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19 June 2018 | Hoteles

Raising Interest of Private Equity Firms in “Affordable Luxury”

Increasing numbers of investment funds are taking an interest in disruptive ‘affordably luxury’ hotel products. Exploring this new trend, we interview Daniel Dejanovic, Head of European Real Estate at Cerberus Capital, for his take on the Qbic Hotels investment

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The Affordable Luxury Hotel Trend

Over the past decade, the hotel industry has witnessed the entry of a number of disruptive players in the market, differentiating themselves from traditional hotels by offering a modern hotel product: “affordable luxury”.

The affordable luxury model is based on several criteria. At the development level, these products are built using modular construction techniques in either new build or adaptive reuse properties. They offer a limited facility mix, compact bedrooms, extensive social space, high-end design furniture and cutting-edge technology. From an operational perspective, they differentiate themselves by running with a lower number of staff and selling at lower rates than traditional hotels in the same category. Their target consumer tends to be money-conscious who want a certain level of comfort.

Overall, the affordable luxury model provides higher returns for the developer, investor and operator than traditional hotel products.

What defines affordable luxury?

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Who Are They?

In most cases, these players tend to be newly-launched companies which started a decade ago in Europe, with no affiliation to larger hotel groups (with the exception of Moxy) and with ambitious global expansion plans. We count brands such as Yotel (launched by British entrepreneur Simon Woodroffe in 2007), Qbic Hotels (launched by Dutch entrepreneurs Paul Rinkens, Rino Soeters and Marcel Voermans in 2007), citizenM (founded by Dutch entrepreneurs Rattan Chaddha and Michael Levie in 2008) and Moxy (from the 2014 merger between the Ikea holding company Vastint Hospitality and Marriott International).

In recent months, we have seen two major deals take place in the market. This suggests a heightening interest among Private Equity funds looking to invest in these hotel concepts. Starwood Capital’s $250m investment in Yotel in September 2017 equated to a 30% stake of the portfolio, while  Cerberus’ investment in Qbic Hotels in June 2017 saw the acquisition of the entire platform.

The Example of Cerberus and Qbic

Under a year after the Qbic acquisition, Christie & Co interviewed Daniel Dejanovic, Head of European Real Esate at Cerberus Capital Management, to get his take on why these disruptive hotel concepts attract large Private Equity funds, the drivers behind these acquisitions and Cerberus’ vision for the platform.

What are the key reasons that pushed you to invested in the Qbic platform?

Qbic Hotels is a forward-thinking, eco-conscious, urban 3-star-plus hotel offering that can act as a disruptive player in the limited service hotel space in Europe. In its existing locations, Qbic Hotels has demonstrated consistent above market KPIs and margins supported by a well thought out brand positioning and an attractive price point. Additionally, we were impressed by the ‘Qbi’ whose crowd pleasing, quirky design hides a hyper-rational low-cost real estate conversion solution that fits with Cerberus' vision for a freehold property acquisition and value-add plan across major European cities.

A year after the acquisition, what is the key element your ownership has brought or will bring to the hotel group?
This transaction represents an opportunity for Cerberus to work closely with Qbic Management while also applying our substantial experience in the global hospitality sector to a new growth platform. Cerberus has offices in multiple European jurisdictions and a long history in hospitality related investments throughout the capital structure, comprising over $3 billion of equity invested and over 135,000 keys. To be successful, we need to leverage all the team and in-house experience while also relying on trusted advisors within our target markets.

How long do you plan on building up a strong Qbic platform and what is your approximate timeline to disinvest?

The plan is to create long-term value in the business through creative real estate solutions and by organically scaling the platform and portfolio across multiple cities. Earlier in the year, we completed the acquisition of a vacant office building in the city centre of Manchester, UK, that will transition in a leading Qbic Hotel product in that destination. The next few years are critical for our growth, and the focus now is to continue building the team and our deal pipeline in order that we can accelerate expansion in line with our business plan.

What is Qbic ideal development model (freehold, lease, franchise, management)?

Our vision for Qbic is primarily based in a freehold property acquisition and value-add business model. The advantage of the brand platform is that it affords us structure optionality, so nothing is off the table during the growth phase or during an eventual exit. We certainly see business advantages with the Qbi, our patented and integrated bed and bathroom unit, and these include quicker fit-out and lower recurring CapEx. Since the Qbi units can be flat-packed, delivered anywhere in Europe and brought through the front door, we would see potential for a broader application across a range of real estate platforms and potentially through a franchise solution for Qbic Hotels in the future.

What is the biggest threat for Qbic growth? (rise of competition, building brand recognition, change of trends, etc.)

One of the advantages of Qbic Hotels is its niche product positioning above the traditional limited-service offerings but at a lower price point than full-service lifestyle brands. A focus on best basics meets all the demands of the modern urban explorer, which we believe is a growing traveller segment. Therefore, we see more upside opportunity to expand our presence in multiple European markets that also continue to show good macro trends. One of the most exciting and differentiating factors of Qbic Hotels versus traditional limited-service is our fresh, new F&B offering now on display in London and to be rolled out across Qbic Hotel sites.

How likely to you think you will be able to develop Qbic in Spain?

We are firmly focused on getting Qbic Hotels into the Spanish market, not least because we believe the product will be a fresh addition to the competitive landscape. The individuality of each Qbic Hotel is important, and there is a strong focus on incorporating elements of the local neighbourhood and diverse city offerings. With Qbic Hotels, this is balanced well with the familiarity and quirkiness of the Qbi as well as the amazing staff who consistently deliver exceptional guest experiences

The Interviewee​

Daniel Dejanovic, Head of European Real Estate, Cerberus Capital Management, L.P.

Mr. DejanovPhoto-Daniel-Dejanovic.jpgic joined Cerberus in June 2006. Prior to joining Cerberus, Mr. Dejanovic worked in the corporate finance arm of Ernst & Young in their London business modeling and valuation team from 2005 to 2006. From 2004 to 2005 Mr. Dejanovic worked for the Australian subsidiary of China Light and Power (CLP) in Business Development and Project Finance. From 1998 to 2004, Mr. Dejanovic worked for the Australian subsidiary of Cheung Kong Infrastructure Holdings Limited and Hong Kong Electric Holdings Limited in various rolls across Corporate Treasury, Financial Accounting, Management Accounting and Commercial Analysis. Mr. Dejanovic is a graduate of the Royal Melbourne Institute of Technology (RMIT) and holds a Master of Applied Finance from The University of Melbourne. Mr. Dejanovic is a member of the Cerberus Capital Management Real Estate Committee.
 
The Author

Guillemette Briard, Consultant, Christie & Co Spain & Portugal

Photo-Guillemette-Briard-(1).jpgGuillemette is based in the Christie & Co Barcelona office where she works as a Consultant, providing advisory services in Spain and Portugal. Before joining Christie & Co, Guillemette worked in London as a Business Development executive for hotel market data provider STR and later as a Consultant for property consultancy firm GVA in charge of hotel developments projects in the UK and Spain. Guillemette holds a Bachelor degree in International Hospitality Management from Lausanne Hospitality Management School and the Certification in Hotel Industry Analytics (CHIA). She also has experience in hotel operations, gained while working for major hotel brands including Marriott, Hilton, Mandarin Oriental Hotels and citizenM in Europe and the US.


 
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