• Institutions turn up heat on Spain 

CBRE Global Investment Partners and Pygmalion Capital Advisers are to invest in hotel assets and businesses across Europe.

The European Hotel Venture has been launched with a portfolio of nine four-star regional city hotels in Spain, previously owned by the Urvasco construction group.

The portfolio included 1,650 hotel rooms located in Seville, Madrid, Bilbao, San Sebastian, Santander, Tenerife, Valladolid and Ciudad Real. Silken Hotels will operate the assets under a long-term agreement and the venture would, it said, implement a comprehensive refurbishment programme.

Alexander van Riel, head of Continental Europe, CBRE GIP, said: “We have entered the Spanish hotel market for the first time acquiring what is a sought-after portfolio. The transaction is in line with our global strategy to establish scalable, programmatic ventures with sector specialists.

“We will unlock value through selective value add projects while at the same time benefitting from a stable and secure income stream. Over time additional investments will be sourced and we will also be looking at hotels with indexed leases.”

Christophe Beauvilain, founding partner, Pygmalion Capital Advisers, added: “This joint venture underlines our view that a significant opportunity exists to acquire, at attractive valuations, a pan-European portfolio of hotel assets and businesses by exploiting special situations generated by the significant European NPL market.

“The combination of European banks still saddled with large NPL exposures and numerous debt funds that have been actively buying NPL books provides a large source of attractive deal flow for our specialist strategy. The Silken portfolio provides us with a strong basis for rapid expansion in the Spanish market given our fast-growing pipeline of investment opportunities.”

Inmaculada Ranera, managing director, Spain & Portugal, Christie & Co, which advised on the deal, told us: “They did very well in a complicated deal. Silken’s potential sale of those assets has been on the market for ages but the insolvency process of the mother company, Urvasco, was not helping the acquisition of the assets and numerous investors and operators tried to get the deal.

“In my opinion, the approach that CBRE Global investors, together with Pygmalion, took on the deal, with the commitment with Silken to keep operating the assets was best strategy to be successful.”

Xavier Batlle, director of the consultancy division at Christie & Co for Spain and Portugal and responsible for the assignment, added: “It has been a pleasure to work with CBRE GIP and Pygmalion in the analysis and achievement of this complex deal. Finally, the appropriate investor has been able to solve the situation of uncertainty of Silken assets, which offer a great potential for repositioning. The CAPEX plan will improve the current status as well as the cost and revenue lines.”

CBRE Global Investment Partners has turned its attention to Spain in recent months, with the creation of a joint venture with Madison International Realty. The venture acquired a portfolio of Spanish residential properties worth EUR870m.

Van Riel said: “The residential rental market in Spain is very fragmented making this portfolio and its critical size unique to act as a major consolidator in the sector. This investment is in line with our key strategy – to focus on urbanisation and demographic trends in supply constrained markets – and increases the CBRE GIP residential sector exposure in Europe.”

Transaction volumes in Spain remain, registering the second-highest hotel investment volume in the third quarter in Europe after the UK, according to CBRE, and recording an increase of 57% year-on-year.

Colin Low, head of hotel investment properties, EMEA, CBRE Hotels, said: “The growth in key European markets such as the UK and Spain has been fuelled by private equity and institutional investors who had experienced yield compression in the maturing hotel markets.”

According to CBRE, investment in property in Spain by institutional investors rose to EUR13.385bn for the year to the end of September. That figure exceeded the EUR12.75bn for the whole of 2017. It was forecast that the total volume of investment for the whole year would exceed EUR16bn, which would mean the highest level for 10 years. The largest investment (28.1% of the total) was in the office segment, followed by the hotel segment (23.7%) and the retail segment (22.9%).

Interest in the country remains high as there remained a number of lenders looking to dispose of real estate portfolios which suffered during the downturn.

As this was being written rumours suggested that Banco Sabadell had mandated investment bank Alantra to sell its real estate management unit Solvia Servicios Inmobiliarios, as it continued to look to bolster its balance sheet. This came shortly after the bank gave Rothschild a mandate to sell the real estate development promoter Solvia Desarrollos Inmobiliarios.

HA Perspective [by Katherine Doggrell]: Europe’s NPLs have proven a rich feasting ground of late, with Greece the latest country to shake out its system and make it easier to resolve the issues which have been clogging up its property markets and making its banks more volatile places to be than really they should.

Spain was ahead of the curve on its efforts and, as we have seen in recent years – and with this latest deal – there are plenty of buyers lining up to move into the country. CBRE GIP is following where Blackstone didn’t fear to tread at all – the PE house became Spain’s largest hotel owner after its purchase of Hispania this summer.

The pickings are there to be had. The dawning of IFRS 9 at the beginning of this year was expected to have given some banks the jolt into action that they needed to encourage them to sell parts of their underperforming and performing loans, as it allowed for extra provisions on bad loans without having to raise extra capital. These provisions could include expected losses on planned sales of bad loans. For once, the accountants are being applauded.

Additional comment [by Andrew Sangster]: The amount of so-called “dry powder” stashed in private equity’s ammo store is estimated at between USD500bn and USD1.5 trillion. That huge variation reflects that measuring what’s going on is more of an art than a science.

But what artistic interpretation does suggest is that an awful lot more money is currently available than has been the case historically, at least in the last decade anyway. Looking at 2017 on 2016, dry powder is up at almost USD1 trillion according to Pitchbook, a significant increase on the less than USD700bn that was available at the end of 2016.

In fundraising terms we are currently at levels last seen in 2007 and 2008 plus there are good reasons to believe that investing is harder than it has ever been. Buyout multiples are looking high and there is growing competition from more institutional investors.

Private equity has been a victim of its own success. The challenging returns environment has encouraged more and more investors to take the plunge with PE. This influx of extra cash has made it ever harder for PE funds to deploy and maintain returns. When coupled with cyclical factors like low interest rates and low inflation, keeping returns at their high historic nominal level is particularly tough.

Into this macro environment steps the hospitality focused PE funds. In Europe, the initial flurry of deals in the post-GFC period was in the UK but subsequently investors have move beyond Britain with Spain a favoured target.

But now Spain looks like a tough place for PE to hit their returns targets and the funds are venturing further afield to places like Greece. The problem is going to be finding deals that make sense.

PE started in the UK because it was the most open and easiest major market to crack. The British legal system and transparent debt markets made it a good place to start.

Spain is slightly more challenging but has proved doable, delivering assets of sufficient scale at realistic enough prices to get deals done.

But as we near the top of the cycle, looking at much smaller and more opaque markets in the Eastern Med is going to be a lot tougher.

During the last business cycle, PE was able to acquire assets held in public vehicles, take them private, and make the return by simply leveraging up. This time it is has been harder and has required heavier lifting in the form of investing to refurbish and reposition.

But at least in the UK and Spain this has been possible to do in transparent and liquid markets. Further East finding a deal to do is going to be challenging. Finding a deal that has a viable exit route is going to be even tougher. But if PE can be the pathfinders, the future of hospitality investment in the European Med will look more accessible than it has ever done.

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