Kissing the frog 

This week’s column from Tom Oakden, managing director, Hilltop Hospitality Advisors, who has thoughts on toads, transactions and timing. 

One of key images of the last week has been that of Matt Hancock in a tank full of water with a toad on his head. 

What better location to risk a kiss from the man Hancock (other than, presumably, his office during COVID restrictions)? You see, put a toad or better still, a frog in front of us most of us will try and kiss it. We’re motivated by hope, and need. 

We have to kiss a lot of frogs with the hope that one will eventually turn into a prince or princess. Sometimes it happens. Sometimes it doesn’t. Tenacity and skill plays a big a part in this, as well as luck.

In the value-add hotel investment world, investors have been getting through the frogs. If you’re looking for something less slimy, think of finding a rough diamond that you can cut and polish into a glittering jewel you can then than sell for 1.5x equity and high teens IRR. 

It sounds simple, but hotel real estate is not as straightforward as that. You’ll have to sharpen your elbows, for one thing. The most-coveted asset is the two/three star unbranded property  that can be converted to upscale or luxury. Billions of pounds and euros are chasing these, which means that competitive bidding pricing has remained strong, making it challenging for value add or opportunistic returns, particularly if you factor in inflationary pressures.

And this was before the cost-of-debt crisis, which for most leveraged investors has meant a near doubling of debt servicing costs on new loans. This has lead to a state of flux with many P/E investors now taking a wait-and-see approach to the market as we head into the new year. In 2023 the P/Es have the firepower to clean up, but only if pricing is recalibrated to match  their return expectations. It might just be that the rough diamonds are not as straightforward as whole asset sales but instead take the form of businesses that need debt and equity support in light of impending refinancing and dramatically-rising operational costs.

Whilst a large part of the market has been taking a deep breath, the longer dated capital has been able to go straight for the Princes and Princesses and acquire luxury hotel assets in some of Europe’s key markets. In the last month or so we have seen this in Rome, Paris, Amsterdam, Madrid and Stockholm. With medium to long-term hold strategies, and an ability to refinance when the the time is right, these investors are able to buy fully-formed diamonds that just need a bit of polishing.

What this demonstrates is the resilience of the hotel asset class, with these upscale and luxury hotels being sold pretty much without discounts in spite of the macro economic situation we are in right now. That well known phrase ‘location, location, location’ is perhaps the key ingredient. Meanwhile, for those other investors looking to circle the wagons, it’s a game of patience and waiting for stars to align before more deals start happening. But be patient – no need to go the full Matt H and head to the jungle just yet. 

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