How would you describe the hotel investment market at the moment?
The UK market has changed markedly in the past 12 months. Whereas previously there was limited appetite for hotel investment/acquisitions outside London, the weight of money that has come into the market from private wealth and institutions has increased competition for assets significantly and thereby vendors’ expectations of value. To my mind, it feels a little like 2006/2007 again when money was readily available and asking prices were going through the roof. I suppose the principal difference this time is that the banks are not there in the same way. Debt lending levels remain constrained but that obviously doesn’t make any difference to the private equity guys who are pushing ahead regardless. Let’s hope that our collective corporate memory isn’t as short as I fear it is and we don’t make the same mistakes as we did in the past.
How does it compare to real estate and residential markets?
In short - worlds apart. I don’t think that many people involved in UK hotel investment market could draw any sort of meaningful comparison between hotels, office or residential real estate investment. Hotels are living, breathing businesses. In hotels decisions taken three of four times a day on your best available rate and yield management strategies have a direct impact on profitability. How you respond to guests’ complaints and TripAdvisor reviews affects your reputation in the market place. It’s a much more dynamic business model than other real estate investment markets. I am sure each sector has its own specialists – and we’re happy sticking to what we know.
What are the expectations of investors at the moment?
Expectations remain the same – investors want to make money. It’s that simple.
What are your predictions for the market over the next year or so?
I think we’ll continue to see demand for assets in London and in the UK provinces increase. Everyone is on the band wagon at the moment and the desire to deploy cash and do deals is palpable. That’s not to say that there aren’t still some great deals to be done – but you have to know what you’re doing and make sure you are acquiring hotels where real value can be created. There’s no point acquiring an asset and hoping that the market will recover sufficiently to increase capital value. It’s not going to happen. You have to work at it.
The cynic in me thinks that the market is not as rosy as some would have us believe, but I guess we’ll all have to wait and see.
Tell us more about HCP
We provide investors with the ability to make money without taking direct operational risk in the management of the hotel. Alongside our JV partner, Cannock Investments, we handle all aspects of the acquisition – from the initial structuring of the deal through to appointment of the management team and negotiation and securing of bank debt. Going forward, we maintain an oversight role on each asset, protecting our investment and that of our capital partners, as well as bringing some of our sector-specific expertise to bear on each of our hotels. In addition, our capital partners receive regular updates on the performance of each hotel, which sounds an obvious thing to do, but it all helps to re-inforce what we’re all about – transparency of information. Investors want to know what is happening with their money and how it’s performing.
Hetherley has only ever focused on hotels. We like to think have a pretty good handle on the market and its opportunities and don’t profess to have that same market knowledge or expertise in any other real estate investment sector. Our capital partners seem to like the fact that we are 100% focused on the one sector and frankly speaking, we wouldn’t want to do anything else. I have been involved in hotels, formerly advising other investors and developers for 12 years, before setting up Hetherley Capital Partners in 2012. We have gone from strength to strength since then and hope to continue to grow at the same rate in the next couple of years.
What sort of investors do you represent?
Investors in our hotels comprise private clients who like the fact that they can secure an attractive running yield on their investment with the added benefit of a share in the capital uplift of the hotel at the point of exit. We look at each acquisition on a three to five-year investment horizon. The key for us is retaining our investors’ confidence in us and our ability to do what we say we are going to. So far we have had some real success – working in conjunction with our management teams to improve profitability by more than 30 per cent year-on-year in one instance and by more than 25 per cent over a 6 month period in another. Going forward we are keen to partner with small and medium-size family offices and institutions who have exposure to the sector but wish to remain relatively passive. We are always open to new investment partnerships.
How do you choose partners to manage your properties?
Choosing the right on-property management team is absolutely critical to the profitability of each hotel. We will only work with management teams that have extensive experience with the brand or the city market, or preferably both. Choosing the right GM is also hugely important and whilst we are happy to delegate the day-to-day operation of the hotel to the management team, we insist on being involved in the selection and appointment process of the GM. ThenHospitality currently operate Dundee on our behalf and InterState Hotels & Resorts manage our properties in Leeds and Folkestone.
How many hotels do you expect to have by the end of the year?
In conjunction with Cannock Investments, our JV partner, we have acquired three hotels so far and would hope to at least double that number by the end of the year. The key is doing the right deals. We are not going to do deals for the sake of it and particularly as a growing business, establishing and maintaining our reputation for deliverability is key. We can do deals very quickly if needs be but we have to be clear that we can substantially improve the capital value of each hotel. If we can’t see that opportunity, we won’t waste our time or that of our investors. We want to build a portfolio of hotels where each one stands up to scrutiny on its own merits - good quality assets in good regional markets with a strong brand and management team. It’s hardly rocket science.
What are your future plans?
To continue to grow the portfolio with decent quality assets in good commercial locations and to make some money for our investors. We may only have a handful of hotels currently but our ambitions for the business are not insignificant so I’d better stop talking about it and start getting on with it!