HOTELS ’ InvESTmEnT OuTLOOk
HOTELS ’ InvESTmEnT OuTLOOk
“ The most desirable [ properties ] might be those with a highly efficient labor model , limited guest services , are relatively new with limited capital requirements and , perhaps , located in a suburban and / or densely populated area . Oh , and you have to be able to drive there . So , you ’ re looking at a first-to-recover asset portfolio — which will be few and far between .”
– Chad Crandell
“ Chinese investment has all but evaporated in our industry the last few years ,” Pritzker says . Some highly publicized situations have cast a negative light on Chinese investments in the U . S . “ In addition , the Trump administration ’ s policies toward China have all but shut down inbound China interest for U . S . properties . EB-5 financing , which helped fuel a num- ber of U . S . ground-up developments , has all but dried up . We are not seeing any green shoots from investors from China ,” he adds . The strength of the dollar should keep most European investors at bay .
Don ’ t look for the giant brands to step up . “ Public companies can ’ t engage because their share prices are so low ,” Adler says . “ They ’ re focused on preserving capital for internal purposes . They ’ re not thinking about buying other companies when they ’ re thinking about survival .”
Prices will have to come down before the deal pace picks up . While owners argue that value has dropped 20 % to 30 %, sellers put that closer to 10 % to 15 %. That will change only if distress forces a lot of product onto the market .
Smaller dealS in europe The story of Europe ’ s near-term M & A pace won ’ t be told in billions . It ’ s the small- and mid-sized hotel platforms that have the biggest targets on their backs . Vulnerable even before COVID-19 because of European market fragmentation and the classic problems inherent in limited scale , a significant number of the pandemic-beleaguered owner / operators and niche brands in this bandwidth will be at the negotiating table well before a recovery projected for 2022 to 2024 .
The good news for capital circling Europe for a year or more is that there will be finally be some interesting hotel assets coming to market . How many initially depends on the banks and , of course , coronavirus . Lenders pretty much have to extend forbearance into 2021 to keep economic recovery on course .
However , their noblesse may be finite as they face down problems of their own . Overall , Standard & Poor ’ s ( S & P ) Global Ratings is projecting US $ 228 billion in credit losses for western European banks over the next two years . Most will survive , according to the report , but their capital buffers will be thinner .
“ In Q4 2020 , the reality of the situation will be clearer to lenders ,” says
Nick van Marken , managing director , van Marken Ltd ., London . “ They ’ re going to be looking at cleaning up their loan books .” They also may be revisiting whether they want further exposure in the hotel sector . If Fitch Ratings ’ prediction is true that the sector won ’ t return to 2019 occupancy rates until 2023 , if all goes well , or until 2025 in a stress-case scenario , more banks may be looking to offload portfolios and limit their hotel exposure to the Accors , IHGs , Whitbreads and a few other select customers .
Workouts and work-arounds have kept distress levels manageable . “ They haven ’ t played through to any collapses ,” van Marken says . At least , not yet . That could change near-term as more companies realize they cannot outwait Europe ’ s slow hotel recovery .
Limited-service and extended-stay brands are “ immensely attractive ” as acquisition targets “ provided that they have a good story and a clearly defined product ,” van Marken adds . “ Both concepts have demonstrated a great deal of resilience [ in downturns ].” He also points to prospects for hostile takeovers .
A few trophy assets will go up for sale , as usual . But the majority of deals coming to the block will more likely be struggling small to mid-sized portfolios that previously did well only because the market was rising . They kept investing , racked up substantial debt — and then got swamped by COVID-19 . “ Overstructured ” companies also are on the watch list to go up for sale in 2021 .
Anders Nissen , CEO , Pandox AB , Stockholm , sees a pipeline of assets coming from owners that want to redeploy their capital to steadier industries . “ Quite a number of investors got their fingers burned because they failed to understand how the hotel market works and how to create value ,” he says . “ Passive owners who bought hotel properties at low yields with fixed leases are now realizing it was much riskier than they thought .” They ’ ll be looking to exit , he predicts .
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November / December 2020 • HOTELS ’ Investment Outlook • www . hotelsmag . com