Despite a sluggish transactions scene, the “fortunate” hospitality industry and asset class continues to convince an increasing group of investors, delegates heard at the IHIF EMEA in Berlin on Tuesday.
Vincent Mezard, global head of living & hospitality at AXA Investment Managers, said: “We are in a fortunate industry and asset class. We went through Covid without crashing operations, and we are going through this yield shift cycle without crashing valuations and the capital markets.
“We never went through the extremes of yield compression that we saw in offices and residential; we have these strong, structural tailwinds post-Covid; there is still capital available, and transactions are happening – there is equity out there.”
In a discussion moderated by Kenneth Hatton, managing director, head of hotels, Europe at CBRE, IHIF delegates heard about the underlying trends supporting hospitality investment theses.
Experience-led spending
Noted Tina Yu, partner, KSL Capital Partners International: “Consumers want to spend more on the experiences that we offer in our hotels than on material goods. We are also looking at wealth transfer, with the Baby Boomers expected to pass around $84 trillion to the next generation over the next 20 years.” She added: “We’re interested it where that next generation wants to travel – they are more tech savvy and seeking more authentic places. We’re not questioning the demand but where the demand wants to go.”
Keith D. Evans, CEO of Lifestyle Hospitality Capital (LHC) Group, tackled the burgeoning lifestyle sector. Evans founded LHC and leads its global investment and asset management platform. He noted: “Lifestyle is a wide band. It requires well-designed hotels, with strong F&B, rooted in local community. It requires a movement away from a commodity to a specialist product, which is demanded by consumers.” He suggested that lifestyle properties require a “more difficult skill set to execute that design” and said that LHC was “building a competitive advantage in that space”.
European opportunities
Timothy Abram, a managing director in hotel acquisitions at Starwood Capital Group, said that Europe still represented a compelling market despite some recessionary markers. “A few markets have higher supply than others, including the UK and Ireland,” he noted, adding that “overall, Europe’s low single digit supply dynamic is fairly advantageous compared to the US.” He said that “the long-term demand thesis for travel is still intact” supporting the case for investing in hotels. He also referenced the deal that Starwood closed at the start of the year for 10 Radisson Blu hotels in London, suggesting that the “resilient” UK capital “is one of our favourite markets in the world”. He noted that while RevPAR was unlikely to continue its stellar climb, the profitability outlook remained impressive.
Added Yu: “So much of Europe is family-owned and under-managed. All of us have to know when to lean in on these types of deals.”
Discussing the outlook, Evans said that he hadn’t been convinced by forecasts that the Fed would cut interest rates so rapidly, but was confident they would come in the second half of the year. He said: “If 2 per cent inflation is the Holy Grail, that might require a more aggressive approach”, wondering if “2.5 per cent might be more realistic in the future”. However, he warned of the sector’s vulnerability to geopolitical threats, “just as it was vulnerable to Covid”.
Added Abram: “Looking at the year ahead, the US elections might interrupt some deals, but we don’t envisage a significant impact in Europe.”
Sector momentum
According to recent CBRE data, Europe's hotel and tourism sector is poised to gain further momentum in 2024, with domestic and short-haul leisure travel remaining as the primary drivers of hotel demand. Additional tailwinds will be provided by a rise in international long-haul leisure travel from Asia.
Business travel, particularly the international long-haul segment, is expected to show meaningful year-over-year improvement. However, this category will lag the leisure segment due to the slow return to the office in some markets and the growing prevalence of virtual meetings.
Several major upcoming sporting and entertainment events should help certain hotel operators increase room rates and raise occupancy. These include the 2024 Summer Olympics in Paris and the 2024 UEFA European Football Championship in Germany, as well as major concert tours by Coldplay and Taylor Swift.
The conflicts in Ukraine and the Middle East may cause some travellers to shift their travel plans to northern and western Europe, as was seen during prior periods of conflict. As these are generally higher ADR markets, this shift could be another catalyst for occupancy growth and rate compression during peak periods.
After strong growth in RevPAR fuelled by inflation and surging demand in 2023, momentum is likely to moderate. CBRE expects RevPAR growth in 2024 to decelerate to a high single-digit rate, indicating a return to more normalised levels of demand growth.