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Spain Free-for-All Pitting Apollo Against Blackstone

Apollo Global Management LLC (APO), which has raised $3.9 billion to buy distressed European assets, is hunting for hotels and resorts in Spain as tourists from across Europe help pull the country out of a two-year recession.

The lodging industry is “rather bombed out, needs capital,” said Roger Orf, head of European real estate at Apollo, which oversees more than $113 billion. “Room rates can go up rather quickly over ensuing years,” he said last month at a real estate conference in Barcelona, one of Europe’s most popular holiday destinations.

Apollo is competing with Blackstone Group LP, Goldman Sachs Group Inc. and Lone Star Funds for Spanish assets as the economy shows signs of improvement and after the European Central Bank pledged to do whatever it takes to preserve the euro. They’re seeking to take advantage after prices plunged, saddling banks with soured loans and leaving companies short of capital.

“No one is now questioning whether Spain will leave the euro zone or not and there are fewer opportunities elsewhere,” Rami Badr, investment director at Orion Capital Partners, said at the conference. “A number of hedge funds and financial investors are now coming to Spain, which is perceived as a new El Dorado,” he said, referring to the mythical city of gold sought by the Spanish Conquistadors in South America.

Photographer: David Ramos/Bloomberg

Visitors sunbathe at La Marbella beach in Barcelona. Close

Visitors sunbathe at La Marbella beach in Barcelona.

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Photographer: David Ramos/Bloomberg

Visitors sunbathe at La Marbella beach in Barcelona.

Apollo has been one of the biggest buyers of distressed European assets since the onset of the financial crisis, including 11,000 U.K. mortgages and Irish commercial property debt. It’s invested more than 1 billion euros ($1.4 billion) in Spain since 2011 and in September bought Evo Banco, a unit of nationalized lender NCG Banco SA.

Investment Plans

The private-equity firm, co-founded by Leon Black, Joshua Harris and Marc Rowan in 1990, could deploy as much as 3 billion euros in Spain in the next three to five years, according to two people with knowledge of the plans, who asked not be named because the information is private.

The New York-based firm has already approached European banks about acquiring holdings in financially distressed hotels. The main targets are 3- and 5-star properties in major cities and resorts on the coast and nearby islands, with the aim of establishing a chain or chains of hotels around recognized brands, the people said.

As part of the strategy, Apollo is in talks to buy a group of hotels in another European country and aims to create a pan-Europe hotel group with Spain as a key component, the people said without disclosing the other country. Charles Zehren, an Apollo spokesman, declined to comment on potential acquisitions.

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A cycle rickshaw take tourists on a journey along the beachfront in Barcelona. Close

A cycle rickshaw take tourists on a journey along the beachfront in Barcelona.

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Photographer: Stefano Buonamici/Bloomberg

A cycle rickshaw take tourists on a journey along the beachfront in Barcelona.

Leisure Target

By focusing on leisure, Apollo is seeking to tap into Spain’s 57.1 billion-euro travel and tourism industry, accounting for 5.4 percent of gross domestic product. The number of tourist visits this year through September reached 48.8 million, the highest for the nine-month period since at least 2000, Spain’s tourism institute said last month.

Hotels in Barcelona, the northeastern coastal city famous for its Antoni Gaudi architecture, beaches and overachieving football club, are already the third-most popular in Europe for investors this year after London and Paris, according to Miguel Vazquez, a partner at Irea. The Madrid-based restructuring firm has advised on 22 billion euros of refinancing and on 3.2 billion euros of real estate transactions.

Revenue per available room, or revpar, for hotels in the city rose about 28 percent in September from a year earlier to more than 123 euros, the second-highest increase in Europe after the Lithuanian capital city of Vilnius, according to data compiled by researcher STR Global. In coastal areas like Alicante and the Canary Islands, the measure of profitability has risen by almost 11 percent this year, compared with a 6.8 percent decline in Madrid.

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Passengers pull their luggage as they arrive outside Joaquin Sorolla railway station in Valencia, Spain. Close

Passengers pull their luggage as they arrive outside Joaquin Sorolla railway station in Valencia, Spain.

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Photographer: Antonio Heredia/Bloomberg

Passengers pull their luggage as they arrive outside Joaquin Sorolla railway station in Valencia, Spain.

