H1 DEAL ANALYSIS: Investor rush for alternatives continues unabated

Long income, high returns and diversification benefits are just some of the factors fuelling the investor scramble for alternative assets in Europe. PropertyEU highlights key deals in the sector in the first six months of 2019.

Based on reported transactions alone, no less than 30 hotels have changed hands in Europe so far this year - either as single assets or in portfolios - underscoring a trend that has been shaping commercial real estate investment for some time now: hotels, along with other ‘alternative’ asset classes, are a red-hot commodity.

From high-profile Hilton hotels in cities such as London, Amsterdam and Vienna, to millennial-focused properties and development projects in secondary locations, the cross-border appetite for hotels appears to show no bounds.

As one of the ‘alternatives’ segments, hotels have enjoyed huge international interest along with other ‘beds’ classes - apartments, student housing, senior housing and care homes - as investors seek out their ‘defensive’ qualities at a time of growing unease over the global economic outlook. 

Last year a record €23 bn of hotels was traded in Europe following a strong year in 2017. And in the 12 months to end-June 2019, deal volumes totalled  €24.3 bn, up 5.3% on the year-earlier period, according to research from CBRE.

‘European hotel investment volumes have remained strong despite the slowdown in wider commercial real estate,’ commented Miguel Casas, head of investment properties for Continental Europe at CBRE. ‘Operational and alternative property types remain in high demand, and there is expectation that this trend will continue due to sustained income growth,’ he noted.

Global investment manager Invesco Real Estate (IRE), which has €1.5 bn of hotel assets under management across Europe and recently purchased three hotel properties in Lisbon, attributes the strong demand to a range of factors: hotels’ long-term leases with sustainable coverage ratios giving through-the-cycle downside protection; positive long-term industry fundamentals; a continued yield premium over prime office of 50-100 bps; and a fund allocation shift away from retail at least in the near to medium term.

'In the current economic climate, hotels remain popular particularly for the positive fundamentals,’ David Kellett, senior director of hotel transactions at Invesco, told PropertyEU. He sums these up as growth of the global middle class, long-term growth in travel and tourism (which represents 10% of global GDP), and a strong increase in tourist arrivals and visitor nights. ‘Whilst GDP growth may come under short-term pressure, these positive demographic trends are expected to continue with the lease structures we favour providing downside protection in the event of a material decline in hotel operating performance,’ he said.

Appetite for alternative real estate asset classes is being seen across markets globally, Kellett noted. ‘In our view, this is driven by a combination of the overall strength of the capital flows into real assets, which cannot just go into the more traditional sub-sectors, as well as an increased understanding from investors of the diversification benefits that many of these speciality sub-sectors offer. When compared to the traditional “mainstream” real estate sectors, assets such as hotels, student housing, or self-storage offer very different supply / demand dynamics, and also very different rental income profiles.’ 

Lisbon in vogue
Invesco’s recent €313 mln deal in Lisbon, marking the firm’s debut in Portuguese hospitality, ties in with its strategy of  targeting major tourist centres. ‘We choose to invest in the largest cities in Europe with strong international travel flows that benefit from a good mix of business and leisure demand drivers,’ Kellett continued. ‘We also monitor new supply closely to help us select markets and micro locations that have high barriers to entry and where hotel performance is expected to be resilient over the long-term.’

Invesco was not the only investor to head for Lisbon in search of opportunities: in July listed German investor Patrizia purchased a hotel development, Tagus Square, in the Portuguese capital on behalf of a pension fund, while fund manager Commerz Real acquired a DoubleTree by Hilton hotel in the city for its institutional hotel fund in May. In both cases the price was not revealed.

Two other major hotel deals in July – both involving Hilton properties – confirmed the cross-border appetite for the asset class. In Vienna, a Korean consortium acquired the 50,000 m2 Hilton Parkview for €370 mln, while in Amsterdam, AXA IMRA purchased the DoubleTree by Hilton from Chinese insurer Anbang for €425 mln.

London was the scene of a major portfolio deal in Q1 involving the €1.2 bn purchase by Queensgate Investments of four London properties from privately held hospitality group Grange Hotels. The four upscale hotels comprise 1,345 Central London rooms and are to be operated by the Fattal Hotel Group.

Another big UK transaction saw 9 Hilton-branded hotels change hands across the country for a combined €282 mln. Although sold out of administration, marketing agent Savills said the disposal of the properties – previously owned by property mogul Vincent Tchenguiz and known as the Zinc portfolio – was indicative of ‘the unabated appetite for UK hotels, particularly those with attractive lease terms and long-term value enhancement opportunities.’ The nine assets included the Kensington Hilton in London, which was sold for £261.5 mln to a company controlled by hotelier Bakir Cola.

