Three key trends from our Q3 Hospitality Investor survey

The turbulence in the global economy has dented the confidence of hospitality real estate investors, according to the latest quarterly edition of the Hospitality Investor Sentiment Index.

The overall sentiment score has fallen to 44.3 for Q3 from 51.5 in Q2 as the post-pandemic optimism surrounding the industry has ground to a halt.

You can download the full report here but below we’ve picked out three key findings worth focusing on.

Demand divergence

One of the standout findings of this quarter’s report was the dampening of investor expectations regarding consumer demand.

The confidence of growth in leisure accommodation demand in the next 12 months has dropped by 17.5 pts to 45.0, a sizeable decrease.

And for demand from the corporate sector, confidence in growth in this segment has fallen by 28.3 pts, to an index score of just 40.5.

This move towards pessimism contrasts markedly with what we are hearing from the big hotel brands other travel stakeholders including airlines. By and large forward bookings are holding up and profitability is getting back to pre-pandemic levels. Well have to wait and see who is right.

“Whilst hotels have so far proved to be a relatively effective inflationary hedge, many investors, in Q3, expressed a much gloomier view of both leisure and corporate demand for the 12-months ahead – tightening consumer conditions are undoubtedly driving this viewpoint, and stalling growth on the top-line will only compound the negative impact of cost inflation on hotel profitability,” said Joe Stather, market lead for Questex's Operational Real Estate portfolio.

Sweating the asset

With central banks across the world raising interest rates, borrowing is becoming more expensive for perspective buyers and while this isn’t deterring everyone it does mean that there has been a slight shift in focus.

According to our survey, the appetite to start a material asset management strategy has increased to an index score of 62.5 from 59.0 in Q2 2022.

Limited development options as well as rising cost mean that the best (and potentially only) way to succeed in the current market is to sweat the asset.

Almost 90% of our panel cited that their requirement for a new brand/operating partner in Q3 2022 remained the same or has increased, giving some indication of where investors feel they can make a difference, especially given the backdrop of evolving consumer needs and expectations.

“For now, it appears that our Investor Council members intend to increase their focus on asset management, to further optimise what they currently own and offset the growing pressure on income – the implementation of tech remains high on the agenda, but there has been a notable increase in those seeking a new brand and/or operating partner,” Stather said.

Pricing power

We’ve heard whispers in the market that buyers are either dragging their feet and sometimes pulling out of transactions entirely and given the macroeconomic environment it isn’t really something of a surprise.

According to our investor audience, the competition to acquire hospitality investment opportunities has softened significantly since last quarter, falling by 28.6 pts to an index score of just 38.1.

Investors are still sitting on vast amounts of capital and still view the medium and long-term fundamentals of the hospitality sector positively, so it might be a case of waiting for market conditions to settle before deploying funds again.

Stather added: “Most investors also expect a decline in the competition to acquire stock in the coming months, with many happy to spectate until economic and political conditions stabilise. However, the amount of capital that investors have to deploy in the sector is significant relative to historic levels and remains unchanged; suggesting that any slowdown in deal activity will be temporary and, once ‘normality’ resumes, investor demand will swiftly return, such is the belief in the relatively strong, long-term, underlying demand fundamentals for travel and accommodation.”