ECE Real Estate Partners, Hamburg, is raising a hotel investment fund with a point of view that is more sector specific than so many other larger, open-ended fund with “a lot of everything,” as Dr. Volker Kraft, founder of ECE’s investment management platform, likes to call it. “We want to come with a hotel view and work as more of a specialist,” he adds.
The new, Luxembourg-based ECE European Lodging Recovery Fund that Kraft refers to now has a seed asset in the heart of Venice since ECE Real Estate Partners in May acquired for €100 million (US$118.5 million), together with joint venture partners Soravia and Denkmalneu, the Hotel Bonvecchiati and the Residenzia Bonvecchiati.
Next, after it completes the €300 million (US$355.6 million) raise with institutional partners by the end of Q3 (the Family Office of ECE’s Otto family and the fund management team have a 15% stake), the plan is to opportunistically and selectively acquire eight to 10 value-add, upper upscale hotel assets. Kraft and Ascan Kókai, principal and head of hotels, will be challenged to match the first asset in Venice but will pursue deals in growing and attractive European cities that tend to attract both business and leisure traffic with longer seasons – think Florence and Paris.
With a long history in retail (ECE is the largest shopping center developer and operator in Europe with more than US$5 billion in assets under management and privately owned by the Otto family), Kraft said the company has learned it can be a great retail real estate investor if they have successful retailers in their assets. “This is very true for hotels, as well. You need to find places with happy, successful operators, and then you can make money on the real estate,” he said. “You need to think of it from a hotel perspective – what is successful in this location and what needs to be done to the asset to make it successful for the operator. Then it will work as a successful piece of real estate.”
First in Venice, the group is planning a lifestyle-focused renovation as well as the selection of a global management company for its new property acquired when a deal broke down for the selling family.
Kókai said there is already a lot of competition for the management contract with a hybrid lease, adding that a niche player might be a good fit. ECE will be methodical in its renovation and expects to have the repositioning completed in early 2023.
There are two back-to-back hotels on the site and ECE plans to connect the 115- and 70-room spaces through the ground floor and spend about €150,000 (US$177,836) per room all in. An underutilized terrace and restaurant are expected to become the new focal point to make it an all-day destination.
In the meantime, the new fund will start to source deals and Kraft said all the ingredients are in place – an investment track record, development expertise and now operational expertise after it took a majority position in German lean luxury operator, Ruby Hotels & Resorts, Munich. Now they have perfect market timing with COVID and the ability to take advantage of the crisis.
While acquiring at a discount would be nice, and those discounts may escalate after banks start to lose their patience, for ECE the strategy is to buy quality at a decent price. “We have a value-add strategy but we are not a vulture fund nor do we have a steep discount strategy,” Kraft said, adding that new deals should be announced before the year’s end. “You need to pay for quality, and maybe it’s a bit cheaper than at the peak to get a reasonable return. But buying at a steep discount ultimately fails. Buying weaker assets maybe is not such a great idea.”
The new fund is a 10-year vehicle as ECE wants a bit more time to maneuver and the group is absolutely looking at raising additional hotel funds. “Some 10 years ago we started our first fund in retail. Today, we have US$5 billion in assets under management in retail funds. We wouldn’t touch hotels unless we believed we could scale this up significantly,” Kraft said. “But it’s step by step. We will be selective with the first fund, but our objective is to do more than one and make a long-term strategy. After the value-add fund, when markets stabilize, funds could be more open-ended income funds. It depends on situation.”
Bigger picture, while guidance suggests a more complete hotel recovery in Europe in two to four years, Kókai is a bit more bullish and already seeing a rebound in leisure business. (ECE has an active hotel development arm in the German-speaking region doing ground-up development with the likes of Motel 1, 25hours and Steigenberger and then selling to institutional investors.) “We remain positive about hotels having positive long-term fundamental trends despite some recent doomsayers,” Kókai says.
But he adds the hotel investment market in Europe still hasn’t seen the full impact of the pandemic with assets being shielded by lenders. But as he speaks to other observers, sentiment suggest support programs will soon expires and patience will run thin, creating more M&A activity and opportunities. “There is a lack of product now, but there will be more opportunities coming as various stakeholders in the investment chain start seeing options and things start moving,” Kókai adds. “Our timing will only get better.”