Distressed deals may become available in key markets, according to real estate private equity investment manager ActivumSG.
Speaking to PropertyEU, James de Lusignan, the firm’s UK managing director, describes a recent deal completed in Greater London where the prior owner was facing difficulties with the mixed-use asset’s capital structure.
‘The sale of the property had recently fallen through,’ de Lusignan explains, ‘for a complex asset which probably wasn’t for everyone. The Sutton Point development had completed in 2019, comprising residential, two hotels and a couple of floors of office space, retail and the freehold interest. The residential component had been sold to an institution, so we took over the rest, which involved complex underwriting and dealing with neighbouring ownerships.’
For ActivumSG, the majority of the value of the asset resided with the hotels, flagged by major brands. Therefore, on closing, the non-hospitality elements of the scheme were sold off in back-to-back disposals. This significantly de-risked the transaction and allowed for the retention of the two hotels, namely a 99-key Ibis hotel and a 59-key Adagio aparthotel.
While the asset carries a BREEAM Excellent label, the Adagio and Ibis hotels benefit from EPC ‘A’ and EPC ‘B’ ratings, respectively. Subsequently, the hospitality assets were financed with an attractively priced senior loan provided by Leumi UK.
Pandemic opportunities
According to de Lusignan, ActivumSG isn’t afraid of complex transactions or exploring assets mired in distress.
The business drove forward a successful strategy during the pandemic to identify dislocations in the European hospitality sector, carving out a few key deals. The firm acquired the pan-European Odyssey Hotel Group in 2021 through ActivumSG Real Estate Fund VI at the height of the pandemic.
The deal for Odyssey was driven by an aim to capitalise on the recovery of the European leisure and business travel sector. The group, which operated just 1,940 rooms in 2021, now operates around 3,750.
Also during the pandemic, ActivumSG identified a strategic opportunity to acquire the bonds of budget hotel operator Travelodge, which had significant exposure to the UK, at a compelling entry point.
Market conditions during this period led to a mispricing that ActivumSG capitalised on, de Lusignan notes. As the UK travel economy began to recover, investor sentiment towards Travelodge bonds improved significantly. This positive sentiment was bolstered by a robust corporate update from Travelodge, which further enhanced the attractiveness of the bonds.
The strategic acquisition and subsequent management of the bonds led to a successful exit marked by impressive returns in 2021. Says de Lusignan: ‘We were actually expecting to see more distressed hotels come up for sale during Covid, but they didn’t fully come to light, probably due to forbearance from lenders. So, we decided to look for dislocations in other aspects of the capital structure, such as the Travelodge bonds.’
Future dislocations
But now that the hospitality sector is firing on all cylinders, isn’t distress in the rear-view mirror, just like the pandemic? Not necessarily, de Lusignan says. ‘There’s still a bit of a hangover,’ he notes. ‘It’s true that post-pandemic, we have seen really impressive recovery for a lot of hospitality assets in the UK and Europe, with some nuances for specific segments and geographies. But many assets have been under capexed for some time which continues to manifest itself.
'That has also coincided with headwinds like interest rates and inflation, plus the recent UK Budget, all of which are placing cost pressures on the sector.’ He suggests that lender patience may also be running out nearly five years after the pandemic began. ‘RevPAR is softening for certain segments across the UK, and we think there may be some level of sales activity in the near future.’
For ActivumSG, high conviction themes remain hospitality and living assets, particularly in the value add and opportunistic segments. De Lusignan adds that even within this focus, ‘you have to be very disciplined about where you spend time. We have a good ability to cut through and see where there are really opportunities to add value, such as repositioning assets in hospitality’. He says that the firm prefers budget or luxury stays, avoiding ‘that dangerous middle ground which is most at risk from rising operating costs’.
In the living sector, the UK business is exploring purpose-built student accommodation (PBSA) but seeks a differentiated entry point or strategy from other investors. ‘The headwinds for assets that target international students have tainted the sector a bit, but we are prepared to spend some time on the asset class and work through a differentiated thesis,’ he says.
Looking ahead to 2025, de Lusignan expects to see ‘lots in play’ requiring ‘situation specific and asset specific attention’. ‘There will be winners and losers,’ he says. ‘But I do expect to see more deals happening at the stressed end of hospitality, for under loved and under managed assets.’
