Construction pipelines in Europe and Middle East continue their decline

At year-end 2013 the total construction pipeline in Europe stood at 734 projects/126,249 rooms, down 5 percent and 1 percent respectively from the previous year (Chart 1). Widespread austerity measures have slowed the region’s overall economic recovery and contributed to a sluggish pipeline. 

The economic recovery remains fragile. Europe will need to continue making adjustments to overcome new financial hurdles caused by the U.S. Federal Reserve’s reduction in its quantitative easing program and the uneasiness surrounding Russia’s interference in Ukraine. 

The total pipeline in the Middle East stands at 276 projects/77,972 rooms, down 14 percent and 16 percent respectively year-over-year (YOY) (Chart 1). Since peaking in 2007, pipeline trends have been in a steady decline.  The global financial crisis severely impacted the region as lending evaporated and the real estate market collapsed. 

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More recently, projects that were previously stalled in the pipeline are now moving toward construction and eventual completion. The potential for any large injection of new project announcements into the pipeline remains remote as the region is still absorbing the influx of previous hotel openings. Further declines in the pipeline are expected into 2015. 

European Pipeline Struggles to Gain Momentum
The European pipeline remains locked in a bottoming formation. A surge of projects in the previous real estate cycle caused hotels under construction to peak in late Q2 2012 before dropping for six consecutive quarters. New project announcements and construction starts entering the pipeline are at the lowest levels LE has tracked since beginning to record European development in 2007. 

This means new hotel openings coming online will continue to trend downward and drop below the 2013 mark of 221 hotels/30,062 rooms. LE’s forecast calls for a new low of 211 hotel openings in both 2014 and 2015. 

The UK has the largest pipeline at 157 projects/21,901 rooms followed by Russia 114/23,988, Germany 96/17,997, Turkey 63/12,282 and Spain 47/6,535 (Chart 2). These countries account for 447, or 61 percent of the 734 pipeline projects across Europe.  London with 36 projects, Moscow 33, Istanbul 29, Hamburg 23 and Berlin with 19 have the largest market pipelines. 

The pipelines in both Russia and Turkey may slow considerably in the near future as some projects are expected to cancel and others to stall. The retreat of investor capital has accelerated in Russia because of the country’s expansion into Ukraine, and in Turkey because of political turmoil. With both economies facing a bumpy road ahead, investors have withdrawn. 

Three-hundred-and-sixty-one projects, nearly 50 percent of all projects in Europe’s pipeline, belong to just five franchise companies. Hilton International has 20 percent of these, 143 out of 734, and is the largest and the fastest growing company in the pipeline. Hilton’s count of open and operating hotels in Europe will have expanded by 53 percent when all their pipeline projects come online. Hilton also has the top two brands, with 49 Hampton Inns and 48 Garden Inns in the pipeline. 

Middle East Pipeline Metrics Falling Precipitously
The Middle East pipeline reached a six-year low, down almost 50 percent from its peak. All chain scale categories and pipeline stages hit lows in 2013. 
Saudi Arabia has the largest country pipeline with 83 projects/24,405 rooms, followed by Dubai 42 /12,145, Qatar 24/6,181, Oman 23/4,610 and Abu Dhabi 21/6,823. Together, these five countries account for 193 projects, 70 percent of the Middle East pipeline. 

Of the global franchise companies, Hilton has 48 projects, Starwood 31, Marriot 22, IHG 20 and Accor 16, totaling 137 projects and 50 percent of the Middle East pipeline. Hilton International has the top two brands in the Middle East with its full-service Hilton at 21 projects and its Doubletree flag with 16.