Outlook Strong for Europe's Hotels but With Challenges Ahead for Some
By Magalí Castells Senior Association, HVS London | June 09, 2019
There is no doubt that people are still travelling, and more so than ever. Europe consistently maintains an impressive 50% share of global tourist movements, receiving 713 million visitors last year, a 6% increase on 2017.
As a result the European hotels market remains strong, both in terms of the buying and selling of hotels in the region as well as the demand for rooms. With some exceptions, last year was generally a profitable one for hotels, with most properties experiencing a solid rise in RevPAR performance - an aggregate increase in euro terms of around 5%.
But the detail paints a slightly different picture, with some markets in growth while others are suffering from influences such as the impact of supply increase or ongoing geopolitical tensions. Each year global hotel consultancy HVS looks at the trends in the European hotel market in two ways: firstly, by indexing the changes in hotel values across the region; and secondly by recording and analyzing transaction levels. Changes in hotel values are based on hotel performance, which reflect the success of a particular market in attracting both business and leisure guests. Transaction levels demonstrate investors' longer-term view of the market. Together these two reports give a unique picture of the health of the European hotel sector.
Top Performing European Markets
Out of the 33 hotel markets analysed by HVS in its recently published annual European Hotel Valuation Index (HVI) based on hotel operating data, only six markets across Europe saw a value drop. This was a strong result considering the geopolitical uncertainty and economic slowdown in some parts of Europe, suggesting that the influence of such issues on hotel investors, developers and lenders seems to be lessening.
In 2017 European hotel values registered an impressive 3.9% growth on the previous year, and this positive trend continued throughout 2018 with values growing by an additional 3%. Despite this last year's increases were somewhat more modest than the year before, with none of the bottom or top performing markets reaching double figures in terms of value change.
Looking at the region more closely, figures for 2018 indicate the consolidation and slowing down of value growth in hotels in Eastern and Southern Europe, with increases in hotel values of 5% and 4% respectively, compared with the 9% and 7% achieved in 2017.
The HVI also revealed the recovery and growth of some of Europe's more mature markets, such as Paris, Berlin and Vienna, which has contributed to a rise in hotel values in Western Europe after two muted years.
Lisbon Takes Top Slot
For the second consecutive year the Portuguese city of Lisbon was ranked by the HVI as the fastest growing hotel market in Europe, largely due to its popularity as a leisure destination and its increasing use as a business and conference hub. Lisbon has been on the rise since 2013 and was last year named as the World's Leading City Destination at the World Travel Awards.
Tourism in the city continued to grow last year too, albeit at a slower pace due to a decline in demand from the UK and European markets which impacted occupancy. However, hotel average rates rose by more than 5%, driven by visitors from the US and Brazil. Looking forward, future supply growth in the city is likely to prove a challenge for hoteliers, as more than 2,200 rooms are due to come on stream in the city over the next three years, which is likely to dampen RevPAR growth in Lisbon's hotels.
Moscow is another city whose hotels performed well last year, with hotel values rising strongly as a result. This was largely on the back of the FIFA World Cup 2018, which boosted values 8% in euro terms due to extra demand from players, workers and tourists in the few weeks before and after the tournament. RevPAR in Moscow for June and July rose more than 180% in euro terms.
However, with more than 2,900 rooms entering the market over the past two years and no major international events planned for 2019 the future performance of Moscow's hotels is likely to be more subdued.
St Petersburg also benefited from last year's World Cup, with a hike in values of 6% on the back of increased demand for rooms. In local currency the rise for both Russian markets was even more pronounced given the softening of the rouble against the euro.
Paris returned to the top five in terms of value growth last year, following slower years due to terrorist attacks. Visitors to Paris seem reassured by heightened security and up until November when the gilets jaunes movement forced the closure of several businesses and tourist attractions, there was a strong improvement in arrivals and overnight stays. On the back of this hotel values in Paris rose by 7% last year, but there's still room for further growth as RevPAR in the city remains 17% below their previous peak in 2014.
Hotel supply in Paris has been relatively stable over the past two years although the recovery of the sector has attracted more investors and developers to the city boosting its pipeline to over 3,200 rooms over the next three years, which may restrain future growth.
Hotel rooms in Paris still top the chart of the most expensive in Europe, along with those in London, Zurich, Geneva and Rome.
Other European cities seeing particularly strong growth in hotel values last year include Brussels, Berlin, Istanbul and Budapest. Berlin in particular continues to show an impressive rise in popularity, owing in part from its strong MICE market. Berlin's hotel pipeline saw some 1,300 new rooms come on stream last year, although this new supply has been compensated by a strong increase in arrivals. Supply increase is set to continue further in the city, but the long-term forecast for its hotel sector is positive, with the much anticipated opening of a new airport which will further boost Berlin's appeal to visitors.
Cities Showing the Strain
European cities where hotels performance has been under particular strain in 2018, causing hotel values to stagnate or even fall, include Barcelona, which has been affected by the instability generated by the Catalan independent movement. The city enjoyed eight consecutive years of RevPAR growth until 2017, mainly due to increased demand and popularity as well as a moratorium on new hotels, which limited new supply to the market. More recent civil unrest has had a direct impact on Barcelona's hotels, with average room rates dropping by around 4% in 2018.
