately mean, but there will be enough qualified institutional investors that remain interested in deploying capital.
Evans agreed. “(Europe) is still a deep pool,” he said. “It depends on what you are selling. There is a lot of competition in the buyer pool.”
Evans said there remains a reasonable level of volume transaction. “Some risk is properly priced, but there is a general trend of taking more risk for the same return,” he said. “Traditionally investors have looked for higher yields or new markets, but now you are looking at more liquidity risk when comes the downturn. When you start layering all that in, the capital expenditure and return differentials start looking not as attractive. You need better business plans and more efficient construction and operational models.”
These new considerations can allow fresh thinking and capital to locate and act on opportunity.
“We’re long-term, which is why we’re active in the United Kingdom, places where we look for similarities to the model in the Nordics. A lot has to do with knowledge,” said Jacob Rasin, director of business development at Swedish hotel firm Pandox.
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