Excerpt from CoStar

Challenges Include High Interest Rates, Buyer-Seller Divide on Pricing

Core real estate investors in Europe who acquire hotels with lower risk, exercise less leverage and rely more on stable revenue streams from mature assets are not currently having things their way.

“You have to believe in [net operating income] growth to succeed,” said David Kellett, managing director and head of alternative investments in Europe at Invesco Real Estate.

“We need to see and touch the hotel and then underwrite strong NOI growth,” he said.

On a panel at the International Hotel Investment Forum, Kellett said “the real answer, is that it is very challenging.”

“Hybrid leases with some form of fixed component? That might work well for core investors in this period of inflationary pressure, but in the wider market, no, it is not a good time, even if hotels are a good hedge against inflation,” he said.

Andreas Löcher, head of department and investment management at Union Investment, said core investment in hotels requires a bridging of the buyer-seller divide.

“We’d like to increase liquidity in our funds, and there are investment opportunities in other sectors outside of real estate, such as infrastructure. The demand for end investors is for higher yields,” he said. “By the end of the year, if interest rates settle, more transactions could continue. We are investing in hotels but at a lower rate.”

Philippe Rossini, deputy manager of hospitality at Swiss Life Asset Management, said his firm is in the same boat.

“We cannot buy at the same rates we used to. There are limits, and we have lowered our expectations. Higher interest rates do not make sense for [core investors], and [those rates] will stay — well, at least higher than 0%,” he said.

Kellett said for core investors, the spectrum of investment is currently narrower and the deal structure more important, with necessary stipulations including having the right partner and brand.

“Third-party operators do not make sense. There needs to be a closer relationship between lender and client,” he said.

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