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[#PAFh19] "Even with seasonality, we see higher interest from institutional investors entering the leisure market"

By Sergio Carrascosa, Co-Founder & Managing Direct Asset Management, Hotel Investment Partners, at the Paris Asset Forum >hospitality.

Who we are? Hotel Investment Partners is today the largest hotel owner in Spain. We own more than 67 hotels, more than 20,000 rooms. But it is true that in a very short period of time, we have been able to build a very unique portfolio of hotels. It is also true that the investment landscape in Spain, but also in southern Europe, has changed significantly. When we find that the company in 2015, the investment landscape was very different from the current one today.

There was the opportunity to really help the banks that had huge exposure to the hotel industry through non-performing loan portfolios to unlock value with an industrial approach. So basically, we saw the opportunity to do this at that time. We created a joint-venture with Banco Sabadell that is today the 4th largest financial institution. So we manage a portfolio of 1 billion euros of non-performing loans, and we help them to restructure this portfolio. Thanks to that, we were able to take control and to acquire 14 hotels. Once we solved that situation, we saw a large opportunity in the Spanish market.

Our approach has always been an added-value approach to the Hotel industry. Today Spain is a very fragmented market, with a lot of small hotel investors, families, that control 3, 4, 5, 10 hotels. But from a management point of view, there is a lack of distribution capabilities. So we saw that opportunity, as we saw the opportunity to reposition those hotels. That’s why in 2017, Blackstone acquired the company. We had a partnership with them, and this has boosted the growth of our company. Moving from 17 hotels in 2017 to 67 hotels today. Apart from Spain, we are also very interested in Greece. That’s why, a couple of weeks ago, we acquired 5 hotels in Greece. We do that in a market where we see a larger interest from institutional investors. We see that in the last 10 years, the investment landscape has completely changed in Europe, especially in the hotel industry. So, in 2007, the hotel transaction from hotels just represented 3% of the total transactions in real estate, whereas last year, it represented 22 million euros, so almost 8% of the total transactions. So we see an increasing interest from international and institutional investors in Europe and in the hotel industry, but also in Spain.

In the last 7 years, the number of transactions in Spain has been almost multiplied by 10 times. We see larger private equities, larger institutional investors entering into the market, and also very interested e-leisure hotels. I think that institutional investors are realizing that investing leisure hotels is much more resilient than it used to be. So for instance, investing in the Canary Islands, a destination that works 365 days a year, and that can deliver GOP levels very similar to certain urban destinations, is something that is getting more and more interests from institutional investors.

So what we like is to invest in mature destinations. For us, this is a must, like Spain, like Greece, like Portugal, or even Italy, mostly in leisure destinations. As you know, Spain is the second largest industry in the world, with almost 83 million visitors coming to our country. We are also very well diversified from a clientele point of view, UK being the first one, and then Germany, but also France. So for us, investing in those mature markets is very important, because this gives us a certain control and certain diversification of the demand.

What is even the most important is the location. We mostly invest in prime locations, which means beach hotels that are in first line. Also it is about the size of the hotels. We like big hotels, at least we invest in hotels that have no less than 200 rooms. Actually, we see a huge opportunity in Spain and in southern Europe to develop large resorts. This is something that we are starting to do very actively. For instance in the Canary Islands, but also in Greece, we see the opportunity to invest in resorts of more than 1,000 rooms. That is not only a hotel business. It is a combination of different real estate business, so you have a mixed-use of hotels, commercial facilities, restaurants, experiences… We think that here we have a unique opportunity to really create a competitive advantage in our industry. And fourth, we invest in what we call under-capitalized or under-managed hotels. This is something that is, in our country, quite common. So basically what we do is that we acquire hotels that are in good destinations but that are under-capitalized; we reposition them, by investing between 40,000 and 60,000 euros per room; we move them from 3 to 4 stars, or from 4 to 5 stars. We basically drive ADR. In resort areas, most of our hotels are running at 85-90% occupancy. So the value creation comes more the repositioning and increase of the ADR rather than increase in the occupancy. That’s what we have been doing in Spain for the last six years.

