What hotel investors can learn from the second-home market

Mediterranean Resort & Hotel Real Estate Forum

Daniel von Barloewen manages the International Development Consultancy department at Savills, helping developers add value and “de-risk” their projects. He specializes in development management, development investment analysis, development consultancy and marketing consultancy.

At the Mediterranean Resort & Hotel Real Estate Forum, Oct. 16-18, at Portaventura, in Tarragona, Spain, von Barloewen will present a session focusing on the state of hospitality and investment in Southern Europe and the Mediterranean, focusing not just on hotels and resorts, but on the purchase of second homes.

Top Destinations, Top Concerns

“On the tourism side, things keep looking more and more positive,” von Barloewen said. But positive doesn’t mean perfect. “The biggest threat to the industry, obviously, is the impact of the terrorist attacks,” he said, citing the downturn hotels in Paris faced after last year’s assaults. “Barcelona, which has done extremely well, I suspect will also take a bit of a hit as a result [of the recent attacks]. But aside from that tourism is really doing very well.”

Safety concerns have been shifting tourism patterns for some time now, and while Spain has famously benefitted in recent years, von Barloewen has also seen year-on-year increased performance in Cyprus, which benefits from a long tourist season as well as from a reputation for safety in the region.

Cyprus’ security has also benefitted its residential market, with private investors from the Middle East and North Africa buying secondary homes for their vacations. Similarly, von Barloewen said, transaction volumes for new-build developments in Cyprus increased from 2015 to 2016 by 42 percent.

Lessons Learned from Second Homes

The popularity of second homes can be a strong indication of where European residents want to travel for leisure—and where hotel investors and developers can find growing guest demand.

“It's very much recovering in pockets and it is driven by city locations,” von Barloewen said of second-home development. In Southern Italy, these pockets of recovery include Milan, Florence and Venice, while in Spain second homes are popular in Barcelona, Madrid, the Balearics and Marbella. “In Portugal, it's Lisbon, Porto and certain locations in the Algarve,” von Barloewen said. Malta and—again—Cyprus are also doing well.

But the growth of vacation homes doesn’t just indicate where leisure travelers want to go, but where investors see likely profit. “The reason why in the cities primarily are the strongest-performing areas is that the fundamental reason why someone buys a second home property is that it has to have a sound investment angle,” von Barloewen said. “People buy because they're very cautious on buying something which could then lose value, and they end up in negative equity. The cities provide better rental yields and cities are viewed as safer investments.”  

This, he said, is one of the reasons why branded residences are growing in popularity, and why a lot of the operators, developers and deed-masters want to build branded residences. “Residential properties which are branded by the hotel operator provide all parties with benefits. They sell better because for end users, they have rental income elements. For the developer and investor, it's a win-win because it helps the cash flow. And for the hotel operator, it provides an additional source of revenue.”

For example, he said, “if you were developing a hotel and it would cost you $50 million to develop the hotel and you could sell it for $100 million in four years time, you would say, ‘That's a fantastic investment! I'm doubling my money!’ In theory yes, but not if your cost of capital is 20 percent.” $100 million discounted at 20 percent over four years is about $48 million, which therefore makes your return on investment less attractive, particular in IRR terms," von Barloewen said. "Residential and branded residential is therefore very important because it allows developers to sell a number of those units off-plan whilst the construction of the hotel is underway, thus improving the project's IRR."

Beyond second homes, von Barloewen said, Europe has a market for resort properties. “We're seeing a number of hotels popping up, and one thing I've noticed in the last year is the number of projects which are now beginning to move past the inception stage and are actively due to launch,” he said. “In 2017 and 2018, you're going to see the launches of a number of integrated hotel and resort projects in Europe,” he predicted.

The Mediterranean Resort and Hotel Real Estate Forum (MR&H) is Oct. 16-18 at Portaventura in Tarragona, Spain.