This year was expected to be a buoyant one for the transactions market, with size mattering, attendees of this year’s CMS Hospitality Conference heard.
With the background being the Dalata sale to Pandox (which didn’t formally participate in the sales process but still won – lawyers look away now), the sector is bubbling over with excitement at finally moving towards the merger of Marriott and Accor, for crying out loud.
It’s not today, even though every commentator on the deals market has been screaming about the joys of scale, scale, scale. There was less screaming in The City this week, Tube strike notwithstanding.
The issue for us as a sector is that no-one understands us. Operational real estate is hard. Michael Nicholson, head of advisory + M&A at Peel Hunt, was glum, commenting: “The market is not good at valuing the sector. Accor, IHG, have all responded to the market not adequately valuing the companies and have gone asset light as a result.”
Stephen Oakenfull, CEO, Brightbay Real Estate Planners, was more chipper: “There is an evolution happening, with operational-heavy companies coming into the sector. Students and residential price on a yearly basis, which is closer to how people understand traditional real estate, but on the hotel side they can be real estate heavy, but the daily repricing is challenging. Investors would much rather take the certainty of a lease.”
Here at NewDog PR we are, of course, long-time lease fans. Looking to the deals in the sector Dalata was, as host and head of hotels & leisure at CMS pointed out, 70% real estate. And that sure do reassure investors.
Looking at the wider listed UK real estate market – where the numbers are more visible – Nicholson said: “Total UK listed takeover activity is likely to be significantly more active than previous years and real estate is where we have seen a significant amount activity this year, whereas in the consumer segment – which includes hospitality – there has been less.
“There’s a clear trend towards listed UK real estate and, in the absence of IPOs, it’s shrunk the market as a whole. We are seeing more strategic listed bidders, as the market has accepted that scale is valuable. You get a better rating if you are a larger player and you become able to transact in a way that your competitors cannot. PE can exploit the gap between the shares and the asset value. Then you can force your bid at a premium to the share price, which is interesting to them.
“Bigger fund managers managing a lot of money – they don’t want to deploy smaller cheques. This helps to drive people up the scale chains.”
Oakenfull added: “A lot of things have come together at the same time; we’ve come out of a cycle of low interest rates, essentially free money, which real estate got addicted to. If you look at the structural issues of the sector, a lot of companies which have been taken out because of scale. Management structures left a lot to be desired. A number of shareholders look for specialisation in the real estate sector and a number of companies have diversified.
“Liquidity is also a huge concern and increasing liquidity is paramount. Listed strategics are keen to compete with private equity bidders. Liquidity is one of the key drivers since 2019.
“Where private equity has been most competitive comes down to the nature of the targets. Strategic bidders are less drawn to diversified assets, but private equity can look at the different parts. They are also more capable of doing all-cash deals.”
So if you’re a massive, real-estate heavy hotel company, it’s all great news. Sadly we no longer have any of those left, with the exception of Whitbread, which has shaken off its diversity, unless you think it’s going to buy back Costa, and we don’t. No matcha, you see.
So if you’re not participating in a massive takeover deal, how are things looking? Jeavon Lolaly, head of market insights at Lloyds Corporate Markets, told the assembled: “Even as an economist it’s hard to know what’s going to happen and how soon it’s going to happen.”
And that’s that. He did get a little deeper. On the subject of interest rates, which is subduing many an investor, he looked to the US, commenting: “Only one more rate cut is expected in the UK this year, but we are anticipating five approaching in the US, because the market thinks Trump will get his way. The question is, will the Bank of England be able to keep rates high if the Fed act quicker? There is a bias towards lower rates because the governments need them to be lower.”
Could Trump go too far? Of course, it’s his way. Lolaly added: “The question in the US is how far is that capture [of the Fed] is going to go. If the government captures the Fed inflation will increase. It would be bigger than the tariff war.”
Taking the theory that only the strongest will survive such an environment, it’s time for the sector to either work out how to explain itself to analysts or get back into real estate. During the pandemic Marriott and Hilton were able to prove their loyalty programmes were bankable. Can points replace bricks? Is a subscription model the way to smooth this daily variances in rates, so beloved in the sector? Investors want certainty, not agility.
