And while that strategy still has plenty of runway, core investors are gradually returning.
Speaking during a panel discussion at the Italian Hospitality Investment Conference (ITHIC) Cristina Hoyo, southern Europe director at Covivio Hotels, said the company was in due diligence with a property (or properties) and was hoping to buy.
One of Covivio’s last major deals that included Italian properties was the €573 million investment in eight luxury hotels (four of which were in Italy) that it bought from investment firm Värde Partners in early 2020.
Hoyo said that Covivio was also happy to look at other segments as well.
“We also want to expand with brands like B&B [Hotels], which we feel very comfortable with, and [we are] looking to diversify with Italian and local brands,” she said.
According to data from CBRE, core hotel transactions only account for around 10 per cent of the total number in Italy by volume, with value-add making up around 90 per cent.
Domenico Basanisi, head of hotels investment properties Italy at CBRE, said that while core investors were currently in a “reflective period” the situation “should change, hopefully next year.”
Getting the right location
Elsewhere, for an investor like Omnam the key is getting the right location.
“We're quite aggressive on the investments, on the returns that we're looking from the investment part. So we're willing to take bets on capex, on build out construction on brands, we wouldn't take a risk on location unless we see a location with a proven track record,” said Guy David Heksch, chief operating officer at Omnam Group.
Three years ago Omna and Four Seasons Hotels and Resorts announced plans to open a new property in Puglia.
Conversion strategies
When people talk about conversions in the hotel industry it can mean something different depending on who is saying it. It could be reflagging an existing hotel brand to another, it could be putting a brand onto an independent property or it could be turning one asset class into another. From a real estate perspective the last on the list is the most attractive if you are happy to take the risk.
“I think for us, we see the opportunity in repurposing a building, a different asset class being office to hotel. We love those, [it's] fairly easy, and this is where we can use our expertise. We see that as the opportunity of the aggressive returns,” said Heksch.
Covivio is also happy to target offices in the Italian market.
"One thing that is interesting for us in Italy, since we have our Covivio Italy team specialising in offices ... is that we can accompany some hotel operators in buying a building and redeveloping and finally get lease,” Hoyo said.
Can value-add work in all segments?
Value-add is the dominant strategy across Italy and in many other Southern European markets but arguably the biggest successes have been in the high-end space. So, can it ever make sense to do it in the economy or midscale segment? After all, construction and/or refurbishment costs are the same, but the ADR you can charge after the hotel has been completed is obviously a lot more for a five-star property.
Grazi Paineli, managing director at Limestone Capital, said it was undoubtedly “a bit more challenging” working on a three-star property, however, she said that luxury wasn’t the only way to go.
“I think, especially in Rome, probably the luxury market for the next two years is very saturated. So there is a gap actually one notch down, where you could charge perhaps 20, 30 per cent less and still make that work,” she said.
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