Pro-Invest rises in Australia and wants more

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

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.

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

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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.”