Pro-Invest rises in Australia and wants more

Pro-Invest rises in Australia and wants more

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In less than three years, Pro-Invest Group has doubled its
portfolio to 32 properties and tripled the room inventory to 6,000. The
Sydney-based investment firm and asset manager is continuing to raise capital
for its Asia-Pacific Distressed Hospitality Fund III.

The fund was launched in 2021 to seize opportunities created by
COVID-19, but most of the action remains in Australia and New Zealand where
investors still show “a lot of interest in hotels,” said Jan Smits, Pro-Invest
Group’s CEO and deputy chair for APAC. That said, he is keeping watch on Asia,
an area close to his heart.

The former long-time IHG Asia chief joined the Pro-Invest board in
2019 and moved into the CEO role in 2020. In a way, he never really left IHG.
Under his charge, Pro-Invest has introduced IHG’s brands Indigo, voco and
Kimpton in key cities such as Sydney, Melbourne and Brisbane by franchising
these flags for its latest acquisitions.

As a result, Pro-Invest’s hospitality portfolio in Australia and
New Zealand has expanded beyond select-service into the lifestyle and upper
mid-scale segments. The company was founded in 2010 and its partnership with
IHG goes back to 2014, when IHG backed Pro-Invest’s A$150 million debut fund
with the aim of developing up to 15 Holiday Inn Express in Down Under.

Catalyst for growth

COVID-19 was the catalyst for the firm’s unprecedented growth in Australasia
in the last few years. The pandemic drove it to raise capital, launching the
Australian Hospitality Opportunity Fund in 2020, followed by Fund III in 2021.

“I was far more interested in what was going to happen after
COVID. I always felt that travel would explode and grow, and that’s what
happened in Australia, especially with the domestic market,” Smits said in an
interview with Hotel Investment Today.

Fund II raised A$300 million from a group of domestic and
international institutional investors, funding acquisitions such as the Sebel
Canberra and the former Holiday Inn Flinders Lane in Melbourne, now an Indigo
hotel after a A$20 million renovation. Pro-Invest acquired the hotel from New
Zealand property investor Carter Group, which is also a significant investor in
its Fund III.

Hotel Indigo on Flinders Lane, Pro-Invest’s 32nd hotel which opened in August 2023

Hotel Indigo on Flinders Lane, Pro-Invest’s 32nd hotel which opened in August 2023

Fund III so far has secured only around A$120 million out of a
projected A$500 million. But the capital markets are strong, Smits maintained.
“Originally, we wanted A$500 million for this fund. We might still get there as
the capital markets are constantly moving. We are scheduled to do another close
towards the end of this year,” he added.

“There’s now more predictability that interest rates are most
likely going to stay [rather than rise further]. Australia has a strong GDP. We’re
seeing family offices and some of the bigger boys coming back into the market
looking at real estate assets, especially hotels,” Smits said.

Hotels have been performing well as investors see it as a hedge
against inflation, Smits said. “The whole living sector [which includes
build-to-rent and student accommodation] is really strong in Australia.”

With students returning after COVID, demand is healthy for their
accommodation. Blackstone recently bought Student One in Brisbane, the sale comprising
three housing assets (2,300 beds) and the management company. Last year, Gaw
Capital Partners snapped up 11 hostels (1,500 rooms) owned by the Youth Hostel
Association New Zealand. The hostels closed down in December 2021 due to
extended lockdowns.

Build-to-rent is relatively new to Australia. An Ernst and Young
2022 report estimated it is just 0.2% of the total value of residential
housing, with 23,000 units completed or in development.

Adding value

Due to rising construction and labor costs, Pro-Invest has shifted
its strategy to buying existing assets and repositioning them, rather than
build from ground up as it did in earlier years. Smits believes there are still
plentiful opportunities across the eastern seaboard of Australia, with some
owners needing capital to reposition, say, assets that were used as quarantine
hotels.

“We buy hotels off-market through our relationships with owners we
know, and it’s important we get the returns we need. It has to be in the right
location, right city and right brand,” he said.

Quote

There’s now more predictability that interest rates are most likely going to stay [rather than rise further]. Australia has a strong GDP. We’re seeing family offices and some of the bigger boys coming back into the market looking at real estate assets, especially hotels.

Jan Smits

The funds seeks a 20% annual internal rate of return. One way is
through operational performance, Smits said, the other is adding value to the
asset, which produces a capital uplift as well.

He points to the Kimpton Margot Sydney, the first Kimpton in
Australia, as an example. After buying the heritage Art Deco hotel, previously
Primus Hotel, from Chinese developer Greenland Group in 2021, Pro-Invest worked
out how it could add 16 more rooms, a rooftop bar and a celebrity chef
restaurant to the hotel.

“Just by putting the Kimpton brand on it, from a domestic brand
Primus, and with all the new additions, you get a lift in ADR, occupancy and
capital value,” Smits said.

ESG is also key to lifting the capital value, as the asset gains a
more premium valuation if it has ESG components, he said. “We will not buy an
asset if it does not fit into our ESG criteria. We do an audit when we buy the
asset, which gives us an idea of where its rating is. If it’s low, we work out
how we can get it to a high rating and where we need to spend the capex.”

The company has an ESG manager since 2014 as it was building
projects from scratch and could factor ESG into the construction.

“Now ESG has become trendy. Customers and corporates ask for their
carbon footprint when they stay in a hotel; some European debt markets won’t
lend to you unless you’ve got a certain ESG rating. It’s become critical.

“Moreover, in Australia there’s a lot of old stock. That’s
another great opportunity for us as we have the expertise to buy heritage
hotels like the Kimpton [Sydney] and get them up to NABERS [National Australian
Built Environment Rating System] rating. We have deep understanding on how to
do this; it has  been part of our model
for nine years,” Smits explained.

New vista

Meanwhile, Vista Hospitality Group Australasia, a third-party
management company which Pro-Invest established last year in a joint venture
with Next Story Group, is eying deals in Australia and Southeast Asia, although
it may take a while to achieve its goal of 5,000 rooms in five years as
announced at launch.

Since 2019, Industry pundits have been anticipating a rise in the
number of such companies on the back of an expected growth in franchising in
the region. That hasn’t happened, although U.K.-based Kew Green Hotels seems to
be making some headway, particularly in Thailand, in managing franchised
Wyndham and Ennismore’s Tribe hotels on behalf of owners.

“In the U.S. and Europe, 65% of the hotels [of big chains] are run
by third-party operators. In Australia it’s less than 10%. It will take a bit
of time,” Smits said. “For these operators to flourish, you need the big brands
to have a strong franchise platform. But if you look across Southeast Asia,
franchising is not a strong model yet. In Japan and India, it is. In Australia,
franchising is starting to take off now. So, it’s different stages for
different markets.”

Smits believes there are great opportunities in Australia, and
across Southeast Asia in places such as Thailand, Vietnam and Malaysia. “Don’t
forget that while the big international brands have been in those markets for a
long time under the management platform, it’s largely with their luxury brands,”
he said. “But as midscale and select-service brands expand, that’s when white
label third-party management makes a lot of sense.”

Pro-Invest also invests in Europe and the Middle East and in
commercial properties, but hospitality is its main focus.

When asked about the pitfalls of a hospitality-focused investment
company, he said, “In the current climate, it’s around people. We opened eight
hotels last year. There’s low unemployment rate [in Australia], so attracting
and retaining talent is a challenge.

“The second is managing hotels in a high inflation environment.
But that’s one of our key strengths; we operate them really efficiently and get
good returns for our investors.”

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