The hunt for hotel yield moves east

European hotel investment continued its positive growth through the third quarter, rising by 3 percent, according to CBRE. However, with ever-rising investor interest and limited supply of stock making the hunt for hotel yield more difficult, the Central and Eastern Europe (CEE) region is seeing those looking for returns turning their attention eastward.

European hotel real estate investment volumes reached €22.9 billion in the year to Q3, driven by continued growth particularly in the UK, Spain and Benelux. UK hotel investment volumes reached €6.8 billion in the period, reflecting a 15-percent, year-over-year increase, and accounted for 30 percent of all capital invested into European hotels. 

While the mature markets continue to attract attention, CEE has seen growth in both visitor numbers and interest from the global brands. Between 2013 and 2017, Bucharest reported an average increase of overnight stays of 10.1 percent per year, the highest in the region, according to a report by Cushman & Wakefield.

Accordingly, the city was due to see a number of hotels open under international flags, including Courtyard by Marriott, Ibis Styles, IHG’s Hotel Indigo, Corinthia Grand Hotel du Boulevard, Moxy by Marriott and Marriott International’s Autograph Collection.

Four of them will be backed by Lithuania-based Appex Alliance, whose chairman, Arunas Beleska, is the former owner of the Europa hotel chain. The hotels, which will have more than 1,000 rooms, will be completed by 2022 and will be operated by Marriott International and Hilton Worldwide.

Appex Alliance CEO Augustinas Barauskas told the local press: “The international hotel chain market in Romania is underdeveloped. Most investors still approach the market with caution, but we believe that this trend is temporary. There will be more international brands in the market within the next few years.”

Appex Alliance wants to reach a total of 11 properties by mid-2020, five of which will be in Bucharest and the others in Vilnius, Kaunas or Riga.

Still, with 3.2 million overnight stays in 2017, Bucharest lags behind Prague (18 million overnight stays), Vienna (15 million), Budapest (10 million) and Warsaw (6 million), surpassing only Bratislava (2.7 million) and Sofia (2 million).

According to the Cushman & Wakefield report, the solid results recorded by the hotels in the CEE region during the past few years have attracted both developers’ attention and investors looking for higher returns compared to western markets. 

It indicated in cities such as Prague, Budapest or Vienna, it’s now more difficult to find land or buildings that can be used for hotels. In Warsaw, Bucharest or Sofia the accommodation capacity will continue to increase in the coming years, with an annual average rate ranging between 3.9 percent (in Bucharest) and 8.5 percent in Warsaw, the report noted.

Martin Thom, senior director, CBRE Hotels Germany and CEE, said: “The CEE markets continue to enjoy a period of growth in both business and leisure tourism. The positive outlook is not without some element of risk. In some CEE markets, we are seeing a marked increase in the hotel-development pipeline. Whilst we expect this pipeline to be absorbed by growing demand driven by further economic development, there could be some slowdown in KPI [key performance indicator] growth in the short term.” 

Perhaps those looking for a quick return to tide them over in what many feel is a peaking European market would do best playing a longer game in CEE. 

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.