What is the hotel investment outlook for the year ahead in Europe? Where are the opportunities? The new bi-annual “BHN Hotel Investment Survey” completed in January, coupled with input from industry experts, suggest that European hotel investment activity will continue to grow despite the wobbly economic recovery. Similar to past economic recoveries, Europe as a whole is trailing the recovery of the US, whilst the UK seems to follow the US more closely. As the UK hotel and real estate market has shown signs of a quicker recovery from the recession than the rest of Europe, money has been flowing into hotel deals in London. With acquisition prices high and on the rise in London, and the market being crowded with investors, other locations in Europe appear to be finally poised to benefit from increased investment activity.
European Economic Trends
Compared to 2014, approximately half of the survey respondents believe that Europe’s economy will be Flat in 2015. Although slightly more survey respondents are positive then they are negative, the largest share believes that the year ahead will be similar to the current economic climate. This compares to the optimistic results for the US where 81% believe that the economy will trend upward in 2015.
Echoing this outlook, past Hotel Investment Conference Europe (Hot.E) keynote speaker, David Smith, Economics Editor, The Sunday Times, London sheds some light on the outlook and reason for uncertainty. “The outlook for the euro-zone is clouded by renewed political uncertainty and very weak growth at the single currency’s ‘core’, notably France and Italy. But prospects in some of the peripheral economies have brightened, and the fall in oil prices will provide a boost for European consumers. In Britain there is some evidence that the pace of growth has softened, but the economy should still outperform all the other big European nations. The main risk is political, and the danger of an inconclusive outcome in May’s general election, which could add to the uncertainty.”
When considering economic cycles as well as opportunity differences across Europe, Rod Taylor, Managing Director, Taylor Global Advisors Limited shared, “The US is ahead of the UK, which is itself 12 months or even more in front of mainland Europe. As such US funds and individual investors may quite reasonably be thinking that their economic and thereby investment cycle will bottom out earlier in the US than in the UK and Europe. Therefore, Europe might offer better opportunities to acquire, but also successfully dispose of hotels bought within the usual investment horizon of 5 years.”
Hotel Investment Cycle and Opportunities
What stage of the hotel investment cycle are we currently in? Focusing on Europe, 56% of survey respondents believe that Europe is either at the bottom of the trough or in the early stage of an upturn. Taylor added, “I would agree with this, although I suggest the upturn is much stronger in the UK, whereas, in other European areas, even a late downturn might be applicable.” When comparing the outlook for Europe to the US survey results, 82% of respondents believe that the US is either in the early or late stage of an upturn.
In further elaborating on opportunities outside of London/UK, Desmond Taljaard, Managing Director – Hotels, London & Regional says, “The results of the survey are not a surprise, although in comparing the US to Europe, I would say that the UK is much closer in the cycle to the US than mainland Europe. The hotel investment environment in the UK has been very competitive for two years now, and therefore, whilst remaining very much fans of UK hotels, London & Regional more recently has been closing acquisitions in markets outside of the UK, including Barbados, Austria, and Spain.”
Andreas Scriven, International Managing Director & Head of Consultancy, Christie + Co says, “In a little over a year, we have seen a dramatic change in sentiment. As the US investors poured money into Europe last year, they sought Christie + Co’s expertise to help them understand the differences between the markets in the UK, France, Spain, and beyond. Globalisation might have changed the sources of investment, but it hasn’t changed the complexities of entering different jurisdictions.”
Investment Activity – A Better Year Ahead
When compared to 2014 in Europe, 68% of survey respondents believe that acquisitions will be the investment activity seeing the largest percentage growth in capital provided in 2015. A minority share of 6% believe the investment activity with the largest growth of capital will be development. By way of comparison, the investment outlook in the US is considerably more balanced with 27% expecting development activity to grow the most and 36% expecting acquisitions to see the largest growth in capital.
What is the deal outlook for 2015? Charles Human, Managing Director, HVS Hodges Ward Elliott commented, “We estimate that there is more equity capital chasing European hotel deals than at any time in the past, even at the peak of the last cycle. This, combined with the fact that there is more product for sale – much of it coming from profit-taking by those who bought early in the upswing – means that we expect 2015 volume to eclipse even the high levels recorded in 2014. The global PE funds still dominate the market, but increased Asian investment into Europe looks likely.”
Further emphasizing a strong 2015 for deal makers, Josh Wyatt, Partner, Hospitality and Leisure, Patron Capital says, “Rising consumer confidence, a continued low interest rate environment, and increasing liquidity within both debt and equity markets should make for a very strong 2015 for hotel deal makers. Most hotel segments should perform and transact strongly with a particular emphasis on budget and new/innovative products.”
Shedding a similar light on outlook while expressing an increased focus on southern Europe, Dominic Murray, Director and Head of Cross Border Transactions EMEA, CBRE Hotels contributed, “The European hotel investment market remains on course for another strong year repeating, and likely exceeding, 2014 total transaction volumes. There remains an insatiable appetite from capital sources across the globe to invest in the hotel sector in Europe and with the number of significant deals already slated for 2015 there is a continuing supply of product available. We believe there will be an increasing focus on southern Europe, particularly Spain, Portugal, and Italy, as the banks in these markets come under pressure to clean up their balance sheets. Underlying economic and trading fundamentals in core European markets are generally positive, and the advent of quantitative easing by the ECB will further enhance this optimism. As a result we expect regional transactions in both the UK and Continental Europe to top the agenda in 2015.”
Further elaborating on the capital markets as well as emphasizing the complexity of Europe, Theodor Kubak, External Advisor, Hotel Investment & Asset Management, Union Investment Real Estate GmbH contributed, “The present capital markets coupled with the strive of the brands to position themselves through predominately franchise vehicles are favorable for new players who have either the capacity to deploy their own funds or bring along the know how to take advantage of the various support platforms provided by the brands to Third Party Operators to establish a presence in Europe. The main challenge will remain the scarcity of available products which requires an in depth understanding of the market and its opportunities. It is also true that this window of opportunity is now as, for the last few years, a couple of European players have successfully positioned themselves and there is a drive by new investors, brands and entities from the USA as well as from Asia which aim to penetrate the market.”
“Hot” Spot Cities
Lastly, in terms of ‘hot spot’ cities in Europe for investment, the survey identified the top five cities as London, Paris, Barcelona, Madrid, and Amsterdam.