Hotels: mid-market warriors and budget bedfellows

European specialist investment funds are holding their own in the packed mid-class segment which offers something for everyone.

Internos Global Investor closed the acquisition of the NH Düsseldorf City Nord hotel in the second week of November. The four-star hotel was acquired for €37.5 mln 1 a yield of 7.8% - on behalf of the Internos Hotel Real Estate Fund I.

The property has 330 rooms and operates under a long lease with NH Hotels with 15 years unexpired lease term. This is the eighth hotel the fund has acquired since its first closing in July 2012. Jochen Schäfer-Suren, partner and head of Internos' hotel and leisure division: 'We have now deployed two thirds of the capital subscribed by our investors in 15 months since the fund’s launch, whilst adhering to the fund’s investment strategy and exceeding the fund’s target returns. We have 2 or 3 more acquisitions in the pipeline over the coming months and thus expect to deploy the remaining equity of the fund and reach an estimated AUM of close to €400 mln by mid-2014.' Schäfer-Suren expects to launch a successor fund during 2014.

Invesco Real Estate (IRE), who’s hotel business was also founded by Schäfer-Suren before he joined Internos, has also been busy during EXPO REAL. Apart from sponsoring the IPD report referred to on page 2 and launched in Munich, the company’s specialist hotel fund acquired the Park Hotel in Amsterdam and leased it back to the operator Grand City Hotels for a period of 20 years. Speaking at EXPO REAL Invesco associate director Erik Jacobs declined to disclose the investment volume, but it is believed to be around €75 mln.

Hotels currently represent over 20% of IRE’s assets under management. The company owns 26 mid-market hotels with around 5,690 beds across Europe, including Poland. Jacobs said Invesco was actively seeking further hotel investment opportunities in Western Europe.

Such deals suggest European specialist funds are holding their own against stiff competition from a broad spectrum of players, including US private equity.

Fund manager like Invesco and Internos, JLL’s Harle says, follow a strategy where assets can provide a mix of guaranteed rental income and a revenue or profit share that can provide them with some up-side through asset management. ‘These guys are looking for stable IRRS in the mid-teens rather than in the 20-25% range that private equity opportunity funds have sought in the past. For the likes of Apollo, Carlyle and Blackstone the hairier it is at the beginning so they can create extra value through repositioning, renovation and adding rooms.’ Harle noted those funds would look for an exit within three to five years, while Internos and Invesco probably have a five to seven year horizon.

BUDGET BEDFELLOWS
The lower you go in terms of the offering, hotel investment tends to be very much the arena for institutions and private individuals. The budget sector tends to offer long leases with stable, secure income which fits the return profile of insurers and pension funds. Union Investment launched an institutional fund, UII Hotel No. 1, in April 2013 to focus on the growing budget and midscale segment. In the medium term, the target size of the fund is €250 mln, comprising between 10 and 15 hotels from different operators. CBRE’s Murray notes the German investment acts limits them to acquiring leases, something which the hotel industry has been moving away, except maybe in Germany.

Nevertheless, Union’s fund has already secured seven assets. Murray: ‘Covenant strength of operator is key because they can’t buy hotels without a lease in place.’

Union’s answer has to work closely with budget hotel operator Motel One, and in October the pair carried out Motel One’s first sale-and-lease back comprising three assets. The portfolio includes a total of 693 rooms across a gross floor area of some 22,821m2 in Düsseldorf, Frankfurt and Stuttgart. The fund had acquired the Motel One 'Deutsches Museum' in Munich at the end of September.

'Our partnership with Motel One as a financially strong hotel operator is allowing us to establish a solid foundation for further expansion of our portfolio in the form of hotel real estate that offers stable income, said Christoph Schumacher, a member of the management team at Union Investment Institutional Property, which is responsible for managing the institutional fund.

A special report on the European hotel investment market appears in the December edition of PropertyEU Magazine.