Last week, CBRE Hotels reported that investment into European hotels reached €3.7 billion in the first quarter of the year, representing the second-largest deal volume recorded in any first quarter in the last decade. HOTEL MANAGEMENT spoke with Joe Stather, information and intelligence manager EMEA at CBRE Hotels, who authored the report, to find out why certain markets were on the upswing and why others seemed to have reached their peak for this hotel cycle.
HM: Why is Germany appealing for investors?
Joe Stather: We recently conducted a survey, an investor intention survey, on the hotel sector. Most responses that came back, when we asked investors about their concerns for the year ahead, were about political and economic uncertainty. Germany’s strong economic fundamentals [are] a strong aspect of why investors are looking to put money into the hotel market there this year.
Germany isn’t limited to one or two markets. There are five or six strong cities and hotel markets within the country—which, of course, again, broadens the country’s appeal. The German markets have all performed very strongly in the past few years. They were fairly resilient in the face of the recession last time around. There are questions at the moment as to where we are in the cycle, but I think if you take the view of now investing through the cycle with a medium-term holding horizon, Germany is one of those markets that will weather any downturn fairly well.
The German markets have reached a high base in terms of performance. That low-hanging fruit in terms of new demand generation to boost performance is going to be hard to come by, but in some markets, it still does exist. There’s a very strong events market in a number of German cities, Munich being one of them. Hotel performance goes up and down each year, and is often quite difficult to look at in terms of long-term trends, but I think the prospects are quite bright and that corporate segment will remain buoyant.
There’s still some scope left for yield compression. A lot of Western European markets have probably seen as much yield compression as they’re going to get this time around, whereas in some German markets, recent transactions would suggest that yields are still coming in—and again, that’s probably linked to the appetite we’re seeing for the market at the moment.
HM: Why is the UK's market declining?
JS: Transaction volume was down 58 percent based on same quarter in 2015. There are a few reasons for this. The “Brexit” and the uncertainty surrounding that is having some impact on owners thinking about taking their properties to market this year. They feel if there’s sufficient risk, which would put investors off, they’re less likely to bring their property to market because they don’t feel there will be the same competitive landscape in terms of bidding and therefore they won’t get best price…Also, for investors, people are waiting for the outcome of the referendum before they commit capital into the UK landscape.
That said, If the UK does decide to stay in the EU, we’ll see deferred deals coming through in the third quarter and a slug of investment in third and fourth quarter.
Again, it’s similar to Germany in terms of hotel performance, looking at key indicators like RevPAR, total revenue and profitability. In Q1 this year, we’ve seen some declines in some of the markets that, toward the back end of last year, were seeing fairly solid growth—and I think, again, that reflects where we are in the cycle, the fact that we’re at a very high base of performance now, and that strong performance growth is much harder to come to unless it’s a city or a market within the UK that has some critical infrastructure project or some wider real estate development that is continuing to drive demand into hotels in certain markets.
HM: Why are France's hotel numbers declining?
JS: France is a very Paris-centric market. We trend to not see a great deal of investment take place outside of Paris. The France numbers you see very much indicate what’s going on in the capital. Of course, in Paris, you have a hotel market dominated by trophy assets, and the people buying them tend to be generational purchasers. When these assets come on to the market, they’re taken by people with long-term holding strategies—basically, high net-worth individuals—and then kept under the same ownership for a long time. The France numbers, because they’re so Paris-centric and because of the nature of the properties that sell in Paris, it really depends on availability of stock within the given year as to whether the transaction volume for France as a whole is up or down compared to previous year.
Talking to our Paris team, there are a number of owners who were considering bringing stock to market this year. However, given the terrorism in Paris and the impact that had on performance, that had an impact on the value of assets and those owners are now refraining from bringing their properties to market because they want to achieve maximum pricing and don’t feel they can do that based on the performance they’ve seen over the past few months, so we’ll probably see a deferance on activity until at least later in the year, if not next, before we see much activity out of Paris.
HM: Why is Belgium doing so well?
JS: Belgium is another market that is really built around the capital city, in this case, Brussels. We never really see huge amounts of transaction activity in Brussels simply because the hotel market isn’t that large, but because of the strength of the market and because a lot of the business comes from the European headquarters, it means that it’s fairly stable in terms of investment. So if you want a safe investment, those kinds of investors would look to Brussels. Again, terrorism has knocked performance. That will probably mean that any owners who wanted to sell will hold on until performance starts to come back a bit. But we don’t expect the impact to be too significant on Brussels simply because it’s such a corporate market and the corporate segment is less sensitive to terrorist attacks than the leisure segment. Hopefully, we’ll see performance recover over next few months.
Check back soon for more insights from CBRE on the future of the UK's hotel industry.