Does opportunity knock for hotel investors?

Investors have been waiting in the wings of the hotel sector since the start of the pandemic, certain that there would be bargains to be had in the form of distressed assets. In the event, government support and understanding banks (we understand banks don’t want to find themselves owning hotels) kept everyone in business.

The boom in travel, which we are still enjoying, meant that many hotels did better than merely ticking over, and the leisure and luxury segments attracted many oft hose investors, spawning a number of large transactions and buoyant development pipelines.

Travel restrictions saw a focus on domestic markets, but earlier this year, the UNWTO forecasted international tourist arrivals could reach 80% to 95% of pre-pandemic levels this year, depending on the extent of the economics lowdown, the ongoing recovery of travel in Asia and the Pacific and the evolution of the Russian offensive in Ukraine, among other factors.

The recent lifting of Covid-19 related travel restrictions in China, the world’s largest outbound market in 2019, is a significant step for the recovery of the tourism sector in Asia and the Pacific and worldwide.

At the same time, strong demand from the US, backed by a strong US dollar, will continue to benefit destinations in the region and beyond. Europe will continue to enjoy strong travel flows from the US, partly due to a weaker euro versus the US dollar.

But behind the scenes, those high rates are not always translating into profit. The ongoing issues around finding team members means that many hotels cannot open all their rooms, and wages are an ever-rising cost. In many locations, that government support now has to be paid back.

And they are not the only cost. Towards the end of last year, Hotstats reported that electricity at Europe’s hotels was more than €5 on a PAR basis, its highest level ever recorded and €2higher than at the same time in July 2019.

Inflation is likely to have an impact on demand and is certainly having an impact on supplies. In the UK the CGA Prestige Foodservice Price Index reported that year-on-year food inflation was 20.6% in February this year. This provoked UKHospitality CEO Kate Nicholls to say, “Energy costs, food price inflation, and staffing shortages are a triple whammy that are dragging businesses to failure. Something has to be done or hospitality will look like a shell of itself in a year’s time”.

If you’re reading this, the chances are you’re feeling these pressures too and might be wondering whether this sector we call home is really for you any more and whether now, during a period of high rates, is a good time to make your exit.

The IMF certainly believes that the good times are not about to roll. International Monetary Fund managing director Kristalina Georgieva told a news conference at the IMF and World Bank spring meetings in Washington that the organisation’s forecast of 2.8% global growth for 2023 was “not enough to bring opportunities to businesses and people around the world, and most worrisome is the projection for weak growth over a longer period of time”.

Enter the opportunistic funds. Last month Blackstone reported the closing of its biggest-ever real estate fund, Blackstone Real Estate Partners X, with a $30.4bn war chest. The group said: “Anticipating changing macrotrends, Blackstone Real Estate shifted its portfolio away from assets facing headwinds such as traditional office and malls and is approximately 80% concentrated in logistics, rental housing, hospitality, office, and data centres.”

Yes, hospitality. Ken Caplan, global co-head of Blackstone Real Estate, said: “We believe the current market is tailor-made for Blackstone Real Estate. We have made some of our best investments in periods characterised by the market volatility and dislocation we see today. Furthermore, sector selection has never been more critical as we witness the bifurcation of performance within real estate, which is favouring our high-conviction themes.”

Blackstone has a long history in the hotel sector and is sure to be using its relationships to source what it hopes will bemouth-watering deals.

For those owners thinking about maximising their sales price, now is the time to talk to your asset manager about critical improvements to improve performance and increase those multiples. Or even to consider whether now is the time to sell at all and keep those improvements for yourself.

Alex Sogno will bespeaking at: RightPerson, Right Time, RightProduct: Strategies for Alignment on Tuesday,May 16, 2023 3:15 PM to 4:00PM (CET), Kopenick

Alex Sogno
CEO & Senior Hotel Asset Manager
Global Asset Solutions