While the European hospitality industry achieved around €20 billion in transactions in 2024 according to industry estimates, the absence of key players suggests that 2025 could be an even more impressive year for deals.
Vincent Mezard, global head of living & hospitality at AXA Investment Managers, thinks that the hospitality industry has plenty to offer a range of investors in 2025 – including more risk-averse capital.
“Few asset classes are as well positioned as hospitality when it comes to investment volumes,” he notes. “The long-term trends are there, as is good quality product – the capital is also present to drive strong transaction volumes in the coming months. The only issue might be how many people are willing to sell.”
One investor type that was conspicuous by its absence from the deals table last year was core capital, with INREV’s large, pan-European open end diversified core equity fund (ODCE) index revealing part of the story. While the 16 funds tracked by the index resumed marginally positive returns in March 2024, and continued to slowly improve over the year, this followed six quarters of negative returns, undermined by sluggish capital raising prospects and significant outflows.
Brighter outlook
The outlook at the start of 2025 is brighter, according to Miguel Casas, managing director of Stoneweg Hospitality. “The big change in 2025 is the type of capital looking at hotels,” he says. “It is no longer just private equity – we’re seeing plenty of core plus strategies too from family offices. The industry’s tailwinds are attracting core capital, with more generalist investors now very much looking at hotels.”
Mezard agrees that the industry’s 2024 performance “was much better than we could have expected three years ago, when experts debated whether the recovery would be a U, a V, or a W shape”. In terms of AXA IM’s hospitality portfolio, he says that performance has also improved year-on-year, thanks to good operational metrics and the fact that “pressures on costs are softer than 12 months ago”. Explaining this latter point, he notes: “When wage inflation started to impact hotels 12-18 months ago, the industry started exploring efficiencies including AI and technology. The results of that are starting to trickle through.”
Ongoing trends – such as the travel habits of the global middle classes – also boost the investment outlook. “The desire of travellers from around the world to visit Europe, combined with very limited supply, continues to boost ADRs. In parallel, there are very high barriers to entry to the asset class.” He suggests that in the long-term, there is plenty of conviction that RevPAR growth will continue to outperform inflation and the CPI.
Global capital agrees. “The appetite for other asset classes is not as high as it used to be, so demand for hospitality is unlikely to go down,” Mezard adds. Despite all this, the outlook for core capital is mixed. “If you had asked me three months ago if core capital would return to the hospitality sector this year, I would haven’t hesitated to say yes. Now I’m not quite as confident,” he says, suggesting instead that high net worth buyers, along with value-add capital, are likely to continue to be the major players at the deal table at least for the first half of this year.
Broad appeal
Core strategies have more broadly woken up to hospitality’s appeal for a number of reasons, says Richard Everett, managing director, Europe core strategy, CBRE Investment Management. “Hotels can certainly be an interesting asset class but you have to keep looking at the fundamentals. The core sector has learned that it’s not just about operator and lease length - the underlying land value is key,” he notes.
He adds: “If you have all three, you have the ability to invest in an asset and also consider alternative uses – you can buy a hotel that you change to residential, or residential that you switch to a hospitality use case. At the end of the day, the fundamentals are the most important thing. You want to avoid single tenants and long leases in the middle of nowhere. Real estate is about land value, cash flow, and the resilience of that cash flow.”
The one bleak note on the horizon could be the uncertain macroeconomic outlook. Hopes that the Federal Bank might cut interest rates rapidly have started to recede, in the face of frothy US inflation data. Complicating the picture, too, is incoming president Donald Trump and what analysts have called a “scattergun” approach to policy. With the new US administration having already signed hundreds of executive orders in its opening days, ranging from backing fossil fuels and pulling out of the Paris agreement to an investment in AI infrastructure, the markets are still trying to digest what all this might mean for the business and investment climate. Trump has also signalled that tariffs may come into play as early as February, targeting Canada, Mexico and China.
Fund restrictions
Another issue remains the fact that hospitality hasn’t always been an option for core funds for regulatory reasons. German open-ended funds, for example, have typically been restricted from owning assets with variable elements in their leases, limiting their exposure to the sector.
Yet Deka Immobilien, part of Deka Group, has long been an active investor in the sector, notes Victor Stoltenburg, the firm’s global head of acquisitions and sales. “We have more than 80 hotels across Europe,” he says. “Although offices represent 65% of our portfolio, we have always invested in hotels and logistics, as well as retail,” he says.
Capital raising for core real estate may take some time to improve, even if the direction of travel is largely positive, he confirms. “While there is good liquidity for value-add strategies, with opportunistic funds able to target double-digit investments, core money takes longer to return,” he says.
Stoltenburg also suggests that a key alternative to real estate, the German bond market, may further complicate the capital raising outlook. “There are concerns that the German 10-year bond yield will stabilise somewhere above 2%, which is an important benchmark for us,” he concludes.