Despite concerns that global capital flows into the U.S. lodging markets could slow during 2017, offshore investors continued to show interest in hotels across the country during the first half of the year with foreign buyers accounting for a quarter of transaction volume through May 2017 – a four percent increase on the same period in 2016.
Though groups from Asia retained their status as the most active offshore investors in the U.S. lodging market in Q1, European buyers significantly increased their share of overall investment volume. From January to May 2017, Europe accounted for 38 percent of all foreign investment into U.S. hotels – a 13 percent increase on the same time frame last year.
Stability and yield potential
So why are European investors so keen on the U.S. hotels market?
Politically, a lingering sense of uncertainty following the EU Referendum vote and recent U.K. elections have led investors to question potential repercussions – including around tax and regulatory changes.
Acquisitions in the U.S. are often favoured as a way for investors to diversify their portfolio in a major global market with strong economic prospects and take advantage of high yield opportunities. Retaining full or even partial ownership of a hotel in the U.S. can help investors hedge the risk of currency fluctuations.
“Institutional investors from Germany, France and the UK have recently shown significant interest in U.S. hotels,” explains Gilda Perez-Alvarado, from JLL’s Global Hotels & Hospitality Group. “We’ve also seen family offices and ultra-high net worth individuals from several European countries become more active buyers of U.S. hotels.”
Single assets and select service portfolios
Focusing on quality hotel product in well-known markets, Europe’s private investors and institutions have largely been interested in single assets in the U.S. while some private equity groups, conversely, have started to consider higher yielding select service portfolios. These are investors with large select service portfolio holdings in the UK and Germany who are looking at the U.S. for diversification reasons, says Perez-Alvarado who argues that the favorable debt environment creates very interesting cash-on-cash returns, which are high enough to off-set a less favorable tax structure in the U.S. when compared to fiscal policy back home.
“We’ve seen a lot of interest from European groups in primary markets like New York, Chicago, Boston and Los Angeles,” she says. “What is interesting, however, is that large European private equity groups are starting to enquire about mid-market or select-service assets in secondary locations across the U.S. as they look to make a country and sector play in one go.”
Will U.S. hotels keep European interest?
According to Perez-Alvarado, the U.S. will continue to see elevated levels of European investment in the lodging sector. The lure of diversification, stability and promising yields has attracted increased levels of interest from investors in Germany, France, Spain and the UK, and that trend is likely to continue through the rest of the year, she explains.
“We are just seeing the beginning of institutional investors who are entering the market for the first time through hotel operating lease structures. As more domestic operators get comfortable with operating lease structures and other related obligations such as bank guarantees, we should see additional fixed-income institutional investors come into the market.”
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