European Hotel Investment – Continued Recovery & Diverse Opportunities
The bi-annual “BHN Hotel Investment Survey” completed in January, coupled with input from industry experts, suggests that European hotel investment activity will continue to grow in 2016. Similar to past economic cycles, Europe as a whole has been trailing the recovery of the United States. While some key European hotel markets are well advanced in their recovery from the Great Recession, for others the timing appears to be ripe for investment.
A slight majority (51%) of the survey respondents believe that Europe’s economy will be trending upward in 2016, with only 9% believing the economy would trend downward. This is very similar to the outlook for the United States where 56% believe that the economy will be trending upward in 2016, and only 7% believe it will be heading south. For the past several years, the outlook in the United States has been more bullish then in Europe.
While it may be cliché to state that the economic trends in Europe always follow the trends in the United States, it is important to remember that you can’t paint Europe with one brush, as it’s a large and diverse market. Major hotel markets like London and Paris probably more closely resemble a faster recovering market behavior like found in New York City, while markets in Central and Southern Europe have recovered at a slower pace.
According to Rod Taylor, co-managing director, Taylor Global Advisors, “Just as Alaska is very different from Florida, the countries in Northern, Eastern, Western, and Southern Europe are just as diverse and each offers opportunities and challenges for the hotel investor. The majority should expect positive economic movement in 2016, but there will be winners and losers. No one should anticipate a level, economic playing field.”
Hotel Investment Cycle
The question was asked, what stage of the hotel investment cycle are we currently in? Focusing on Europe as a whole, 40% of survey respondents believe that Europe is in the early stage of an upturn, while another 28% believe it is in the late upturn stage. As Rod Taylor suggested, this answer would likely be different depending on the market of investor focus.
Cody Bradshaw, head of European hotels, Starwood Capital Group touches on Europe’s diverse nature by saying, “Even against the backdrop of ongoing economic and geopolitical uncertainties, the fragmented nature of the European hotel landscape, coupled with its world-class and high-barriers-to-entry destinations, continues to offer astute investors opportunities to achieve significant value creation through enhancements to operating performance and capital appreciation of the underlying real estate.”
It’s as if two of Europe’s key hotel investors were in sync when Carmen Hui, senior vice president, acquisitions, Europe, Host Hotels and Resorts, reacted similarly to Bradshaw by saying, “The beauty of Europe is that the region offers multiple distinct macro-environments, which allow investors to play in different market cycles at any given time. Certain markets – London, Paris, and Munich – may be further advanced in their investment cycles, whilst others in Southern Europe are just ripe for investing.”
Further touching on Europe’s diversity and opportunities, Andreas Scriven, international MD and managing director consultancy of Christie & Co, said, “The pan-European context for those involved in the hotel sector markedly improved in 2015, but risk profiles remain variable as one would expect for a continent with such diverse cultures, business environments, economic climates and legal systems. This variability has presented opportunities for those investors looking for opportunistic returns, while at the same time offering safe haven status in other jurisdictions.”
The Year Ahead
The survey asked about the confidence level for increased hotel investment opportunities in 2016 compared to 2015. With respect to Europe, one third of respondents were very confident that the volume of investment activities would increase in 2016. This very confident percentage was approximately double the outlook expected for the United States. In fairness, the US market has been very hot, so some cooling off could be expected. A full 80% of survey respondents were somewhat or very confident that investment volumes would increase in Europe. A good sign, indeed.
Charles Human, Managing Director, HVS Hodges Ward Elliott commented, “Despite an unsettled start to the year across global capital markets, we expect to see a high level of transaction activity in 2016. Some of this will be early profit-taking by investors who bought as markets started their recovery. With buyers still significantly outnumbering sellers, and a generally bright trading outlook throughout Europe, we expect values to continue to climb across the board this year.”
Turning to the surplus of buyers, many people would like to know the answer to the question posed by Marco Rentsch, manager – lodging and tourism clients group, PwC, when he said, “How much of the European trophy hotel assets will be bought by Asian, specifically Chinese investors, given the pressures they have at home?” Emphasizing the high demand and opportunity, Rentsch added, “The large appetite of Asian Investors, specifically Chinese, represents a great opportunity for some of the private equity and hedge funds to exit their positions.”