What is our value chain? First, what we do is that we acquired hotels, and we have a very professional investment theme, that’s part of the success of our story. We don’t often go through institutional processors. We go through local families, local private investors that have some problems of succession or some problems of liquidity. We create a relationship, and we offer the possibility to acquire those hotels. This is how we have been creating our portfolio and has been able to be very successful.

Second, we conceptualize. For us, this is very important. When you are in business to increase ADR, what you need is to create a differentiated product. We take very seriously how we create our concept in our hotels. We do a very serious process of selection of brands. We are a multi-brand owner. We don’t manage any of our hotels, we are just a pure ownership. So we work with Barceló, with Melià, with Marriott, with NH… So for every specific asset, we take very seriously the section of the brand. Sometimes we do some combination with other kind of brands like F&B brands that can give an extruded value for the management of beach clubs, etc. So the conceptualization is something very important. Almost one third of our company is based on conceptualization and transformation of the assets. As mentioned before, we invest between 40,000 and 60,000 euros per year on our hotels, mostly without closing the hotels. That’s very important, especially in the Canary Islands, where you don’t have any shoulder season.

Most importantly, we deliver. You cannot image how rapidly you can recuperate and you can pay back the investments in all these assets. Our experience in repositioning assets in Spain is very successful. We are getting capit shields of between 15 and 20% just in the first two years. That’s a clear sign of how people react to upper level repositioned hotels. That’s also very important.

We are also very active in asset management. We have been talking about asset management. We also take that very seriously. When you reposition a hotel, it’s not just repositioning the product, it’s also about repositioning the management model. Indeed, most of our hotels, like about 90-100% of hotels worked with tour-operator, only with one tour-operator at a time. We work without tour-operators, trying to diversify yielding, in terms of revenue management, to launch e-commerce strategies. This is something that obviously needs to change. We help our operators in all the transformation, not only of the product itself, but also of the management of the hotels. We acquired last year a big portfolio in Spain, Hispania. We are investing more than 500 million euros in repositioning of these hotels. This is going to be very successful. We normally acquire hotels that are yielding between 5 to 6% a year, and after investing CAPEX on the transformation of the hotels, we move to 9, 10 or even 11% sometimes. With CAPEX shields in the first year, we do 15 to 20%.

We want to keep doing that, but in other regions of the Mediterranean Sea. We are now very active in Greece. We see a very similar opportunity than the one that we saw some years ago in Spain. That’s why we have acquired 5 hotels. We are creating an office there to keep expanding in Greece. But also we are very active in Portugal. We see similar opportunities in Portugal, and also in some areas of Italy.

In the future, we want to be the first hotel owner in Southern Europe. That’s our ambition for the next couple of years. So today, we have 67 hotels, 20,000 rooms. We will probably add a billion more in terms of acquisitions, and we will be around 30,000 rooms in the next couple of years.

How do you see the appetite for investors in the resort market? Because there is usually a seasonality, a lot of stuff on the payroll, different factors that are not convincing investors…

We are seeing an increasing interests from institutional investors. It is true that the profile is changing. Some years ago, those investors in Spain and in the resort areas were much more opportunistic. Now they are more about value-add. And we are seeing an increasing interests from investors on the core-plus side, entering into the market. Understanding that even in some areas of Spain, like Balearic Islands or even in Greece, there is seasonality. The product is very robust. The demand is very solid. The profitability is very interesting. The reality is that even with seasonality, we see higher interest from institutional investors entering the leisure market.

And what kind of yield we should expect?

Since we are in a value-added strategy, we acquire hotels that are yielding today between 5-6%. Then we reposition them, we invest an important amount of money in CAPEX, and we end up with yields around 9-10%. Our business model is more based on management agreement and variable resources. I think this will change in the future, because when you have more core-plus investors in the market, they prefer fix leases or warranties. This will probably reduce the cap rase and the yields of the market. Today, the transactions that we are now buying in Spain, the yield is between 5 to 6%. That’s why we are moving more to Greece or to Portugal, because we see a greater opportunity. Our cost of capital is very important, so we have to be very selective, and see a very clear value of reposition.

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