“The Otto family used its historic experience in retail to develop and manage shopping centres,” says Ascan Kókai, head of hotels at ECE Real Estate Partners (ECE REP). “Today, it is replicating that path with hospitality real estate, through its development, investment and management skills.”

The firm also has plenty of other asset classes in its stable. While ECE’s vertical integration helped it steal a march on its peers in shopping centre development and ownership, when the wind changed for retail, ECE was ready to pivot towards new themes.

“Over a decade ago, a decision was made by the group to further intensify diversification into the development and management of hotels, offices, logistics and build-to-rent (BTR) residential that began in the 1970s. Today this is handled by the ECE Work & Live division,” Kókai explains. In parallel, the group’s investment and fund management platform, ECE REP, also started to branch out into different asset classes. Founded in 2010, ECE REP successfully launched its first shopping centre fund in 2011, and today manages a portfolio of real estate assets worth €10 billion, and several open and closed-end funds, including a hospitality fund. ECE REP’s subsidiary in Luxembourg has been a licensed Alternative Investment Fund Manager (AIFM) since 2014.

Hospitality entry

In 2009 ECE built its first hotels, starting with a raft of developments in Dresden city centre and at the new Berlin airport. Today, ECE is the third largest hospitality developer in the DACH region, with a taste for markets in Southern Europe in recent years. The Otto family also acquired the largest single stake in the Munich-founded Ruby Hotels Group in 2019, equivalent to a circa 25% share. Kókai describes Ruby Hotels as a “rapidly growing and innovative, lean luxury brand, with limited food and beverage (F&B) but trendy bars”. He adds. “They’ve expanded quickly given that they are only 10 years old and are quite flexible in their projects. Pre-Covid they did some ground-up development, but the current focus is conversion, with a preference for converting offices. The Ruby concept is very adaptable for such building layouts.”

ECE is currently developing the Ruby Hotel in Rome and has just started work on an office-to-hotel conversion in Copenhagen, which was unveiled last month. Adds Kókai: “The operator for that project will be announced by my ECE Work & Live colleagues in the coming months.”

Kókai himself joined ECE around three years ago, following a long pedigree in the hospitality industry. He started out in the sector in 1992 at what is today the Fairmont in Hamburg, before attending the School of Hospitality and Tourism Management in Guildford, Surrey. A six-year spell at JLL Hotels followed before he was poached by Invesco Real Estate to assist in setting up their hotel business. After 10 years with Invesco in London and then Munich, he went to NH Group to gain further operator-side experience, and then moved to ECE REP.

Fund management platform

While ECE REP is able to draw on the wider group’s capabilities, it tends to be a little conservative around development risk – preferring not to take on ground-up developments, but happy to tackle refurbishment projects. “Today we manage real estate funds for institutional investors, co-invested by the Otto family to the tune of 10-15 per cent, so we’re not a family office, although we are privately held and owned, but rather an institutional investment management business,” he underlines. “ECE REP works with institutions, pension funds, insurers and sovereign wealth funds, with an investor base which is around 50 per cent German, 30 per cent European and 20 per cent global. My job is complementing our diversification strategy with hospitality investments.”

The sector’s strong fundamentals have helped build the business case around this. “Just looking at tourism demand, the data is very good – recovery has been faster than any expert in the sector envisioned,” he says. “We are back at or above 2019 levels in most markets in terms of RevPAR and in terms of ADR.

“Furthermore, the financial growth model for hotels is very good. When you think that Asian travellers have not fully returned to Europe, there is plenty more potential to drive occupancy. It’s true that the double-digit growth post-lockdown has softened, but it had to even out at some point yet continues ahead of inflationary growth.”

Investment horizons

Kókai is equally optimistic about the investment and operational horizons. “While investment activity in our sector has reduced somewhat, hospitality today is viewed more positively as an asset class. We took a hit a couple of years back in terms of investment yields, so our pricing has moved out already, which means we are not so penalised now by inflation and interest rate hikes.”

All of that gives the sector “more stability and a healthy premium relative to bonds” he adds, creating a “basis point buffer which allows a risk profile that is attractive to investors”.

He adds: “Virtually for the duration of my entire career, offices were the flavour of the month. It’s quite a novel feeling that hotels have become the preferred use case in many examples. Hotels offer a lot more clarity than offices – people simply don’t know yet what the future of work will look like, so many investors are just pausing on the entire asset class.”

This moment in the sun also translates into an easier debt environment, he notes. “For existing hotel investments, you can still obtain debt financing to the tune of 55 per cent with few issues. There are also several banks that have built expertise in the sector over the years, plus plenty of private equity funds happy to step up with mezzanine or debt funds.

“Hotel development still remains costly and difficult, but banks see that there is business to be done around standing assets which require capex, which is what we’re acquiring.”

The ECE REP strategy currently focuses on Southern Europe, Western Europe and capital cities in the Nordics. In Southern Europe, the bounce back in leisure travel has created “a good deal flow and fungibility of assets”, he notes. “Although we often like hotels which serve both business and leisure, those dynamics led us to buy in Venice, which is mostly a leisure destination but in a city context.” He adds: “We like markets including Barcelona and Madrid which combine strong leisure and corporate travel, as well as Lisbon, Rome and Milan. Then the Paris market is roaring right now, although we haven’t invested in France yet – it’s on the list!”  

For now, the UK market isn’t explicitly excluded but currency risks rather place it on the “watch list”. Kókai says: “When buying, it all comes down to location, as we can always improve the quality of a property. Our skillset on the development side and our in-house teams enable us to take under-performing assets and make them something special.”

By Isobel Lee