Property investors bank on lifestyle hotels for better yields
Funds shift focus from government bonds to a sector that is reaping the benefits of economic recovery and growing traveller numbers
Investors are expected to pump more money into buying, converting or building hotels in 2015 than in any year since the global financial crisis, with a focus on budget and "buzz".
In a sector enjoying the benefits of economic recovery and growing traveller numbers, yields are attractive compared to alternative real estate such as office, industrial and retail.
"It's not about people loving hotels, it's about investors searching for a return on their money which they can't get these days on government bonds," said Nick Skea-Strachan of law firm BLP at a hotels conference this month.
But investors say there are signs of overheating in some areas, making it more challenging to hit target returns that are typically 6.5 to 7.5 per cent.
That is forcing them to seek out niches and jump on new trends such as lifestyle hotels, serving a generation of travellers looking for a hip place to hang out, not just somewhere to sleep.
Typically featuring smaller rooms, local-themed design and buzzy lounges, lifestyle covers luxury and budget classes and includes hotels such as Starwood's W, IHG's Indigo, Citizen M and Moxy. Hilton, Best Western and Germany's Steigenberger are among those recently announcing new brands in this space.
Examples of the genre include the privately owned 25 Hours Hotel in Berlin, where visitors flock to a 10th-floor bar and restaurant that overlook the neighbouring zoo.
Liran Wizman, a developer and owner who is opening two W hotels in Amsterdam this year that will be managed by Starwood, said he had shifted his focus in the past couple of years from mid-scale hotels to lifestyle, which now makes up half his portfolio.
Prestige "trophy" hotels in cities like New York, London and Paris would continue to be in demand, executives at the conference said, as institutions or high-net-worth individuals sought assets that would still be standing in 50 years.
But with travellers still keeping an eye on costs, the higher yields now are in the budget sector. Chains such as Marriott say growth in their room numbers will be mainly at the economy end.
"There's a shortage of good-quality economy product, I think we'll see more build in that sector," said Patrick Fitzgibbon, a senior vice-president of development for Europe and Africa at Hilton.
Consultancy Christie+Co suggests those seeking higher yields should consider southern Europe such as Portugal, Italy, Greece and Spain, where budget hotels can account for up to 58 per cent of supply and assets are often in need of some work. In a report, it said prime hotel yields could vary between 14 and 18 per cent in Greece.
Another consultancy, HVS, said high prices in cities such as London and Paris were leading investors to look at hotels in smaller towns and cities. That is especially visible in Britain, where occupancy rates and revenue per available room in cities such as Manchester and Edinburgh have been rising as consumers take more mini-breaks.
The branded hotel groups have been moving to an "asset-light" strategy in recent years, leaving it to others to own the hotel real estate, while they manage them under franchise or lease contracts.
Property giant JLL predicts US$68 billion in hotel real estate transactions this year, a 15 per cent increase on last year and the best year since 2007.
Of that, about US$24.7 billion is expected to be invested in Europe, the Middle East and Africa, with North American and Chinese investors set to be the major drivers.
"Yields are coming in and are relatively low from a historical perspective, but still offer a premium to general and commercial real estate," said Marc Socker, a managing director of hotel fund management at Invesco Real Estate.
Invesco has 31 hotel assets worth US$1.5 billion in Europe, accounting for 20 per cent of its European real estate assets under management.
Socker said the premium could be 100 to 150 basis points as a result of operating agreements that allowed investors to assume different levels of risk.
According to a report by HVS, investment volumes in European hotel real estate rose 83 per cent last year.
Investors from North America, looking increasingly at Europe as prices rise at home, accounted for 26 per cent of the total investment on the continent, up 13 percentage points from 2013, it said.
Even Qatar Airways is getting in on the act, announcing the purchase of the Sheraton Skyline at Heathrow airport, which it will rebrand as the Oryx, as part of the airline's plans to expand in travel-related business.
Chief executive Akbar Al Baker said at a recent travel fair in Berlin he was in talks for properties in two more locations and expected a return on investment of at least 10 per cent.