Geneva, where hotel performance has been stable during the week from business demand, is suffering from an inability to capture the leisure segment at weekends and public holidays. Hotel supply has been stable in recent years with the market predominantly occupied by luxury and upscale properties. A recent influx of economy and midscale hotels has put pressure on average rates, which fell by 5% in 2018 in local currency.
While German markets have been known for their stability, Hamburg has suffered from substantial new supply coming on stream putting pressure on occupancy and rate levels and taking RevPAR down by 2.5% in 2018.
While occupancies in Manchester were impressive at 80% last year, average rates stagnated in 2018 as a result of substantial increases in hotel supply reducing room values by 2% in euro terms. Likewise Stockholm, where currency issues weakened the Swedish krona against the euro, also had a number of hotels entering the market, as did Warsaw, where existing stock faced an 8% increase in hotel rooms supply, reducing RevPAR by 4% in local currency.
Hotel Investment Stands Firm
With hotel values continuing to rise, the sector's popularity amongst investors as an alternative asset class remains strong, as hotels still offer interesting yields in a low rate environment. Regardless of an overall decrease in transaction volumes in 2018, compared to an exceptional year in 2017, Europe's hotel markets and its key leisure destinations continued to attract international investors as they seek to diversify their portfolios.
According to HVS's annual European Hotel Transactions report written by Nicolas Auer and Alexandre Rey, published earlier this year, total hotel transactions worth €18.6 billion were recorded in Europe in 2018, representing a decrease of 14% on 2017. This decrease was primarily driven by slightly fewer hotels transacting combined with smaller assets, as 700 assets with an average room count of 189 rooms exchanged hands in 2017, compared to 695 properties averaging 156 rooms in 2018.
RevPAR growth across most of Europe helped support 2018 transaction levels – with many markets such as London, Paris and Amsterdam all recording increases in RevPAR matched by growth in the price of the transacted assets. Germany, an operating lease-dominated market where performance increases have a more measured effect on values, recorded a relatively stable level of investment and remains a highly sought-after investment market. Despite the uncertainty around Brexit, interest from overseas investors in UK hotels has also remained very strong.
Single asset transactions across Europe saw a 23% decrease in 2018, while portfolio transactions, which included a handful of mega deals, decreased by 3%.
However, the average price per key grew by 8% in 2018, reflecting the higher product quality of the assets transacted as well as growth in values generally.
With clouds of uncertainty layered over Europe regarding the future relationship between the EU and the UK, combined with 2017 having recorded the second highest level of hotel transaction volume on record, most European markets saw their transaction volumes decrease somewhat during 2018.
The UK and Spain remained the most attractive markets to investors, with a year-on-year increase of 14% and a decrease of 22%, respectively. The UK posted total volume of €6.2 billion (£5.5 billion), with single asset deals worth €2.4 billion (£2.1 billion) and portfolio activity of €3.8 billion (£3.4 billion), demonstrating strong investor demand despite the political uncertainties.
London remained the leading European hotel transaction market, with a total volume of around €2.1 billion (£1.8 billion) in 2018 (-16% year-on-year), ahead of Dublin with €610 million (+215%). Amsterdam's €560 million ranked the Dutch city in third place (-58%).
The largest volume increase in absolute terms among European cities was recorded in Ireland's capital, Dublin, which received over €416 million more (+215%) in transaction volume than in 2017. Germany's five largest cities, Berlin, Munich, Hamburg, Cologne and Frankfurt jointly reached a transaction volume of more than €2.1 billion (+3%).
A reduction in Asian as well as European buyers was the main reason for the overall decrease in transaction volumes last year. High net-worth individuals in particular decreased their investments in hotels in 2018, spending only €116 million in 2018 (-79%) compared to €554 million during 2017.
Real Estate Investment Trusts' (REITs) appetite to invest in European hotels increased by 9%, resulting in a total buyer volume of some €1.7 billion in 2018 versus around €1.6 billion in 2017. Private equity firms provided the largest amount of capital by buyer type in 2018 (€3.9 billion);
Despite reducing their investments by 17% compared to the year before, institutional investors continued to be net buyers, heavily investing in Germany and reaching a total of €3.1 billion in new investments in 2018.
So What Does the Future Hold?
Demand for hotel accommodation remains vigorous across most markets, so while it might be true that economic growth for this cycle is past its peak, it would be too dramatic to expect hotel demand to suddenly fall away.
New hotel supply across Europe is currently at a modest 8%, apart from particularly active pockets such as London, Manchester and various German cities. This low level of increase should prop up fundamentals for Europe's hotels going forward, even in the event of diminishing demand volumes.
While a number of factors will impact the sector as we move forward, namely the UK's exit from Europe, a potential rise in interest rates, currency issues and not least geopolitical issues in various European countries, the future for profitability for Europe's hotels remains positive.
The hotel market always emerges with exciting innovations and disruptors ready to challenge the preconceived notions of the hospitality 'model'. The growing interest in alternative concepts such as hostels, serviced apartments, co-living, co-working, extended stay and student accommodation, keeps this sector fresh and vibrant.
Furthermore technological advances promise to shake up things up further too, whether it's voice-search capabilities, AI-based advertising or self-check in kiosks. The unveiling of Alibaba Group's FlyZoo – the hotel of the future – relying on robots to operate it just shows how inventive hoteliers bring the future just that little bit closer.
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