Following the U.S.’ election of President Donald Trump and the economic ramifications that face the U.K. as it cleaves itself from the European Union, the continent faces continued political instability with upcoming elections in France, Germany and the Netherlands. The region’s economic growth doesn’t look promising either as Barcelona-based Focus Economics forecasts both a slow-down and a rise in inflation.
But according to PwC’s report “Emerging Trends in Real Estate Europe 2017,” it’s the geopolitical environment that weighs top of mind for many investors; 89 percent of survey respondents identified international political uncertainty as their greatest concern for 2017 while 63 percent expressed apprehension over national stability. A mere 10 percent are optimistic for improvement over the course of the next three to give years. Similarly, Deloitte research reported in November found that 52 percent of hotel investors named geopolitical instability as their top concern for 2017, with another 47 percent citing trepidation over deflation and the continent’s lackluster economic prospects.
This year certainly isn’t expected to reach the record levels of 2015, for which Samantha Ward, PwC UK’s hotels sector leader for M&A deals advisory, reports that deals in the U.K. totaled about £9.3 billion, accounting for approximately 60 percent of all deals throughout Europe. Last year saw about half as much hotel investment in the U.K. at about £5.5 billion and few major deals done on the continent, except HNA Hospitality Group’s acquisition of Carlson Rezidor Hotel Group. Hotel performance in Paris and Brussels also fell about 25 percent in 2016 due to terrorist attacks. “We have seen a flight for safety by investors in terms of the geographic location, but also in terms of the structure of the hotels that they’re buying,” Ward told HOTEL MANAGEMENT. “So stable assets—leased hotels—were of particular interest.”
Safe Havens
Consequently, investors are looking away from the U.K. and to the rest of Europe with many risk-averse investors heading to resorts with compressed yields in Spain. Ward also expects nonperforming loans for hotels to become available in Greece as a result of the country’s bank reform, leading to more investment activity in that market.
Rod Taylor, managing director of U.K.-based Taylor Global Advisors Limited, concurred that the Iberian Peninsula is currently an investment hotspot and will likely remain so. “Spain and Portugal are benefitting hugely—they offer sun, sand and safety and I suggest this position could stand for several years to come,” he said. However, he also views the U.K. hotel market as offering greater value to investors now that the exchange rate has moved in favor of the U.S. dollar post-Brexit. “U.K. assets are cheaper than they were six months ago and overseas investors from the U.S., the Middle East and the Far East—particularly China—are seeking either gateway assets of quality or portfolios that could be used as a base for European expansion or which demonstrate opportunities for a rapid improvement in trading and thereby value,” he said.
Asset Pinch
But when considering PwC’s U.K. Hotels Forecast 2017, the value to be gained in this market is less than assured as London occupancy saw a year-over-year decline of 1.8 percent in 2016 and is expected to drop another 0.8 percent in 2017 while average-daily-rate growth dropped 1.1 percent in 2016 with a projected slight gain of 0.4 percent this year. Revenue per available room, too, decelerated 2.8 percent in 2016, with another 0.5 percent decrease expected in 2017.
Yet, along with the macroeconomic factors that are affecting Europe’s investment climate, Phil Golding, partner at UK-based Cedar Capital Partners, pointed out that potential investors face an even greater issue in a lack of available assets. “The lack of product available is largely a function of where we’re at in the cycle and anything of quality that is for sale is fully priced so we’re finding it increasingly challenging to get new deals done,” he said. “We were net sellers last year, not net buyers, and I think that trend will continue.”
Abundant Financing
Golding additionally said that while his firm focuses on full-service hotels with international management agreements and yields that might approach 6 percent, the marginal short-term gains are not dissuading available capital from going after hotel real estate. Taylor likewise attested that financing is readily available since “U.K. and European borrowing rates are at historically low levels and debt capital is available for financing blue-chip assets, portfolios or assets delivering robust, sustainable cash flows.”
Buyer interest in Europe isn’t waning, either. Although China-based investors seem to close the lion’s share of Europe’s marquee hotel deals, both Golding and Ward report that institutional investors as well as high-net-worth-family groups are competing. “Hotels have a very mixed pool in terms of their buyer universe,” said Golding. “Family offices, private equity and insurance companies are all looking for good hotel investments.”