For the second year in a row, Amsterdam has claimed the title of most attractive European city for hotel investment. According to an annual survey by Deloitte, almost a third (32 percent) of hotel investors forecast millennials will be the driving force behind the hotel and leisure sector's overall business over the next five years.
Amsterdam continues to top the charts
Investment volumes slowed in 2016 mainly due to a supply shortage in the sector. However, the market has seen this year's investment flows regaining momentum. In the first half of 2017, investment increased by approximately 6 percent compared to the same period last year. Amsterdam continues to be Europe's most attractive hotel investment destination. Almost a third (32 percent) of respondents ranked the Dutch capital at the top. Barcelona and Dublin, both scoring 25 percent of votes, followed as London, which claimed second place last year, slipped to fourth with 23 percent of votes and down from 32 percent last year. Madrid rounded out the top-five list with 22 percent of votes.
“It is not surprising to see London slip down the pecking order, with concerns of over-supply, high pricing and uncertainty starting to bite. Investors may be questioning how much value they can get out of the city, despite the weak pound and the city being a standout destination for both business and leisure," Andreas Scriven, head of hospitality and leisure at Deloitte, said in a statement. "Interestingly, most hotel investors remain bullish on the UK capital–around 60 percent expecting to see pricing multiples of at least 16x in the next 12 months. Amsterdam can expect to see further inbound investment. We are also seeing evidence of Barcelona and Madrid being highly sought-after from North American private equity houses, driven by Spain’s economic recovery, favorable yields and asset availability. Dublin has also recorded significant RevPAR growth in recent years supported by constrained supply and investors expect this income growth potential to continue into 2018.”
Europe’s hotel industry troubles
More than two-thirds (67 percent) of hotel investors named terrorism as the European hotel industry’s top risk within the next five years. Lack of economic growth followed terrorism with 50 percent of votes while 28 percent of respondents voted on black swans.
“Hotel investors are having to contend with a number of macro elements that are out of their control, including terrorism and political and economic uncertainty across Europe," Scriven said. "However, a lack of stock in general also remains an issue. The survey respondents cited that Spain, Ireland and Germany are in the upturn of the investment cycle: a sign of demand outweighing supply.”
UK university towns to see investment boost
This is the fourth year in a row almost half of the respondents named Edinburgh the most attractive hotel investment destination in the UK outside of London. Manchester retained its second-place spot with 39 percent of votes. Meanwhile, the university towns Cambridge with 30 percent, Oxford with 29 percent and Bath with 13 percent also claimed ranks in the top five.
The survey stated hotel investors have remained optimistic about the Regional UK hotel market's projected growth in 2018. Most respondents expect RevPAR to surge between 1-3 percent next year, with larger cities, including Edinburgh, according to 32 percent of respondents, and Manchester, according to 28 percent of respondents, achieving the highest RevPAR growth totals. However, respondents were more pessimistic about.
“The Regional UK market remains in good health and continues to attract overseas investors, particularly those looking to take advantage of the recent currency devaluation and flourishing leisure demand," GOPPAR growth in 2018. A quarter at 25 percent of votes expected no GOPPAR increase for Regional UK hotels. Nikola Reid, director and head of UK hospitality at Deloitte, said in a statement. "Edinburgh and Manchester are robust hotel markets with strong occupancy levels and have a track record of absorbing new supply. Appetite for hotel investments in the UK university towns of Bath, Oxford and Cambridge is not surprising due to high barriers to entry and their strong leisure appeal in the wake of tourism from overseas while the pound remains weak.”
More than two-thirds of respondents at 69 percent stated Brexit is the biggest risk to the UK hotel industry. Slow economic growth at 48 percent followed while a shortage of skilled labor at 38 percent took last place. More than a fifth at 23 percent claimed that we have already passed the peak of the current UK hotel investment cycle. A quarter at 26 percent believe the peak will be noticeable over the next 12 months. However, 47 percent of respondents felt that the industry won't reach its peak investment for more than a year.
“Hotel investors are anticipating RevPAR growth in the Regional UK market, but rising costs, driven by inflation and recent payroll increases, are clearly at the forefront of investors’ minds," Reid said in a statement. "Hotel owners will need to think about how they can offset these increasing cost pressures whilst growing top-line growth in 2018 and beyond. Several private equity houses are coming towards the end of their holding period and are therefore assessing their exit strategies, and this could be impacting investors’ views of where we are in the investment cycle. Nevertheless, we are continuing to see interest in single asset and portfolio deals, indicating that we may have some time to go before the cycle peaks.”
Millennials forecast to drive future growth and performance
As the respondents discussed wider industry trends, 32 percent of hotel investors predict millennials will drive business for the hotel and leisure sector until 2021. Although this age group owns much more disposable income, just 16 percent of respondents expect baby boomers to drive revenue in the short term.
“Hotel investors have identified millennials as the key drivers for future growth," Scriven said in a statement. "Hoteliers and leisure companies will need to adapt their business models in order to appeal to these younger, tech-savvy consumers. Indeed investors are acutely aware of this with 38 percent of the respondents citing they would invest their own money in small, innovative and upcoming hotel companies, compared to just 8% saying the same for established companies. Established chains need to adapt and innovate in order to continue their growth story and compete with the disruptors entering the industry. However, at a time of rising cost pressures and squeezed incomes, it may be that older consumers will be more likely to have the spending power for city breaks and longer holidays in the near term and this segment is not one to cast aside and ignore.”