Investor Sentiment Index Q1 2024: Investors get back in the game

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Oracle Hospitality

Although the geopolitical landscape remains fragile and we are entering into a potentially disruptive election year in both the UK and US, the recent easing of inflation pressure has provided our investor council with a renewed sense of positivity, according to the results of the latest Hospitality Investor Sentiment Index.

Albeit not a resounding vote of confidence, the shift in sentiment was sufficient to nudge the index score into positive territory in Q1 2024 to 52.9, which was the highest overall score recorded in the survey since it was relaunched almost two years ago.

And with a significant uplift in the index scores for the competition to acquire hospitality investment opportunities (+10.2pts) as well as the price of hospitality investments (+13.6pts) this quarter, it is clear that a number of hospitality investors who have waited patiently on the sidelines are now getting back in the game.

“The investment space is undoubtedly set to become more crowded as lending conditions become slightly more palatable and no further interest rates increases are likely. However, investment opportunities for those reliant on debt are likely to remain marginal and it will continue to be the well capitalised investors who will be best positioned to take advantage of the improvement in market conditions.” said Joe Stather, market lead for Questex's operational real estate portfolio.

“So far, in 2024, the positive sentiment of our Investor Council is already playing out in the UK, with over £1 billion already transacted in the Starwood and Travelodge deals alone. This is equivalent to almost 50 per cent of the deals done in the UK in 2023.”

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Appetite for borrowing grows but risk remains

As the fiscal action taken by administrations globally to combat soaring inflation has had the desired effect, the appetite of our investor council to use leverage has increased, to an index score of 47.1 this quarter, which is 17.1 pts ahead of the recent low at 30.0 in Q2 2023.

Additionally, the index score for the price of debt (margin) fell by 16.3 pts in Q1 2024, with this measure now sitting at a score of 61.4, some 31.8 pts below the score this time last year at 93.2 reflecting the easing borrowing conditions.  

Despite this positive sentiment, for 34% of our investor audience, who have capital originating in the US, traditional hotel debt remains harder to come by as institutions, such as banks, continue to be cagey. For the country’s CRE capital markets, they are getting more traction with smaller and more localised debt providers, albeit the market still sits heavily in favour of the lenders.

The reliance on non-traditional lenders, as well as the challenges which may persist when it comes to raising capital, for equity as well as debt, has meant the investor council anticipates an increase in the hurdle rate (total costs of capital), as reflected in the index score rising by 2.0 points to 72.9.

Furthermore, the index score for the appetite for risk has increased to 60.0 in Q1 2024. The appetite for risk is the only measure in the Hospitality Investor Sentiment Survey which has continuously increased since the relaunch in Q3 2022. In spite of the apparent improvement in macro-economic conditions, it’s clear that a proportion of our Investor Council remain very wary of sticking their neck on the line.  

Hotel values shored up by punchy performance

The increase in the overall index score in Q1 2024 was led by a much brighter outlook on a number of key hotel performance metrics, which included a particularly punchy view on the overall growth in long term accommodation demand which increased by 14.7 pts to an index score of 80.0.

Key hotel markets globally have performed well in 2023, which has undoubtedly informed the positive responses of our investor council on performance in 2024, including +25 per cent RevPAR growth in key European cities such as Amsterdam, Brussels, Milan, Prague and Rome against 2022 and pre-pandemic profit now being (finally) recorded in numerous markets, including London and Edinburgh.

The confidence of our Investor Council in revenue growth over the next 12 months increased by 8.4pts in Q1 2024 to an index score of 51.4.

The index score for the growth in profit over the next 12 months also increased, by 9.4 pts to 40.0 in Q1 2024. Although this score remains well below the magic 50.0, it’s nearly double the score from the same period last year, at just 23.9, indicating that market confidence is heading in the right direction.

“For operators, the target in 2024 will be seizing the opportunity for real revenue growth. For sellers, this should mean hotel values remain strong. For buyers, unless they want to continue to wait on the sidelines, they will need to get clued-up and comfortable with the post-pandemic dynamics of hotel operations,” added Stather.