Investment activity in the European hotel sector has picked up substantially, as evidenced by AXA Real Estate Investment Managers' recent €132.9m portfolio acquisition for French institutions. But only a month prior, the Quebec state pension fund sold its near-50% interests in five Westin hotels as part of a tactical shift away from hospitality and towards office.
What does this tell us about institutional appetite for hotels? It should be noted that the unidentified buyer of the Quebec fund's five assets is understood to be another pension fund. Furthermore, Bill Tresham, CEO of SITQ, Quebec's property subsidiary, says he has "no intention" of moving out of European hotels.
Nor do European investors, it seems. Jochen Schaefer-Suren, head of hotel and leisure investments at Internos Real Investors Invesco, reckons the current revival in the hotel market reflects not only a broader recovery across real estate but a relative advantage.
"Hotels are attractive to institutional investors because yields are relatively attractive," Schaefer-Suren says.
They are also reasonably low risk. "Hotels are a specialist asset class but investors are after core-type assets, with proven cash flow and a track record. In other words, they're after assets that are as much like core as they can be within a specialist asset class," he adds.
According to Jones Lang LaSalle, investment in the European hotel market rose by 73% in H1 2011 compared with the same period last year. If you look specifically at German hotels, investment totalled €325m in Q2 - an 82% increase from 2010, according to Colliers International. If current deals complete by the end of the year, Colliers is forecasting year-end German hotel transaction volumes of €1-1.5bn.
Yet Andreas Trumpp, Colliers' head of research for Germany, points out that exceptional volumes in the German market in the second quarter were skewed by three large deals each worth more than €60m - an indication that it is a niche asset class. Hotels made up just 5% of total H1 property transactions worth €11bn.
The giant Canadian pension schemes invest via joint ventures with hotel operators. So do their European counterparts, as shown by the recent three-way institutional deal via AXA REIM to acquire hotels in France and Belgium. AXA REIM has a 99-asset, €2bn hotel portfolio of its own.
As portfolios go, this one had a lot going for it. AXA REIM hotel investment head, Gael Le Lay, said the acquisition had long-term income prospects without the need for capital expenditure as each asset had recently been refurbished. The leases are linked to turnover.
"When you buy a hotel portfolio, you buy a hotel business," he says. "It's important that you have a relationship with a hotel operator because in this case the value is strongly driven by the value of the business. You need to know your budget from your luxury, to know your leases and management contracts, and to maintain the business as well." He adds: "Many investors are not ready to do it directly but we can bring expertise to the client, and we can also make them see that it's not so secretive and volatile a sector."
The AXA REIM acquisition is justified by growth in central business districts. Indeed, investment seems to be focused on hotels that cater for business travellers, with tourist hotels still suffering from an association with peripheral economies and fragile consumer confidence. Yet despite the focus on core, some investors are willing to compromise - if not on the location, on the quality of the asset.
A German fund manager that recently acquired a single London hotel confirmed that he would only consider long-term leases, large assets and prime locations accessible to central business districts. But he added that, at least in Germany, a prime location in a secondary city could be more attractive than a not-so-attractive location in Berlin or Munich.
Trumpp goes further. Although the bulk of investor appetite will be for five-star hotels in prime locations, he sees traction at the discount end. "Some hotels are quite new or under construction and leased to well-known hotel groups. You have a good product, a good location, leased to a good company and on a long lease," he says.