Risk averse hotel investors head to safe havens

Investors may be retaining faith in the European hotel sector but unsurprisingly caution has focused the major players on what they view as safer bets — the core Western European markets and key, gateway cities — at the start of 2023.

Global hotel investment in 2022 dipped slightly by 2% to $71.9 billion from $73.5 billion a year prior, according to January 24. 2023 research figures from advisor JLL, but while the Americas and APAC regions nudged upwards, EMEA transactions declined by 27%.

However, with new supply across the EMEA likely only to add around 2.5% of extra capacity to room availability, existing assets in gateway cities are likely to attract increased institutional and sovereign wealth interest, notably from cash-rich Middle Eastern and Latin American investors, JLL predicts.

Nuanced picture

Indeed, beyond the headline economic challenges, a more nuanced picture has emerged at country level, with several markets recording notable growth in transaction activity, says advisor Cushman & Wakefield. It points to investors demonstrating continued confidence in core UK markets, with several notable portfolio deals closing in 2022, such as Tristan’s acquisition of a majority stake of Point A Hotels and KSL’s investment in Pig Hotels UK. However, transaction activity slowed towards the end of the year, as the gap between buyer and seller expectations widened.

The rising popularity of resorts among investors, as well as the continued attractiveness of major gateway cities with a strong leisure appeal, encouraged hotel investment activity in both Spain and Italy, while the rising popularity of resorts was illustrated by Union Investment’s acquisition of the Marriott Bonvoy Autograph Collection boutique hotel on Lake Tegernsee, Austria.

The hotel is scheduled to open in March 2023 and the acquisition was made on behalf of a special fund from Union Investment and was brokered by Christie & Co.

“The resort hotel sector has experienced decades of growth. It has shown itself to be crisis-proof and proved its resilience again during the COVID-19 pandemic,” says Andreas Löcher, head of investment management hospitality at Union Investment. “New concepts and the ongoing professionalisation of operators are making the asset class increasingly attractive as an investment target for institutional investors.”

Union Investment’s global hotel portfolio currently comprises 90 properties with a total estimated value of €6.7 billion.

The Parisian hotel market and the popularity of resorts also supported transaction activity in France last year, particularly during H1 2022, while Germany remained active but saw a fall off of over one third in transaction volumes due primarily to a marked increase in debt costs.

In addition, the recent spike in prime office yields has begun to impact hotel pricing, holding off sellers from putting their assets on the market. Furthermore, the market for forward deals has slowed as developers are battling increased construction costs, supply chain disruptions and financing obstacles, according to Cushman & Wakefield.

Opportunistic acquisitions

Activity in 2023 is likely to continue focusing on those key markets – Europe’s big five made up around 80% of transaction volumes in 2022 – and a number of players are also circling looking for opportunistic and value opportunities.

Among those, ICG Real Estate has launched a new investment platform together with specialist hotel investor and asset manager Pro-invest Group, with a target to invest up to £500 million in institutional-quality hotel assets in London and other core-UK markets during a “period of dislocation and repricing” according to Krysto Nikolic, global head of ICG Real Estate.

Invesco Real Estate has also pledged its commitment to the hotel sector after adding three hotels to its European Hotel programme last year – Holiday Inn Express The HagueHotel Occidental 1929 Barcelona and Vinnci Selección Malagam – with a combined value of approximately €100 million.

“We fully expect to make additional investments with the aim of creating further value. Our intent is to create investments that have potential to deliver long-term compound growth above the market,” says Chris Brassington, senior director – fund management at Invesco. 

And Schroders Capital  acquired the recently built, 67-room The Standard Hotel in Ibiza. It was Schroders Capital’s fourth acquisition over the past 12 months in the European luxury-lifestyle hotel sector and Benjamin Chiche, investment director, real estate hotels, adds: “Schroders Capital currently manages 55 hotels across Europe with a significant exposure to the luxury lifestyle end of the market.” 

While few trophy assets became available last year, Fattal Hotel Group acquired The Dilly hotel in London. Re-branded to The Dilly from Le Méridien Piccadilly in 2020, Ed Fitch, partner in Cushman & Wakefield’s EMEA hospitality team, adds of the deal: “Hotels of this nature don’t come up that often and this sale demonstrates that, when it comes to getting a sizeable London hotel presence, seizing the opportunity is everything for investors.” Dublin is also finding its feet among investors, with European private equity giant Deutsche Finance International and property investor BCP Capital having signed an agreement with Ennismore for Ireland’s first Hoxton Hotel, a 129-room venue to be located on the site of the Central Hotel on Exchequer Street, opening in 2024, financed with a loan from a fund managed by an affiliate of Apollo Global Management.

Hoxton already operates across several locations in London, Europe and the US, with further openings planned for Brussels, Amsterdam, Edinburgh, Berlin and Vienna.

“We fell in love with the product and the location of Central Hotel," Deutsche Finance international managing director Paul Nearchou says. "It was a landmark statement building in one of the more vibrant locations within Dublin. And the plan there was to add value through refurbishment and extension as a boutique lifestyle hotel. We saw a gap between luxury and five star and the more affordable three to four star." 

Confidence in UK hit by economy

But while investors continue to seek value in the hotel sector, Deloitte’s European Hotel Industry Survey noted that hospitality leaders are concerned about rising inflation and labour shortages in 2023.

Confidence in the UK hotel market has fallen year-on-year by ten percentage points, though 66% remain positive about the long-term future and 48% agree that investment into the UK will materially grow over the next five years.

Edinburgh remains the most attractive UK city for hotel investment in 2023, up 12 percentage points year-on-year, while London slipped from second to third place in the top ten most attractive European cities for investment, falling 13 percentage points year-on-year. Amsterdam remains the most attractive European city for hotel investment in 2023, closely followed by Lisbon.

“Amsterdam stays top of the most attractive European cities for investment in 2023, despite a slight drop off in favourability, while Lisbon shot up the rankings to second as Portugal becomes a more enticing market for investors. Paris has also seen a strong rebound, following a sharp decline in 2021, as corporate and leisure travel was boosted by the ending of restrictions across Europe,” says Andreas Scriven, head of hospitality and leisure at Deloitte.

With a flight to quality and location, what is clear is that there is a growing disconnect between operational performance and the macro-economic environment and, as a result, CBRE predicts that it is likely investors will continue to adopt a “cautious approach to continue into H1 2023”, while hotel yields remain stable or soften slightly.