Hotel investors used to fall into a few recognisable types. There were hotel groups that owned their own buildings; there were ex-hoteliers who raised money to invest in their own businesses; and there were the trophy buyers who made their money elsewhere but enjoyed owning the world’s great hotels as solid symbols of their success.
These types of owners still exist, but things have been changing for several years as many hoteliers have decided to leave it to property specialists to own the bricks and mortar. Sale and leasebacks are one option, but Paul Bartrop of Colliers Robert Barry says that sale-and-management-back deals are also becoming increasingly popular.
Certainly the division between owning and operating hotels continues to widen in 2006, according to observers such as Mark Wynne-Smith, who heads the European hotel division at Jones Lang LaSalle. He says: “We still have the ‘pride of ownership’ buyers, but more and more private equity and property companies are becoming interested in hotels because they have seen that it is somewhere they can make a worthwhile return.”
Classic examples until now have included equity group Blackstone, which is among the world’s largest hotel owners. Its recent biggest buy was the $2.6bn purchase of Meristar, one of the largest hotel real estate investment trusts in the US.
But it is not only global giants such as Blackstone that now own hotels – the sector has become a much more mainstream target for traditional commercial property investors. Wynne-Smith believes that the new type of investor has given hotels a much sharper approach to maximising property values.
He says: “Some of the hotel groups have not managed their real estate in a very effective way and while there are still people – like Rocco Forte – who own buildings and operate them, the trend is very much for hoteliers to run hotels and property specialists to run the property.”
Typical is the listed hotel giant Intercontinental, which owns Holiday Inn, and sold 73 hotels to a consortium made up of Realstar Asset Management, Lehman Brothers and GIC Real Estate, for £1bn last year. Intercontinental’s European hotels are now up for sale and its stated policy is to become purely a hotel operator rather than a real estate owner.
Wynne-Smith says: “I can’t ever see the big hotel companies going back to being quasi-real-estate operations. In future, when they want to expand they will be partnering up with other investors to buy new sites.”
For hoteliers, one of the big advantages of not owning their buildings is that it frees up capital to expand or invest in the day-to-day operation, but it has also resulted in better property management, says Wynne-Smith.
He explains: “I think they [individual hotel owners] tended to over-invest in an effort to make their hotels as perfect as they could, but that the investment was not always justified by the potential return. The new type of investor tends to look at things in a more hard-headed way.”
But that very hard-headedness might mean that the hotel investment market has now peaked, because the returns investors can expect on hotel investments have fallen as investor demand and prices have risen.
Richard Candey, director at Cushman & Wakefield Hotels, says that yields on some deals have now fallen as low as 4.5%, which may make investors question the amount they are being asked to spend on hotels.
Deals still being done
For the moment, however, the deals are still being done. Recent large sales include Sloane Capital’s purchase of the Hilton Canary Wharf, due to open this summer, for £66.5m reflecting a yield of 4.9%. This represents a price of £242,000 per bedroom on the 275-bedroom hotel.
The Hilton Canary Wharf is a good example of how active the hotel investment market has been in the past couple of years, because only a year before Sloane bought it the hotel was purchased by WG Mitchell from developer Capital & Provident. Mitchell bought it for around £60m, so made £6m profit by simply holding onto the lease.
Candey, who acted for Sloane Capital, says that the deal appealed to Sloane for a number of reasons, including the strength of the Hilton name, guaranteed rent levels and the likelihood that even if Hilton did depart, another group of similar stature could quite easily be found to run it.
But Candey still believes that the market is likely to slow in 2006: “We have seen massive yield compression throughout 2005, which is merely a reflection of the huge weight of capital following real estate generally. But because hotels are now regarded as mainstream investments, the yields have fallen and this will almost certainly lead to the market slowing a little.”
It will also probably lead to the end of opportunities in the market for the sort of investors looking for steep, fast profits, says Candey.
Falling yields and rising hotel rents also spell danger for potential investors, warn some agents.
Nick Boyd, hospitality and leisure partner at Edward Symmons, believes that operators opting for sale-and-leaseback deals have often pitched their rents too high.
This poses a real risk for investors who make a bid on the basis of that rent without realising that it may be difficult for the hotelier to sustain.