The UK continues to be the standout market for hotel investment in Europe, although deal volumes were down 26% in the 12 months to end-June, according to CBRE. Single-asset sales soared by 44.5% but portfolio sales declined by 53% over the period. The firm attributed the decline largely to a shortage of stock on the market, noting that demand from overseas buyers seeking to take advantage of the current weakness in sterling remained strong.

More broadly, alternative assets are now the most actively traded property types in the UK, accounting for 37% of year-to-date investment, according to research by Cushman & Wakefield. All other property types have seen their share of the investment pie decrease, with the share of offices now at 33%.

‘Beds’ sector booms
Across Europe as a whole, the ‘beds’ sector is booming. According to figures from RCA, this asset class now attracts around a third of all the investment capital being placed in European property. Apartments overtook retail as the second-largest real estate investment sector, after offices, in the second half of 2018 and have consolidated that lead in the first half of 2019, with European transaction volumes rising 6% to €23.5 bn.

John German, managing director of residential investments at IRE, says the ‘beds’ sector provides a ‘compelling investment case’ relative to other potential real estate investments in the UK, where the firm has committed around  £1 bn to date. He cites two main reasons for the sector’s appeal: based on historic returns, bed investments have outperformed over the medium and long term; and on a risk-adjusted basis they provide a strong diversification benefit relative to other real estate asset classes. He also points to the growing ‘institutionalisation’of the bed sector over the last five years. ‘Student housing was already an established investment, but in the last five years PRS/BTR has seen a considerable increase in institutional investment, making it a more acceptable investment class.’

Deals tracked by PropertyEU over H1 confirm this trend; a mammoth deal in March saw Swedish investor Heimstaden acquire a Dutch portfolio of over 9,500 apartments from investor-developer Round Hill Capital for €1.4 bn, making it the third-largest private property owner in the Netherlands. That deal was followed up in July by the purchase of another 772 residential units in the Netherlands from German REIT Patrizia for €97.4 mln.

In June AXA IMRA acquired a 396-unit PRS scheme in Copenhagen for €174 mln, marking its second acquisition in the sector in Denmark. In the student housing sector, a joint venture between global investor Greystar, German insurer Allianz and Public Sector Pension Investment Board (PSP Investments) acquired a student housing asset in London’s Shoreditch from Apache Capital Partners for over €185 mln. The purchase of the 458-bedroom Paul St. East scheme, located in the heart of London’s tech quarter and close to Amazon’s east London office, was said to be one of the biggest single-lot transactions in the history of the UK’s purpose-built student accommodation (PBSA) sector.

Berlin tops resi table
Germany also witnessed its fair share of housing deals in the first half of 2019. In March, German landlord Deutsche Wohnen acquired 2,839 apartments from Northern European residential investor Akelius for €685 mln, mostly concentrated in the Rhine-Ruhr metropolitan region. And in June, Hamburg-based Deutsche Investment KVG acquired a portfolio of 1,088 residential assets focused on Berlin for €220 mln from a European family office.

Recent research from CBRE reveals Berlin was the top destination for cross-border multifamily investment in Europe between 2015 and 2018, followed by Copenhagen and London. In the last four years, a total of €14.8 bn was invested in apartments in the German capital, against €11.2 bn in Copenhagen and €7.7 bn in London.

The firm says multifamily housing could even become the largest real estate investment segment in Europe if international investors continue to plough record volumes of capital into the sector. Between 2015 and 2018, €52 bn of cross-border capital was committed to European multifamily housing, making it the second biggest investment sector in Europe after offices.

Pubs and data
Alternatives deals in H1 did not revolve only around beds, however. In the UK, the country's largest pub owner and operator, Ei Group, divested 370 pubs and commercial properties to Tavern Propco, a private fund owned by Texas-based Davidson Kempner Capital Management. Analysts described the €388 mln deal as a ‘game changer’ for the pub operator, allowing it to quickly cut its total debt and return money to shareholders.

Also in the UK, insurer Legal & General and Goldacre Noé Group plugged into the data centre market by taking a 50% stake in the £230 mln (€263 mln) Kao Data Campus in the South of England.

Located in Harlow, between London and Cambridge, the 35.2MW data centre serves so-called ‘hyperscalers’ - global tech giants - as well as enterprises across what Legal & General describes as ‘the largest data centre market and technology cluster in Europe’.

Commenting on the deal, Matteo Colombo, director of strategic private capital investments at Legal & General Capital said: ‘As technology continues to evolve and our future cities become more connected, we see data centres as critical infrastructure of national importance. At a time of increased sensitivity around data sovereignty, the UK lacks its own flagged data centre platform. We see a market gap, and Kao presents a unique opportunity to build and create a leading UK proposition.’

And in the same sector in the Netherlands, global tech giant Google said at end-June it was investing a further €1 bn in expanding its data centre capacity there, including building a new facility in the north of the country. Including the proposed investment, Google will have spent a total €2.5 bn on data centres in the Netherlands since 2016, the only country outside of the US where it has more than one facility.

 

 

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