The European real estate market has experienced turbulence due to rising inflation and shifting investor sentiment. At a subsector level, however, the continent’s hotel sector has emerged as a promising asset class with a strong future. As travel restrictions have largely eased and consumer confidence proves resilient, the hotel industry is currently undergoing a resurgence – and astute real estate players are well poised to reap the rewards.
The opportunities presented by the hotel sector’s continued recovery are enormous. As the industry has continued to grow, so too has demand for hotel properties – resulting in higher asset values. This creates opportunities for real estate investors and operators alike to profit from capital appreciation or to generate higher returns on their investments.
As the industry rebounds, hotels can expect higher occupancy rates and increased revenue per available room (RevPAR). This improvement in operational performance can translate into increased rental income for real estate investors and operators who own hotel properties or have exposure to hotel assets through real estate investment trusts (REITs).
A growing and recovering sector may also provide the industry with various growth opportunities, such as acquiring underperforming or distressed hotel assets at discounted prices. Players can then reposition or upgrade these assets to capitalise on the sector’s growth. Investing in European hotels can also help real estate investors diversify their portfolios by adding exposure to a different type of asset class. This diversification can work to reduce overall portfolio risk and potentially increase returns, especially if the industry continues to outperform other segments of the real estate market.
Last year, the European hotel industry posted stronger-than-expected operational performance. According to CBRE’s European hotel figures for 2022, total RevPAR was up 71% for Q3 2022 compared with Q3 2021, and occupancy rates improved, almost recovering to pre-pandemic levels.
At the beginning of 2023, JLL forecast a surge in travel demand due to more favourable exchange rates and the return of North American and Chinese visitors. This, coupled with the expected resilience of intra-continental travel in the face of the cost-of-living crisis, was predicted to prove successful in fuelling growth in occupancy rates in desirable locations.
It’s heartening to see that JLL’s positive predictions have materialised – Europe has already experienced healthy hotel investment activity with €4.1bn transacted in Q1 2023, according to Cushman & Wakefield, representing a 18% increase on Q1 2022. Several major deals drove this strong growth, including the sale of Westin in Paris, Mandarin Oriental in Bodrum and Le Richemond in Geneva. In terms of the key urban markets, London remained a standout on the list for investors, closely followed by Paris and Madrid – with these cities alone accounting for 52% of transactions on the continent.
The healthy investment sentiment towards hotels has also been supported by a strong recovery performance. RevPAR for the whole of Q1 2023 surpassed 2019 levels by nearly 13%, driven by robust increases of hotel room prices across Europe – with the average daily rate (ADR) rising 19% above pre-Covid levels in major markets such as Paris, Istanbul, Croatia and Ireland.
These data points undoubtedly speak to the clear resilience of the European hotel market, and industry experts are confident this will continue into Q4 and beyond – but with volatility still lingering in global markets, how best can shareholders future-proof their portfolios to weather the storm? The answer is simple: by investing in assets with stellar environmental, social and governance (ESG) credentials.
The value of improving the environmentally friendly qualities of a property has long been regarded as a necessity. The industry is aware of the need to responsibly develop for people and planet; but recent research has shed light on what these additions also mean for financial returns, too. According to the Sustainable Hospitality Alliance, REITs investing in green buildings have higher operational and value benefits. Additionally, CBRE’s latest Sustainability and ESG Adoption research has found that energy-efficient assets are more resilient to the impacts of energy rate increases. Combined, these findings demonstrate that despite the ongoing economic uncertainty, nimble and environmentally conscious investors can thrive.
The UK market has unique traits that, if capitalised upon, can make it an especially favourable environment for trading activity. Many prime hotel assets are strategically positioned in popular cities, and there has already been a significant push towards decarbonising buildings and implementing energy-efficient features. JLL reports a ‘flight to quality’, with investors seeking reliable returns. Upgrading buildings to be eco-friendly at scale nationwide can add greater value to British hotel real estate, making acquisitions more attractive for financiers and positioning shareholders to reap the rewards.
It’s clear that demand for travel and hotels have persisted – with tourism in the UK, for example, booming from the return of Chinese travellers, and international support for milestone moments such as the King’s coronation.
Despite the ongoing economic uncertainty and unpredictable weather conditions that have been observed across the continent – from Italy’s heatwave to the UK’s wet summer that may have subdued domestic demand – the hotel sector is well positioned to continue on an upward trajectory.
To ensure sustained growth, investments in sustainable measures are paramount. With the right approach, the hotel sector can play an increasingly important role in driving the European economy and providing real estate investors with valuable opportunities.
Dominique Moerenhout is chief executive of EPRA