Investor Sentiment Index Q3 2023: Still positive but outlook remains mixed

Challenging macro-economic conditions continue to hamper the best efforts of our Investor Council to deploy capital into the sector, according to the results of the latest Hospitality Investor Sentiment Index.

The numerous economic false starts, bad news around banks and general volatility in the market are all contributing to an undercurrent of frustration within the investor community. This is not only due to the constantly shifting sands meaning that opportunities which are pencilling one day are not making sense the next, but the ongoing acceptance that the investment landscape has materially altered and the work to get the deal done is likely to be harder and ultimately the returns are likely to be lower.

Overall, the index score for Q3 2023 was recorded at 51.2, which is a 0.7 pts drop against the prior period, though still positive. (A score of +50 indicates an ongoing increase in confidence.)

“While some of the individual responses have fluctuated dramatically it is important to point out that overall sentiment has remained in positive territory, and indeed is largely unchanged based on the previous quarter,” said Joe Stather, market lead for Questex's operational real estate portfolio.

“There are undoubtedly mixed views about what lies ahead, stemming from the conflicting signals of tightening consumer conditions and positive revenue performance alongside high operational and financing costs.

You can download the full report here.

Losing focus on hospitality

On a positive note, the Investor Council are seeing an increase in the availability of stock, a reduction in pricing and an easing of the competition to acquire hospitality investment opportunities.

However, a 5.0 pts decline was recorded in the index score for the focus on hospitality investments (relative to other asset classes/property sectors) to 60.7, which is the lowest it has been since Q3 2022. 

In addition, the Investor Council are expecting a drop in their investment focus on full-service hotels (-7.1 pts to 50.0), limited-service hotels (-5.7 pts to 50.0) in Q3 2023, as well as an 8.9 pts drop in the focus on adjacent spaces, to an index score of 55.4 from 64.3 in Q2 2023. 

Although the ‘cooling’ of our investor council on hospitality opportunities could be viewed as a negative outlook for the market, it is more likely to be a sign of frustration as independent research continues to back the hospitality sector as the best performer with hotels as the only real estate asset class to show positive quarterly returns from Q2 2022 to Q1 2023.

And there are still deals being done, although overall volumes might be down.

Demand swing hits profit expectations

Further to the 21.0pts bounce in sentiment to 61.4 in Q2 2023, the expectation of the Investor Council this quarter is that corporate demand over the next 12 months will now decline. The 13.2pts drop this quarter to just 48.2, suggests that the investor sentiment on the future of corporate demand has turned negative.

In line with this swing, albeit not to the same extent, the investor sentiment on the strength of leisure demand over the next 12 months, which increased by 13.6 pts in the six months to Q2 2023, to an index score of 58.6, has now fallen back, by 3.2pts to 55.4.

“As it has done for much of the post-Covid period, leisure continues to lead the way but the uncertainty around the business environment is negatively impacting sentiment corporate demand growth," Stather said.

“The investor sentiment regarding hospitality returns remains overwhelmingly positive but it has been affected by factors including more expensive debt. For some investors, their focus on the hospitality sector has reduced, with interest rate rises impacting capital allocations, for example.”

This had a knock-on effect on the sentiment from our Investor Council on hotel profit growth in the next 12 months, with this measure also making a significant swing from +17.6pts in Q2 2023 to -7.5pts in Q3 2023, back down to an index score of 33.9.

The anticipated decline in profit is in spite of a continued expectation of revenue growth, which increased by 5.4pts to an index score of 62.5 this quarter.