For market watchers, it is increasingly difficult to guess where geopolitical shocks will land these days. The first few months of 2026 have seen the likes of Greenland, Ukraine, Venezuela and Iran all come under the spotlight. Meanwhile, a Labour leadership challenge in the UK, regime change in Hungary and elections this year in Denmark all imply that the European outlook is also in flux.
With so much geopolitical “noise”, investors are trying to adjust to a “new normal”, suggests David Kellett, head of hotel capital markets EMEA at Savills. “Investors are relatively used to shocks now,” he says. “Nevertheless, when they happen, it is still going to have an impact and sometimes that means deals getting stuck.”
Middle Eastern impacts
The latest conflict in the Middle East is already creating both macroeconomic shifts and more direct effects on hospitality performance, with a handful of geographies impacted by strikes and airlift issues.
“Looking across the GCC, those markets that are driven by international demand, including the Emirates and notably Dubai and Abu Dhabi, are strongly impacted. They are seeing a significant displacement of travel, only some of which is staying in the region,” says Thomas Emanuel, head of hospitality thought leadership, EMEA at Savills. He notes that certain Saudi destinations such as Jeddah are performing well, with the country proving more successful in maintaining occupancies, not least due to strong domestic flows. Other travellers, however, are exiting the continent. “As of March and April, we have also seen a lot of strong growth across Mediterranean markets, with Crete, the Balearics and Canaries doing quite well. Sharm El-Sheikh in Egypt is picking up, as are Agadir and Marrakesh in Morocco.” This is somewhat telling, despite March and April not tending to be high volume months for holiday travel.
He is sure, however, that when the conflict ends, the popularity of the Emirates will surge again. “As soon as it seems safe, we expect a rapid return to normal.”
Kellett agrees. “I would certainly back Dubai as a destination in terms of getting things back on track quickly. While the travel volume there has been impressive, the number of flights passing through Dubai is significant, which has resulted in a phenomenal growth in hotels,” he adds.
Despite this, many investors may take stock of their holdings once clarity returns. “A lot of Middle Eastern owners have quite concentrated portfolios, and might seek greater diversification in future. We would expect to see more capital flows out of this part of the world post-conflict,” he says.
Benefits to Europe
There are further signs that European hotel markets will continue to benefit from the region’s relative safe haven status, suggests Graeme McCormack, head of fund management, hotel & leisure division at Principal Asset Management.
“European travel patterns should remain relatively insulated from the conflict in the Middle East, with demand displacement from the Middle East into Europe providing a near term lift which should compensate for some potential for flight delivery disruption,” he says. He suggests that in the medium-to-longer term, high demand into the region should remain resilient, “as it is driven by long term travel trends that should continue to support performance”, enabling the region to maintain a reputation as “a comparatively stable investment destination”.
Yet he counsels some caution. “In the event of a prolonged conflict, broader capital markets sentiment may weaken. In particular, reduced visibility on inflation trajectories and interest rate movements could dampen investor confidence and slow transaction activity. Early indications of this trend were evident in Q1 2026, when deal volumes were subdued across most real estate sectors in Europe.”
Could this translate into distress and forced sales in hospitality? Not necessarily, but a careful monitoring of macroeconomic effects is important, he adds. “This will largely depend on the duration and severity of ongoing geopolitical tensions. Should disruptions in energy markets persist, particularly if oil prices remain consistently above $90 per barrel, higher inflationary pressure and a more hawkish stance of central banks are likely to compress operating margins for hotel owners via utility and borrowing costs.”
McCormack notes that in such a scenario, an increase in financial distress across the hospitality sector is “possible, particularly among smaller or more highly leveraged owners”. He adds: “Many of these smaller operators and owners are still in the process of rebuilding balance sheets following an extended period of elevated interest rates, leaving them more vulnerable to further cost pressures.”
Says Kellett: “Most markets are relatively rational and trade on yield, which will be driven in part by inflation and interest rates. Historically we have seen a tighter yield in northern European cities, but since Covid, this has inverted somewhat, with southern European destinations seen as stronger markets benefitting from greater demand.” He suggests that “Southern Europe and luxury” are likely to remain top of investor shopping lists, in the wake of both categories demonstrating their resilience in recent years.
Rising expenses
Expenses are a problem for all operators, however, with McCormack observing that elevated energy and financing costs are likely to exert downward pressure on operating margins, especially for hotels with limited pricing power or cost flexibility.
“In response, underwriting assumptions should place greater emphasis on operational resilience, including assets with strong underlying demand fundamentals, efficient cost structures, and the potential for active value creation,” he suggests. “Investors should avoid over-reliance on favourable market conditions and instead focus on assets where performance can be enhanced through strategic repositioning, cost optimisation, or revenue management initiatives.”
Principal’s current hotel strategy focuses on unlocking value through the acquisition and repositioning of underinvested, under optimised and well-located assets. “Our focus is in Europe, where the proportion of branded or chain-affiliated hotels remains relatively low compared to more mature markets such as the United States. This fragmentation presents a compelling opportunity to enhance asset quality and operational performance through repositioning,” he says.
“From a geographic perspective, we prioritise dual-demand markets, namely major gateway cities and select secondary cities that benefit from both business and leisure travel demand. Examples include London, Milan, Paris, and Madrid. These markets tend to demonstrate greater resilience during downturns, as business and leisure segments are driven by different underlying factors and demand cycles.”