In our January 2013 survey of the European hotel investment community, it ‘appears’ that the long winter of frozen investment activity may be starting to thaw, and perhaps there are some better days ahead for one of the largest and most important hotel markets in the world.
We posed a question about how confident the respondents were about seeing an increase in deal activity by the time Hotel Investment Conference Europe (Hot.E) begins in late September. A robust 80% were either very confident or somewhat confident that deal activity would increase by September of 2013. This is the first time we have asked this question in Europe, so we aren’t able to benchmark this from year to year. If this sentiment remains for the rest of the year – it will be a welcomed relief for the beleaguered hotel investment community in Europe.
The challenge for investors in Europe is that the traditional banking community’s interest in doing hotel deals is still lagging behind the interest of equity investors. When we posed the question of the same respondents about their belief that they would see an increase in bank lending activity by September 2013 in Europe – almost half (49%) said NO. The tough regulatory climate, coupled with recent memories of busted deals, has likely made banks more cautious and conservative. The relative lack of bank lending, however, has created an opportunity for non-traditional lenders to enter the market to fill the void, as can be seen with the launches of debt funds by Starwood, Blackstone, M&G and others. It is not clear when traditional banks will become more active, but the activities of these non-traditional lenders may provide the relief valve needed to allow for properties to trade again, and hotels to get built.
Hotel RevPAR Outlook
We asked about the outlook for RevPAR growth in 2013 in Europe. The same question was posed last year, and as a result we can see that the outlook is improving. 68% expected RevPAR growth in Europe in 2013, a healthy improvement from last year when only 54% believed this to the case. ‘Flat’ and ‘negative’ RevPAR growth is not good for hotel owners, as their operating costs continue to increase. In Europe, a large number of respondents, 29%, still expect a flat year in 2013. So while the direction of change is positive, there are still challenges in many markets within Europe, especially outside of the major gateway and capital city markets.
Similar RevPAR surveys were conducted in Asia and the US at the same time this year. These surveys show significant cooling in India and China and that the ‘negative’ growth expectations reported in these two countries are actually greater than what is expected in Europe. When we combined the “flat and negative” scores in all three locations (Europe, China, and India) they all land at 30% or more. Wow, who would have thought that we would see China and India joining Europe with this dubious distinction? The one difference of course is that Europe is improving and China and India are slipping.
Hot Spots for Hotel Investment
Speaking of poster children – the award for good times ahead goes to the US. 98% of US survey respondents indicated RevPAR growth expectations in the country in 2013. A full 56% expect growth to be greater than 5%. The near zero growth in new supply the past few years, coupled with the slow but steadily improving economy have pushed expectations to be relatively optimistic in the US for the coming year.
Now back to the Europe survey. We asked the question about where you see your new business coming from in 2013. The top five destinations were UK/Ireland, followed by Turkey, Russia, Germany and the Iberian Peninsula. The same top four were reported last year, with the Iberian Peninsula replacing France in the top five this year – no doubt due to some of the problem solving underway in Spain and Portugal.
Lastly, in terms of ‘hot spot’ cities for investment, the same results were reported in 2013 as in 2012 – London, Istanbul and Paris.
At last some ‘stability’!