Investors Put Out Welcome Mat for Hospitality Real Estate

Once little noticed, the hospitality real estate segment has been growing in prominence during the past decade, becoming one of the highest performing property plays. That’s according to data provider Preqin and investment firm Pro-invest Group.

Returns for the hospitality real estate sector have met or outpaced the MSCI US REIT index over one-, three-, and five-year horizons, the Preqin-Pro-invest report indicated. The report said that fund managers have put this capital to use by deploying more than $110 billion into hospitality assets since the beginning of 2015. It also said they are increasingly targeting larger deal opportunities and are diversifying into Asia and Australia.

The hospitality industry includes hotels, amusement parks, golf courses, cruise ships, and restaurants.

“The hospitality sector has seen a flurry of activity in the past couple of years, hitting levels not seen since the global financial crisis,” Justin Hall, real estate product manager for Preqin, said in a release. “Returns in the sector have outpaced both office and residential assets in every vintage year since 2010, and investors are taking note.”

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Investors’ search for yield has led to robust private equity real estate fundraising. The capital secured by funds focused on hospitality real estate has nearly tripled since 2010 and has outpaced that of the global market. The number of hospitality funds has also grown as a record 62 funds targeting hospitality held a final close in 2018.

Investors have been attracted to the returns provided by the sector: Hospitality real estate returns have surpassed those of public market benchmarks such as the MSCI US REIT Index in recent years. Hotels have also outperformed other property types. The report attributed hospitality’s outperformance to the steady growth in international tourism, which it said is leading to an increase in hotel occupancy rates and revenue per available room (RevPAR).

The World Tourism Organization (UNWTO) said that international tourist arrivals rose 5% in 2018 to 1.4 billion, reaching the level two years faster than it had predicted. The increase has been spurred in part by the growing number of middle-class families in emerging economies such as China and Indonesia that are spending more holidays overseas.

The world’s top 10 tourism destinations based on international tourism receipts, generated close to 50% of total tourism receipts in 2018, according to the UNWTO. They are the US, Spain, France, Thailand, the UK, Italy, Australia, Germany, Japan, and China.

“Given the sector’s out-performance and positive outlook for tourism this year,” said the report, “it is no surprise that hospitality is attracting more and more investors from around the world.”

The report said that private equity real estate deal activity in the hospitality sector has soared in recent years as deal value grew by more than 210%. It hit a record $28 billion between 2012 and 2017 before dipping to $27 billion in 2018.

There have been several major private equity hospitality real estate deals at $500 million or larger to date this year. That includes the Blackstone Group’s €900 million ($1 billion) portfolio sale of seven hotel properties in Europe to Aroundtown Property Holding. There also was the $610 million sale of 1 Hotel South Beach in Miami Beach by a joint venture that includes Starwood Capital Group.

The report said that although the industry remains heavily focused on North America, there could be significant opportunities for growth in less saturated markets. As of August 2019, hospitality funds investing in Europe have raised $3 billion, already surpassing last year’s total of $2.9 billion. Hospitality funds investing in North America have raised $3.9 billion for the year to August.

“With a stable and growing tourism industry across international borders, the hotel sector has increasingly come in the spotlight and is progressively accepted as an institutional grade asset class,” said Ronald Stephen Barrott, CEO of Pro-invest Group. “In many cases, hotels outperform traditional real estate asset classes, as hotels have the ability to yield high returns.”

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Guy Opperman, the UK minister for pensions and financial inclusion, has chastised investment mangers for their lack of action regarding climate change. Opperman even suggested that pension plan trustees should give their investment managers the sack if they don’t support climate resolutions.

“Some asset managers won’t support climate resolutions, or vote through pay awards for poor performance, and won’t vote out managers who show conflicts of interest or lack of independence,” Opperman said. His remarks were in a speech at the Association of Member Nominated Trustees’ (AMNT) autumn conference in London last week. “If you use these people – well, then you as trustees are far from limited in what you can do. Put simply, you can fire them. You have a great deal of power.”

Opperman said he backed the AMNT’s campaign to make asset managers take more notice of pension funds’ stances on ESG issues. But he was “shocked” by a report it released earlier this year that found that half of the fund managers polled said they did not have a climate change-related voting policy or guidelines in their overall voting policy.

The AMNT has complained to the Financial Conduct Authority and Treasury Select Committee that it is impossible for pension plans to develop robust ESG policies and to take savers’ views into account. That’s because fund managers are not always prepared to listen, the AMNT said.

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“Our market is afflicted with some asset managers – they are certainly not the small ones – who are struggling to have an impact,” said Opperman. “I have in mind asset managers who tell you how many people are in their stewardship team, and the unspecified long-term engagement they have carried out with firms – which on further examination has achieved no substantive change in policy from those firms for 20 years or more.”

He said that it is the trustees’ responsibility to keep their investment managers to task, adding that “you are responsible for your own destiny … while the government is doing our bit, it has to be asked: What are you doing?”

Opperman has written to the 40 largest defined benefit plans and the 10 largest defined contribution programs, to find out what their policies are concerning ESG investing. These programs are responsible for approximately 50% of the assets in their respective sectors. He said a majority of the of those pension plans have responded.

“To put it politely, some are better than others,” said Opperman. “I welcome recent [FCA] changes … but I don’t think we can wait for managers with weak policies to be found out or get their act together. I think we need trustees to be able to set their own voting policies and guidelines now.”

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Tags: Climate Change, investment managers, Pension Plans