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Investment


HOSPITALITY FUNDS BUCK THE TREND, SECURE DRY POWDER

By Isobel Lee Sep 26, 2024 8:00am
IHIF EMEA 25 Fattal Hotel Group Northern Europe Southern Europe

Aerial cityscape image of Vatican City with the Saint Peter Basilica, Rome,
Italy. (RudyBalasko/Getty Images)

While fundraising for real estate might be tough in the current climate, the
fundamentals of hospitality are still attracting plenty of dry powder, according
to Guy Vardi, co-managing director of partnerships for the Fattal Hotel Group.
“We are hearing from more and more institutional investors that they would like
to deploy into hotels,” Vardi says.

Fattal European Partnership, the European investment arm of the Leonardo Hotel
Group, led by Vardi and Yaniv Amzaleg, has raised some €420 million in the past
year for its third European hotel fund. This after Fund II spent some €850
million on 19 hotels over a 12-month period. Vardi says: “We are mostly dealing
with institutions and major players capable of big-ticket investments.”







Fund III is already ahead of its deployment targets, with around 23 assets
acquired and a few more deals on the table. At the end of July, Fattal inked a
12-hotel deal for the Zein Hotel Group in the Netherlands to up its presence in
the Benelux to 28 properties. That transaction marked the eighth deal for Fund
III, following key deals in Galway and Dublin in Ireland, the acquisition of the
hotel Cicerone in Rome, plus a property in San Sebastien and a slate of serviced
apartments in London.















Fattal European Partnership has now exceeded €1.5 bn in deal volume since its
creation in 2022, with over 6,000 rooms added to the group across some 40 deals
via its Leonardo Hotels division.




STRONG POST-COVID CLIMATE

Vardi credits the rapidity of its dealmaking to a strong post-Covid environment
and a good sense of timing. “A lot of investors wanted out of hotels post-Covid,
so 2022 was a great time for us to launch the second fund, and helped us deploy
it really fast,” he says. “On top of that, the inflationary environment created
a dislocation in the market.” He adds: “What was challenging back then was the
financing, but luckily we had the support of the banks and our institutional
partners who believe in our owner-operator capabilities.”







The fact that the firm is an owner-operator is a key draw for investors looking
into its funds, says co-managing director Amzaleg. “While asset classes like
offices and residential are locked in with long-term yields, hospitality yields
depend very much on the operating partner.”

Amzaleg adds that operational experience is also crucial when it comes to
renovating and upgrading the hotels they acquire. “We see a huge meeting room
and know that if we split it into four we can triple revenues,” he says. “You
gain the know-how and the capacity to add value.” He also notes that Fattal
commits a stake to each of its funds which reassures investors.

Adds Vardi: “Being an owner-operator also gives us the possibility to access
transactions that the typical financial investor will not be able to execute.”


MAJOR GLOBAL FUNDS

Of course, Fattal isn’t the only big name securing dry powder for European
hospitality. Major global private market players continue to amass capital for
funds with an appetite for hotels, such as Blackstone reaching $7.6 billion in
equity for BREP Europe VII – the largest opportunistic fund ever raised – which
targets European properties and companies in the leisure and hospitality sectors
as well as residential, logistics, offices and retail.



In July, HIG Capital closed its third European real estate fund, Europe Realty
Partners III, at about $1.3 billion, raising nearly twice the volume of the
predecessor fund which reached $760 million. The investor base was broad -
including public and private sector pensions, endowments, foundations, asset
managers, consultants, fund of funds, financial institutions, and family offices
in North America, Europe, Asia, and the Middle East.

The US private equity firm sees hotels as a key part of its value-add strategy
focusing on Europe’s middle market real estate segment. Earlier this year the
business established a €1 billion resort hotel platform in Southern Europe under
the Ella Hotels & Resorts brand. Kicking off with 13 hotels in Greece, Ella also
seeks expansion into Spain, Portugal and Italy. Says Riccardo Dallolio, managing
director and head of HIG Realty in Europe: “We believe the Mediterranean resorts
market is one of the most attractive real estate sectors with the strongest
fundamentals and secular trends.”


VALUE-ADD WAR CHESTS

Institutional investor PGIM Real Estate, the real estate arm of PGIM, is also
increasingly targeting hospitality on behalf of its European value-add strategy.
Around 20 percent of the strategy is allocated to alternatives, which includes
hospitality assets like hotels and campsites. The platform recently acquired
four open-air sites in Tuscany and Veneto and launched a hospitality joint
venture with Lisbon-headquartered real estate player Sierra, targeting value-add
opportunities with a gross asset value (GAV) of €200 million.

With a focus on sizeable hotels in consolidated leisure destinations with value
creation opportunities, the JV has launched with a deal for property in central
Porto which will be repositioned as an upper-upscale hotel. Nabil Mabed, head of
France, Spain and Portugal at PGIM Real Estate, says: “In the current
environment, investors look for value accretive, inflation hedged and
cash-flowing investments to deliver attractive returns. Our strategy aims to
consolidate local players and improve the quality of the offering to guests.”

London and Barcelona-based Pygmalion Capital is another firm with fundraising
plans as it targets growth opportunities. Following the strong performance of
Pygmalion European Hotel Opportunities Fund II, which closed in 2021, the firm
has a new investment vehicle in the works.

While managing partner Christophe Beauvilain concedes that “fundraising has been
very challenging for the real estate private equity industry”, he thinks that a
“differentiated, dedicated European Hotel investment strategy” should entice
investors.

He says that Fund I secured key value-add deals in Italy which are translating
into “attractive returns” following capex injections to make operations “more
efficient”. Beauvilain adds: “We have been quite active in terms of asset
management, so this is tracking to very interesting attractive returns for our
investors. In the next 12 months, we'll be looking to potentially exit the
position.”

In seeking to circumvent what has been a challenging time for capital raising,
other hospitality firms are pursuing more niche routes for growth. Tech-backed
platform Numa has had success in the venture capital arena, winning seed,
early-stage and late-stage funding from LPs targeting firms with a digital
dimension. The business has secured some $133 million in four rounds to date,
with the largest, Series C funding last year collecting some €55 million from
the likes of Verlinvest, Cape Capital, Headline Cherry Ventures and more. Numa
is using the funds to develop its technology stack further and expand sites
across Europe, where it is now present in 10 countries after entering the UK
market in March. 





IHIF EMEA 25 Fattal Hotel Group Northern Europe Southern Europe Investment


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