Barcelona Hotels

About 235 million euros of hotels were sold in Barcelona through October, six times the total investment for all of 2012, Vazquez said. That includes the five-star, 473-bedroom Hotel W, popularly known as the Sail because of its shape, to a unit of Qatari Diar for 200 million euros. Investment in lodgings in all of Spain in the first 10 months reached 372 million euros and will “without doubt” surpass the 2012 amount this year, he said.

In October, BlackRock Inc. and Fidelity International Ltd. reported that they hold stakes of 5.6 percent and 1.5 percent respectively in NH Hoteles SA (NHH), Spain’s largest publicly traded business hotelier. HNA Group, which owns 20 percent of NH, said last week it has an option to buy an additional 4 percent held by Pontegadea Inversiones SL, Amancio Ortega’s investment company. Ortega is Spain’s richest man.

Properties Offered

Properties currently for sale include seven four-star hotels with a total of 3,400 rooms in the Canary Islands, Spanish territory off the northwest coast of Africa, that investment bank Carlton Group Ltd. is selling on behalf of the owner.

The deadline for binding offers is in November and the deal will close before year-end, said Javier Beltran, Carlton Group managing director for Spain and Portugal, which has additional mandates to advise on and sell 500 million euros worth of commercial real estate assets in Iberia. “There is huge interest, mainly from foreign real estate and private-equity funds.”

Still, Spain’s economy remains weak. While a two-year recession ended in the third quarter and industrial production rose in September for the first time in 2 1/2 years, unemployment stands at 26 percent, the second-highest in the euro zone after Greece, and the nation’s budget deficit was the largest in the European Union last year.

Investor Recovery

“Today, we’re talking about a recovery of Spanish investor sentiment, but the man on the street has not yet seen any recovery,” said Ismael Clemente, founder of Magic Real Estate. That’s likely to take until 2016 at the earliest, he said.

Home prices in Spain have already fallen by an average of 40 percent since the market’s peak in 2007, according to Fotocasa.es and the IESE business school, while office prices in Madrid and Barcelona have plunged 52 percent and 46 percent from the high point, CBRE Group Inc. data show.

The collapse of the construction industry, which accounted for as much as 18 percent of gross domestic product at the peak of the country’s real estate boom, provoked a financial crisis that forced Spain’s banks to take 87 billion euros of impairment charges last year and 41 billion euros of European bailout funds.

Spain created a bad bank in November 2012 to help lenders that took state aid jettison soured real estate assets from their books when the industry crashed. The institution, known as Sareb, will sell 1.5 billion euros of assets this year, out of a total of 50.8 billion euros of assets turned over to it, Economy Minister Luis de Guindos said March 12.

Shrinking Yields

The scope of assets on sale and the shrinking of potential returns on everything from U.S. company junk bonds to U.K. property is drawing investors from across the globe. Yields on real estate in Germany and the U.K. are near all-time lows meaning “the price differential with Spain” has “become too wide,” JPMorgan Chase & Co. analyst Harm Meijer said in an interview.

Blackstone (BX), the world’s biggest manager of alternative assets, agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros. The New York-based firm is bidding against Goldman Sachs for another 1,458 housing units being sold by Madrid’s regional government. Sareb said yesterday it sold loans with a combined nominal value of EU323m to Deutsche Bank AG. (DBK)

Mexican Investors

Last month a group of Mexican investors led by Moises El-Mann bought ISC Fresh Water, owner of 253 bank branches in Spain, from Moor Park Capital for 290 million euros. Reyal Urbis SA (REY), a Spanish developer that sought protection from creditors in February, said on Nov. 8 it sold its ABC Serrano shopping mall and an office building in Madrid to IBA Capital Partners for 96 million euros.

Total investment in commercial property in Spain in the first nine months of the year was 1.49 billion euros, 42 percent more than a year earlier, according to analysts at Savills Plc. They expect total investment for the year to reach 3 billion euros.

Purchases by investors such as BlackRock and Qatari Diar have already fueled investor appetite for Spanish hotel assets, according to Vazquez.

“Funds behave in a gregarious way, so if they see their competitors closing deals, they feel they have to be there,” he said.

To contact the reporters on this story: Sharon Smyth in Madrid at ssmyth2@bloomberg.net; Neil Callanan in London at ncallanan@bloomberg.net; David Carey in New York at dcarey13@bloomberg.net

To contact the editors responsible for this story: Andrew Blackman at ablackman@bloomberg.net; Rob Urban at robprag@bloomberg.net

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