International Report – There’s no denying a queasiness trickling through Europe at the moment. Ahead of the International Hotel Investment Forum in Berlin, reports of a devalued euro, potential deflation in the Eurozone, fragility in Greece’s banking sector and continued uncertainty over the long-term prospects of Russia pepper the news landscape. It’s enough to sound the death knell for the continent, only it may prove to be more histrionics than anything else.
There’s no mistaking the perceived grimness of the situation, enough so that it moved the European Central Bank to act and approve a monetary stimulus package, consisting of the purchasing of €60 billion worth of Eurozone bonds through 2016. The ECB’s quantitative easing program is expected to create approximately €1 trillion of liquidity. According to reports, from its peak in April 2011 to present, the euro has declined 23 percent versus the U.S. dollar. However, this may prove to be not such a malignancy; after all, the devaluation of the euro should help spur economic growth and offset some deflationary pressure.
Meanwhile, in Asia, China’s manufacturing sector contracted in January, the first time this has happened in two years. Expectations are that this could continue, raising the possibility that policymakers will take more action to stave off a sharper slowdown.
The current state of Europe has some eerie similarities to the U.S. and the financial crisis of 2008 triggered by the collapse of Lehman Brothers. However, proactive moves by the ECB and other measures should help shore up the EU and prevent a prolonged economic morass.
Still, the hospitality industry across Europe, though not immune to the shifting tides of politics and economics, is, by all accounts, healthy. In the opinion of HVS London chairman of global consultancy, Russell Kett, it’s downright frothy. He makes the case that now is a good time to develop, acquire or invest in hotels as “economic prospects are encouraging with demand for hotel rooms increasing and many parts of Europe having capacity for further rooms.”
Unsurprisingly, London, Paris, Rome and Amsterdam remain prime investment locations, Kett said, adding hotel investors are also looking at cities such as Barcelona, Hamburg, and Munich.
“We are seeing a number of new investors in the sector including insurance companies and hedge funds, which together with sovereign wealth funds, high-net-worth individuals and private equity firms ensure there is keen interest,” he said.
Arthur de Haast, chairman of JLL’s hotels and hospitality group, is equally optimistic, particularly as it relates to inbound and outbound global travel fundamentals. “From a demand standpoint, overall, it is looking pretty exciting for the global industry,” he said.
Though new supply hasn’t been an issue of late—the global financial crisis helped to stymie it—the global supply pipeline is picking up with more than 1 million rooms—about half of which are in Asia Pacific, with the glut in China. “In some markets, supply is becoming an issue, and getting ahead of demand,” de Haast said. “With the outlook for domestic and international arrivals, we are comfortable with supply in the U.S., UK and Germany. Therefore, RevPAR and profits are in good shape.”
The global hotel transactions landscape is also poised for a heady 2015. The U.S., de Haast cited as an example, in 2014 surpassed 2007 in single-asset sales. “It will remain strong in 2015,”he said. “The U.S. economy and tourism are going to be attractive for the next couple of years. That will attract capital and transaction volumes will grow.”
EMEA hotel transactions in 2015 could be as robust. In Europe, transactions could be led by private equity, which can “come in and do large deals,” de Haast explained, pointing to Mount Kellett Capital Management’s acquisition of Paris’ Meridien Etoile, KSL’s Village Urban Resorts buy from De Vere Group and Apollo Global Management’s acquisition of 18 hotels from Ivanhoé Cambridge, as examples.
According to JLL data, EMEA hotel transaction volume, in 2015, is forecasted to reach $24.7 billion, the highest level since 2007.
Real estate as an asset class continues to shine, de Haast said. “If you look at the amount of capital out there, real estate, relative to other classes, like bonds [low returns] and equities [volatility] are showing decent returns and long-term capital growth. If you are a big institutional investor with billions to place each year, there is very little option than to put money into real estate.”
Global hotel brands don’t appear to be holding back their expansion into Europe, either. Amy McPherson, president and managing director of Marriott International, Europe, said she is “encouraged by the positive growth in 2014.” McPherson said Marriott is on track to exceed the goal it set in 2010 to sign or open 40,000 rooms by the end of 2015. She did admit that, despite this growth, “acceleration has been hampered by the economic pressures in Russia and Ukraine and the overall impact these countries have on Europe.”
Other hotel companies have similar success stories and remain confident. “Western Europe has been a strong focus for us, with openings in London, as well as other parts of the country, Paris and Dublin in the past year and a half,” said Steve Joyce, president and CEO of Choice Hotels International. Last year, Choice opened its first property in Istanbul.
“We also anticipate continued investor interest in select markets in Spain, Germany, and Amsterdam,” Joyce said.
Similar to JLL’s data, Best Western International CEO David Kong expects a strong European transactions market in 2015. “Transactions are definitely picking up,” he said. “Aside from the accommodating ECB, there are funds available from the Middle East, Asia and the U.S. The gateway location prices keep going up. There are still good deals to be had especially in countries such as Spain and Ireland. We envision 2015 to be even stronger.”
THE DEBT GAME
Europe’s debt markets are also beginning to thaw, making it easier for the refinancing, renovation and acquisition of existing hotels. Even financing for new-development projects, though not as easy to attain, is being made available.
“There is very large demand for hotel investments, particularly triggered by the low interest rate environment, but also by the large availability of capital from private equity or from Middle Eastern and Asian investors. That combined with limited supply and high-profile transactions causes prices to increase,” said Bettina Graef-Parker, head of hotel properties, for Germany’s Aareal Bank AG. “There are very few good deals that are being chased by many potential buyers so they end up trading for prices that are more demand driven than cash-flow driven.”
In Graef-Parker’s opinion, if you own a hotel in Europe, now is the time to sell. “There is money to buy,” she said, “and not enough supply of properties to be sold. Prices are so high now.”
“The lending market is back and strong,” JLL’s de Haast said. “U.S. liquidity is back to where it was; CMBS is back in the U.S. In Europe, liquidity has improved over the last 12 months.”
Financing for new development projects is still challenging, de Haast said. “For existing hotels, it’s back.”
Off-shore investment into European hotels
Investment into hotels by source of investment since 2012 ($ billion)
Domestic $19.6 billion
Intra-Regional $8.1 billion
Middle East $7.2 billion
North America $5.3 billion
Asia $4.2 billion
Global $2.4 billion
Africa $0.2 billion
Unknown $0.1 billion
Source: JLL Hotels & Hospitality Group