Real estate: Going against the crowd

3 min read 29 Apr 22

The pandemic has been a positive catalyst for some sectors, like logistics, but those associated with an agglomeration of people, including retail, hospitality and leisure, have been at the sharp end. This has created a pricing opportunity for investors that are prepared to invest against rather than with the crowd into sectors like hotels, which have suffered as a result of forced closures. 

Targeting a cyclical low

Many Western European destinations benefited from stronger than expected tourism last summer, yet international arrivals in 2021 remained 62% below 2019 levels according to hotel data provider, STR1. The war in Ukraine, in addition to the impact of rising fuel prices on airfares, has the potential to disrupt international travel further. However the long-term outlook for hotels remains promising in most European tourism markets, underpinned by people’s appetite for travel and experiences. The majority of Western European markets are expected to reach 60-80% of pre-pandemic revenue per available room (RevPAR) by 20232, largely driven by a bounce back in domestic demand. Pent up demand has already helped to push the average daily rate (ADR) per occupied room above 2019 levels in Europe3.

In this context, there is a current opportunity to identify attractive assets trading at cyclical lows in selected markets, with the potential for substantial improvement in RevPAR and capital values as Europe’s tourism market recovers.  

Accessing high quality real estate

While yields remain more stable for leased hotels, higher up the risk curve, some assets with operating contracts reflect discounted pricing. Many hotel operators were supported through the pandemic by government loans and temporary tax relief measures, but not all businesses have come through unscathed. As governments’ begin to withdraw fiscal support and loans are required to be repaid, those with weaker balance sheets may soon face a point of peak distress. Rising borrowing costs and the continued possibility of new Covid restrictions could compound this further. 

Liability management and balance sheet strengthening will be a priority for operators in the next few years. Selling assets could be one route to liquidity for owner-operators that need to manage cash flow. Identifying businesses that may require investment at a corporate level could therefore offer an opportunity to co-invest in or acquire fundamentally sound hotel assets at attractive pricing.

“While yields remain more stable for leased hotels, higher up the risk curve, some assets with operating contracts reflect discounted pricing.”

With fixed costs and insufficient revenue, some hospitality businesses have become insolvent and can only return to profitability by repaying debt holders. This may mean selling assets or land parcels that are tied in to larger corporate structures. Accessing and resolving these situations will rely upon specialist restructuring expertise.

Leveraging established relationships

For some company founders, faced with rebuilding the business, the timing could be ripe for retirement and asset-exit. The ability to source one-off opportunities through established market relationships is particularly important in these circumstances.

As an active investor in the Spanish real estate market since 2017, M&G’s acquisition of a four-star hotel portfolio in Menorca originated in this way. In an off-market process agreed during the course of the pandemic, we were able to transact with a local family business that had set its sights on a new destination, at compelling pricing. M&G took joint ownership of the assets in October 2020 alongside a domestic investor, carrying out comprehensive refurbishment works to modernise and improve energy performance. Reopening in May 2021, occupancy reached almost 80% during the summer months with travel restrictions beginning to lift.

1 STR, STR/TE Market Forecast Assumptions – February 2022.
2 PMA, October 2021.
3 STR, 5 key points on Europe hotel performance, September 2021.  

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.