Although it’s still a very long way from ‘business as usual’, the results of the latest Hospitality Investor Sentiment Index would suggest that the doom and gloom which dominated the Q4 2022 survey is now firmly in the past and there are reasons to be positive about 2023.
The overall survey score increased by 3.9 pts to 48.2 in Q1 2023 from 44.3 in Q4 2022. Although this remains in negative territory (i.e. sub 50, indicating a decrease in confidence), the responses from the Investor Council – who are responsible for managing over €321bn of real estate assets total - suggest that although the outlook remains challenging, it may not be as tough as previously anticipated.
Joe Stather, market lead for Questex's operational real estate portfolio said: “An overall Q1 index score of 48.2 is indicative of the market challenges that remain for investors, not limited to an increased cost of capital, operational cost inflation, a shortage of investible stock, and compounded by the expectation that leisure accommodation demand growth is set to run out of steam.
“That said, Q1 sentiment for the coming 12-months has rebounded strongly based on the doomsday scenario that many investors predicted back in Q4 ’22.”
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Corporate comeback
The Q1 2023 survey suggests there has been an upturn in confidence in the operational fundamentals of the hospitality sector, led by a significant shift in the sentiment from investors on the recovery of demand from the corporate segment.
The increased confidence in the corporate segment was reflected in an +18.6pts uplift in the index score to 59.1 in Q1 2023 against 40.5 in Q4 2022. According to the Investor Council, the corporate segment is more likely to see growth in the next 12 months than the leisure sector, with leisure demand expected to flatten and stabilise over the course of the year.
This has contributed to a bounce back in confidence in total hotel revenue growth in the next 12 months, with the index score increasing by a robust 8.4pts to 48.9 in Q1 2023.
Stather noted: “The reasons for greater optimism include a more predictable macroeconomic outlook, an expectation of stronger corporate accommodation demand, and a tentative reopening of the debt market (notwithstanding the cost of leverage).”
However, as operational cost inflation continues to run high, opinions on profits remain muted, at an index score of just 23.9, albeit a 2.4pts increase from last quarter.
When assessing demand from the leisure segment, the results of Deloitte’s 2023 Travel Industry Outlook broadly reflected the opinion of the Investor Council.
Deloitte noted in its report: “Leisure travel demand started to soften in September 2022 following high demand in the months prior. That could be either a blip or a lasting downshift by belt-tightening consumers. Consumer travel demand in the year ahead remains uncertain and the economy will play a major factor.”
Keep your eyes on the prize
In line with the recovery in confidence in the corporate market in Q1 2023, the focus of the Investor Council has shifted to urban areas, hitting an index score of 61.4.
This is in contrast to the focus on resort markets, which, according to the Council, has fallen below 50 for the first timing since the survey began.
However, whilst a shift in focus to urban markets could potentially offer more upside in the long run and the current intention to invest from the Council is strong, the reality of getting a deal done remains far from easy.
According to the Council, opportunities are still few and far between, with the index score for the availability of investable hospitality stock falling to just 50.0 in Q1 2023.
Meanwhile, the competition to acquire hospitality investment opportunities increased by 8.5pts to 46.6 during the same period.
This doesn’t seem to have deterred the Investor Council, who are a hardy bunch, with 96% stating that their focus on hospitality investment (relative to other asset classes/property sectors) will remain the same or increase in Q1 2023.
As opportunities for hotel investment remain hard to come by, this has undoubtedly spurred on the Council to explore alternative hospitality accommodation types (incl. extended stay, hostels, co-living) with the index score jumping by 5.4 pts to 62.5 in Q1 2023.
There doesn’t appear to be any shortage of resources to invest in the sector, with funds continuing to have a significant amount of allocated capital to deploy, with this measure increasing to its highest level for a year, by 8.8pts, to an index score of 65.9 in Q1 2023.
Albeit, life just got a little bit more difficult for investors relying on any sort of debt, with recent rises in interest rates in the UK and US; and potentially more yet to come.
“There was hope that buyer and seller expectations would converge in early ’23 resulting in greater deal flow, but with a sense that inflation and interest rates may have peaked, owners and their lenders may hold-out for a return to cheaper money and a possible recovery in asset values in the months ahead,” Stather said.
The macroeconomic picture has undoubtedly improved for now, and certainly given us a more chipper set of responses from the Investor Council. And the news that a widespread global recession is now likely to be avoided will be well-received by the investment community.