Internos Global Investors has raised an initial €133m for a European hotel real estate fund.

Seven German institutional investors backed the vehicle, the manager’s second targeting the sector.

With leverage, the fund has €260m to invest and Internos said it could grow up to €500m in the next few years.

The fund will target value-add investments in three and four-star city-centre business hotels.

Hotel Fund I, a core fund, was launched in 2012 and has €500m in assets under management. The vehicle achieved a 14% internal rate of return.

Jochen Schaefer-Suren, partner and manager of Internos’ hotel and leisure division, said the sector is at a point in the cycle where many hotels with long-term fixed income are “fully valued in many markets, yet may face rising interest rates and resulting potential value impact over the coming years”.

He said: “In such markets, the new strategy focuses on creating value at the individual asset and market level, which can be achieved in any general market context.”

A number of hotels are under exclusivity or in advanced discussions, Internos said. The company expects to deploy the initial capital over the next 12 to 18 months.