Alternatives - Golf Resorts: Par for the course
Following Europe’s victory in the Ryder Cup, institutions are rediscovering the appeal of European golf resorts, writes Harry Douglass
The recent sale of the famous Wentworth Club in the UK to the Chinese Reignwood Group, along with similar deals involving European golf resorts, appears to have signalled the return of investors to this volatile market. Major single-asset investments have already reached €386m this year.
The European resort market experienced a boom in the 1990s, which was widely perceived to have created an oversupply in many locations. Macroeconomic conditions at the start of this century restricted success to the strongest offers; the wider market has found the past seven years highly challenging.
An immediate reduction in the demand for meetings, incentives, conventions and exhibitions (MICE), coupled with a price-sensitive leisure segment, drove down revenue per available room (RevPAR) and ancillary food and beverage spend. At the same time, economies of scale were compromised, resulting in lower net operating income. The simultaneous withdrawal of debt from the market and lower loan-to-value ratios decreased values further still.
Prevailing market conditions and improved investment certainty have now convinced a variety of investors to reconsider the sector and capitalise on some relatively low values crystallised in distressed and work-out situations. These investors have often secured well-built properties with highly regarded golf courses in areas benefitting from a diversity of hotel guests, multiple revenue streams and future development potential.
Hotel performance has stabilised and buyer-seller expectations have now largely been reconciled, as a number of high-profile transactions show, including the sale of The Belfry to US-based KSL Capital Partners, and Mount Juliet and Fairmont St Andrews to Kennedy Wilson.
Elsewhere, we await the outcome of the €25m sale of the acclaimed 350-hectare Adare Manor estate. The property has a 62-room luxury hotel, Robert Trent Jones Sr. championship golf course and significant additional development potential with strong ties to the US and Far East. Resort values are often below replacement cost and subject to strategic capital expenditure and effective management. There are still opportunities – both privately held and in distress – that can offer acceptable returns.
Significant portfolio sales have had a material impact on the tone of the ownership market owing to the weight of capital deployed. These include the sales in the UK of the 23-venue Principal Hayley portfolio for £360m (€456m)and De Vere Venues for £231m to US-based Starwood Capital Group, and Lloyds Banking Group’s pending sale of the six-venue De Vere Golf business (including Cameron House, Loch Lomond) to Bain Capital’s Sankaty Advisers for around £160m.
The sale would mark the final chapter of Lloyds’ involvement in De Vere Golf after it took control of the company during the financial crisis. Other European banks continue to exert control over significant assets that offer new investors good prospects. These arguably include the K Club in Ireland and Aphrodite Hills in Cyprus – the latter operating as an IHG hotel under the control of Deutsche Bank following the withdrawal of Lanitis Developments.
The number of transactions by jurisdiction largely mirrors the current level of participation in golf and the available facilities – Ireland features prominently due to the level of inward investment following the recession. Perhaps more tellingly, buyers from outside Europe have shown strong interest: 62% of the buyers of the significant single assets have been from outside Europe, with 90% of these being from the US. Clearly, the Trump organisation has affected the weighting of the market with its acquisition of Doonbeg and Turnberry. The scale of the acquisition of Mount Juliet, Fairmont St Andrews and The Belfry overshadows more local strategic investment elsewhere by smaller organisations.
Accurate transaction comparisons of initial yields in resorts are challenging due to their scale and condition, the multiple revenue streams and the real estate development potential. The real estate divestment angle often attracts institutional investors that do not routinely compete in open-market sales. Despite this, we have found that commercial loans are still largely offered based on the debt-serviceability of the cash flow from the business alone.
Occasionally, purchasers are faced with a pure investment decision where more innovative ways of value enhancement over and above capital appreciation are required, as was the case with the Wentworth Club. Bought by Richard Caring for €156m in 2004, the estate was sold to the Beijing-based Reignwood Group in September for €162m. Within close proximity to London, the prime 54-hole club also provides extensive sports facilities, accommodation and exclusive venues in a private setting. The sale process did not prevent the business from applying for permission to develop additional income-producing properties elsewhere on the complex to strengthen its investment appeal.
Recent market activity should give new investors and lenders confidence in the liquidity of the market and the ability to exit. Importantly, we have also seen the emergence of institutional interest in competition with private equity organisations seeking similar returns. This involvement was far more limited in the past and is perhaps indicative of an industry that now employs a more accepting attitude to longer holding periods.
Harry Douglass is a senior associate at HVS