More than a third of real estate investors intend to buy more hotels across Europe, according to the latest research from real estate advisory firm Cushman & Wakefield. Despite the disruption to the travel and tourism sector from the pandemic, only 21% of investors intend to dial down their hotel acquisition activity and a mere 10% have put plans on hold.
The results were published as part of a survey of more than 50 senior representatives of major private equity firms, funds, REITs and other institutional investors active in the European hotel real estate market. The respondents’ firms invested, in aggregate, more than $30.6 billion (26 billion euros) from 2016-2020, acquiring 664 hotels with 127,642 rooms, and accounting for approximately a quarter of all hotel transaction volume in Europe.
“The successful COVID-19 vaccination rollout, paired with rising consumer confidence, has revived the demand to resume foreign holidays, therefore boosting investor sentiment,” said Bořivoj Vokřínek, head of hospitality research EMEA, Cushman & Wakefield. “The eagerness to acquire more hotel real estate heavily suggests that investors are looking beyond the immediate impact of COVID-19 on the sector to a point when travel limitations are lifted and the hospitality, leisure and tourism industries can fully reopen, recognizing that they will prove a strong hedge against inflation.”
Traveling for work or leisure?
Resorts are the most popular type of hotel among investors. Despite the complexity of their operation and seasonality, the majority of survey respondents (70%) consider them now to be more attractive than before the pandemic. This is likely to be driven by the expected faster recovery and long-term growth prospects of leisure travel.
Serviced apartments have also become a more attractive asset type for investors (according to 60% of respondents), undoubtedly due to their resilience during the pandemic, high-profitability and low-cost base and their flexibility to shift to the medium and long-term rental sectors.
On the other hand, hotels centered around hosting meetings, incentives, conferences and events (MICE hotels), and those located at airports, have unsurprisingly reduced in appeal for most investors, given the deeper impact of COVID-19; namely the changes to working patterns and the inability and nervousness to host large-scale events in the near-term.
Cushman & Wakefield predicts a return of business travel and events, as the lack of personal interaction created through distant working creates a need for structured meetings and in-person events in the future. Some investors recognize this, with 21% stating that their appetite for acquiring MICE hotels has not altered as a result of COVID-19.
Location, location, location
When asked about geographical locations, the U.K & Ireland is the top target region for investors, followed by Germany, the Iberian Peninsula, France and Benelux. At a city level, Barcelona achieved the highest interest ranking among hotel investors, followed by London, Paris, Amsterdam and Munich, all dominating the top five.
They are all core markets and viewed as a safe investment, paired with the strong domestic demand for these locations and the relative strength of the German and U.K. economies. Barcelona specifically is a major European market and benefits from strong leisure demand. There is also a moratorium on hotel development at present, all of which contribute to its top spot in the ranking.
Broken down by market type, leisure destinations (such as Barcelona) are expected to recover faster, with 85% of respondents anticipating performance to fully return to 2019 levels (RevPAR) by 2023.
Regional cities are expected to follow, with recovery anticipated between 2023 and 2024 by 77% of respondents. Major cities that are frequently more dependent on international travel are anticipated to recover at a slower pace. Nevertheless, 75% of surveyed investors expect recovery between 2023 and 2024, and 21% in 2025. This is a more optimistic view compared with the recovery after the global financial crisis in 2008-2009, when it took on average 5.6 years for hotel RevPAR in major European cities to recover to pre-crisis levels.
Moderate discount expectations
Hotel dispositions at reduced price levels due to the pandemic have been a frequently reported reason for real estate investors to raise capital for investment in hospitality real estate. However, the survey revealed that the majority of investors (59%) would consider opportunities with only a moderate discount of 15% or less, relative to 2019 levels. Just 12% of investors seek more distressed opportunities with at least a 25% price reduction.
“While there is still some gap between seller and buyer expectations, a significant amount of capital has been raised for hotel investment, and this will need to be deployed sooner rather than later to deliver returns,” said Rob Seabrook, head of hotel transactions for EMEA, Cushman & Wakefield. “On the owner side, while leisure travel is recovering, government support for the hospitality sector is fading away, with moratoriums being lifted. Therefore, inevitably banks and landlords will soon expect tenants to repay deferred loan payments and owed rent. This might put pressure on some owners, but the trends highlighted in this survey are reassuring and should narrow the gap between seller and buyer expectations, helping to kickstart transaction activity.”