US private equity checks back into European hotels

US private equity funds are increasingly looking to re-invest in the European hotel sector but this time they are employing structures that avoid the high LTV levels that hobbled several of the portfolios acquired during the boom years.

Starwood Capital carried out one of the largest private equity investments of 2013 in the European hotel sector with its purchase of the Principal Hayley portfolio in the UK for €419 mln.

Another Starwood vehicle was active on the selling side, disposing of a luxury hotel portfolio in France for €717 mln to a joint venture between Qatar Holding and Talaat Moustafa Group.

US private equity groups such as Starwood, Apollo and Blackstone were behind several of the big hotel deals carried out in the period from 2006 to the beginning of 2008 when the over-abundance of cheap debt financing transformed real estate investment into a pure financial play.

While the hotel sector avoided the worst of the CMBS craze, a small number of hotel trades were securitised in the last year of the boom 'when things got a bit wild', says Christoph Harle, CEO of Continental Europe, Hotels & Hospitality at Jones Lang LaSalle.

Buying goes boom
Then came the credit crunch. 'The combination of the downturn in trading and the complete turnaround in terms of the debt market from a huge amount of available debt to no availability caused the structural issues,' according to Dominic Murray, director for brokerage EMEA at CBRE. 'There is still evidence of that coming through such as the Allianz portfolio that Blackstone bought in 2007 on the cusp of things turning. That ended up in a bad place because of the amount of debt in the vehicle and those assets are being spun out as a result.'

UK hotel portfolios such as Malmaison and De Vere's were secured by non-US buyers on the back of very high LTVs and structured as a propco-opco, a sale-and-leaseback or something in-between. CBRE's Murray: 'Because of the nature of the rents being paid by the opco to the propco and the amount of debt in the propco they failed. They failed because of the structure and not necessarily because of the operation. If the assets had continued to operate at the levels seen previously they probably could have been saved.'

Denver-based private equity group KSL acquired Malmaison and Hotel du Vin for a reported €200 mln in March this year after their partner company went into administration a few months earlier.

New strategy
US private equity players, Harle and Murray agree, are back in force in the European hotel investment market but this time they are putting up higher equity levels for transactions. 'What we are generally seeing with all these bigger portfolios is US private equity opportunity funds in the market looking to spend large ticket sizes. They clearly want to write equity cheques of a minimum of €50-100 mln, and any large lot-size portfolio that has lots of moving parts and is cross-border appeals to those buyers at the moment as long as the metrics of the deal work,' CBRE's Murray said.

The latest wave of US private equity is being propelled by a number of factors. The US Fed has up to now continued to print money that has to be spent somewhere. One channel has been private equity real estate funds raised by giants of the industry such as Blackstone, the big daddy of them all, as well as Apollo and Starwood.

The hotel market represents an interesting play because it is cash-flow driven and the funds - in contrast to the boom years - are willing to lead with their equity. 'It is a different formula and one I expect to look more favourable in the next few years when some of these assets start trading again,' Murray said.

Debt is available but rather than being restricted to traditional balance sheet lenders, some of the equity providers are also debt providers.

Blackstone has raised a debt REIT with the sole purpose of lending into the real estate industry. Meanwhile, Starwood and insurers such as Allianz, M&G and AXA are also operating in this space.

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