After nearly three incredible years of recovery and expansion for the European hospitality industry, investors have underlined their faith in the sector this year with record hotel deal volumes.
CBRE research finds that investment into European real estate reached €86.5 billion in the first half of 2024, with year-on-year growth led by hospitality and living. The hotel sector’s Q2 2024 performance was its strongest quarterly performance since Q4 2021, as investment reached €5.4 billion in Q2. For the first half of the year, hotel volumes rose 62 per cent to €9.9 billion, whilst the living sector saw volumes increase 6 per cent to €18.3 billion. Logistics also performed well, with volumes reaching €16.1 billion, a rise of 7 per cent on 2023 figures.
This countered sluggish performance by offices and retail, where investment edged up by just 1 per cent year-on-year in each sector.
While hospitality investment is co-leading the recovery of European real estate’s capital markets, thanks to the ongoing, positive story around the sector’s fundamentals, macroeconomic improvements are also helping.
Chris Brett, managing director, European Capital Markets at CBRE says: “It is clear that investment sentiment is starting to improve across Europe and the uptick we have seen supports CBRE’s forecast of 10 per cent growth in market volumes for 2024.”
For Brett, stabilising prices in key sectors and markets, plus the fact that prime yields have remained flat since March, have further boosted investor belief that now is the right time to buy. But what else will hotel investors need to see for deals to keep flowing in the coming months?
Macroeconomic markers
According to Neil Shearing, group chief economist at Capital Economics, investors are still monitoring the macroeconomic picture, although inflation – and thus the prospect of interest rate rises – has become less of a concern as its trajectory flattens. However, European Central Bank and Bank of England action – namely, the prospects for and speed of interest rate cuts – is still heavily dependent on what happens in the US in the coming months.
Election fervour aside, Shearing notes that the centrality of the dollar to the global economy means that the Fed remains “the world’s most important central bank”. He adds: “Likewise, yields on US Treasury bonds set the benchmark for borrowing costs across the globe. So, if the Fed alters course, it affects markets everywhere – not just in the US.”
The direct impact of the Fed on real estate’s capital markets is a further reminder of the major shadow that geopolitics casts over the industry’s recovery. The inflationary problems of the last two and a half years were arguably caused both by pandemic-era trade shifts from the East, and even more notably by war in Ukraine. Wage inflation provoked by restricted flows of migrant workers – also a post-Brexit hangover – plus increased materials costs – saw inflation reach double figures in major European economies. Softening economic performances have reversed the trend, but higher-than-hoped for inflation figures in the UK for July, for example, suggest that there are no guarantees the Bank of England will continue its rate-cutting cycle in September. All of this feeds into both higher-for-longer borrowing costs and landlord apprehension around upcoming refinancing events.
Indeed, the debt burden on the industry remains a heavy one. Global law firm Weil Gotshal & Manges recently reported that real estate companies remain the most distressed out of all business segments, in its annual Weil European Distress Index. Property value declines may have flattened after a two-year adjustment to higher interest rates, but challenges remain, especially for highly leveraged companies. In the UK, new lending to commercial real estate hit a historic low in 2023, with total loan origination at £33 billion, the lowest in a decade. Meanwhile across Europe, Germany remains the most distressed country according to the Index, followed by the UK, Spain, Italy, and France. This summer’s French parliamentary elections added further uncertainty, keeping the French risk premium elevated.
Investment convictions
Countering the challenges, plenty of real estate investors still have dry powder to deploy and hospitality’s stellar fundamentals continue to tick the boxes for investment committees.
Javier Arus, senior partner for hospitality & leisure at private company Azora, affirms: “We remain very convinced as to the strength of the European leisure sector. The tailwinds are very solid with healthy growth projections for the medium- and long-term horizon.” He adds: “The demand for rooms and nights remains strong across the different geographies and segments with a very good performance across both peak and shoulder season.”
For Arus, too, hotels remain a ‘long term’ bet rather than a ‘right now’ punt. “Tourism represents 10% of European GDP, and is one of the main industries in the region,” he underlines. “Hospitality has been historically underweighted in the portfolios of institutional investors in Europe. We believe that the growth prospects of the industry, alongside its current size and dynamic nature will continue to offer attractive opportunities for sector specialists to remain active in the sector over the long term.”
Azora furthermore believes in the strength of the leisure segment, where it remains highly active across Southern Europe’s main cities, “targeting traditional sun and beach resort destinations as well as assets benefitting from proximity tourism”, he adds. “We also have a particular focus on the hostel market, which is an asset class that is evolving very rapidly with a lot of creativity, and is performing very well. Most recently, we have acquired urban hostels in Dublin, Barcelona and Brussels, and these types of assets complement our luxury hotels portfolio.”
Like many hotel investors, Azora believes strongly in diversification. The firm is also investing in the buoyant living sector and currently manage one of the largest Spanish portfolios of residential units for rent, with more than 14,000 homes. “Over the last few months we have made significant investments into BTR, senior living and land,” he says.
Stand-out luxury
Another sustained conviction for a slate of hospitality investors is the somewhat cycle-agnostic luxury segment. According to Savills data, demand for luxury accommodation remains strong post-pandemic, supporting average daily rates (ADRs). Savills figures suggest that, based on data from the likes of Mandarin Oriental, Four Seasons and Belmond, luxury hotel stock in Europe could therefore surge by 49.3% between 2023 and 2028 in terms of room numbers – equating to as many as 4,000 new keys coming to market. In particular, Mandarin Oriental is planning on launching a further seven new hotels across Europe, building upon its pre-existing stock of 15, while Six Senses wants to triple its current European provision.
Savills research also eases another investor fear – that the ADR growth of the last two years is simply unsustainable. While some recent spikes may not be repeated – such as European year-to-date ADRs surging 25.9 per cent in December 2023 compared to 2019 figures – further growth is still baked into the firm’s forecasts. Air passenger numbers in Europe have not yet fully recovered and consumers continue to prioritise travel, with a slate of city markets, including Rome, Paris, Edinburgh, Athens and Budapest, maintaining excellent occupancy and room rates.