Boyd says: “Sale and leaseback is still a relatively new phenomenon for hotels and operators are sometimes pushing rents up high in order to get access to as much capital as they can. The danger for an investor is that if a tenant defaults and another hotelier has to be found to move in they will probably not be willing to pay the same rent.”
This problem, says Boyd, is noticeable among both individual and small group sale and leasebacks, but less so among the big hotel names, which tend to insist rents reflect the potential profit of the hotel.
Warning to investors
And if sale and leaseback has distorted hotel rents in some cases, the increasing interest in hotels is a warning to investors in other ways. A spokeswoman for Blackstone, for example, admits that even rumours that they might be interested in buying hotels can cause problems.
“If Blackstone is interested and it becomes known, it immediately affects share price and this has become a real issue for us,” she says.
Blackstone or not, the issue for the hotel investment market in the coming year could be whether the big profits have already been made. Yields have fallen and rents have risen. Most agents will still say that there is a lot of investment money chasing too few opportunities, but the real question may be how good are some of those opportunities.
|
|
|
You don’t have to spend millions to invest in hotels. Among the latest investments available is for individuals to buy their own hotel room, take a cut of the room rate and make use of it themselves. Johnny Sandelson, founder and chief executive of Guestinvest, one of the pioneers in this field, describes the schemes as “very scaleable”. He says: “We have individuals and pension funds investing, as well as organisations that use a lot of hotels in London and can make use of the rooms for their own business.” Guestinvest now has two hotels in London, in Notting Hill and most recently Paddington, with a total of nearly 200 rooms. Prices start at around £200,000 a room with some at Notting Hill already having changed hands at a profit, according to Sandelson. Future projects include hotels in Kensington and overseas, with Mumbai, India, the first in line. Other companies involved in similar sell-a-room schemes include Galliard Homes, which has sold more than 700 rooms in its two apart-hotels on London’s South Bank and plans a further 900 nearby. The sales pitch is that 999-year leases start at £195,000 with a 6% net return guaranteed until 2015. Elsewhere, Mountgrange Capital has invested in Eleven Cadogan Gardens, a 65-bedroom townhouse in London, selling rooms to those who need them between 30 and 90 days a year. The idea is that the hotel continues to serve regular guests but that the debenture holders will buy the right to stay for their required time, as well as receiving income from the capital committed. Debentures here range from £140,000 to £450,000. |
|
|
|
If the corporate and group hotel market has become keener and keener on divorcing hotel operations from ownership of the property, the same cannot be said of the old-fashioned hotel market of UK seaside towns. In a resort such as Bournemouth, for example, things could hardly be more different from London. Most of the hotels here are still owned by those who run them. Ian Palmer, hotel specialist and divisional director at Goadsby, says: “This is a market driven by investors who are fulfilling a dream of running their own hotel. Many are first-time buyers, spending around £700,000-£800,000. I’d say that nine out of 10 hotel transactions in the town are by individuals who plan to run the hotel they are buying.” Bournemouth has 15,000 hotel bedrooms. This has fallen from its peak of 22,000 as residential developers have taken over old hotel sites, but still puts the town as by far the largest hotel market in Dorset. But most of the hotels are small – there are only 15 hotels with more than 100 bedrooms – something else which has limited the interest from big outside investors. Palmer says: “In national terms, the biggest interest here is from developers looking for sites for budget hotels but the town is so well served generally that there is not a lot of interest from big national companies otherwise.” |
|
|
|
One UK-based hotel group notable for owning most of the buildings in which it operates is Rocco Forte Hotels. Group financial director David Munns says this is partly because of the group’s relatively small size (it has 17 properties open or under development), partly because, at just 10 years old, it is a young company and partly because the group is small enough to be opportunistic if it sees what it believes is a potential capital gain in the value of properties it owns. Munns adds: “Size is significant because we are still relatively small and therefore each bit of our portfolio is more important in its own right.” The group’s hotels now include Brown’s in London (left) which Munns says is an example of a hotel that the group bought partly because it saw the potential for increase in value after re-furbishment, which has now been carried out. But Munns says that as the group expands it may take on more management contracts. “There is nothing wrong with them. We don’t want to be constrained one way or the other. The main thing for us is to become the largest luxury operator in Europe, with an aspiration to run 20-25 hotels,” he says. In the UK the group already owns Brown’s, the Balmoral in Edinburgh, the Lowry in Manchester and St David’s in Cardiff. |
