Reports reveal concern, optimism for European hotel investment


Following 2015’s banner year for M&A in the hotel space, Deloitte is reporting that deal flow in 2016 has been more subdued. Still, hotel executives are optimistic about upcoming investment opportunities that lie ahead.

More than a third (34 percent) of respondents to an annual survey of more than 100 international senior hospitality industry leaders by Deloitte said that the European investment cycle is 12-18 months away from peaking, while close to 60 percent of respondents see disposals and consolidation as prominent investment themes in the next year.

Industry Concerns

More than half (52 percent) of hotel investors cited geopolitical instability in Europe as their number one concern for 2017—understandable in the wake of terror attacks in Brussels and France. Other concerns include deflation and lack of economic growth on the continent (47 percent). 


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Significantly, only a quarter were worried about the UK’s decision to leave the European Union, with the various European elections scheduled for 2017 generating greater unease (37 percent). With these concerns in mind, one-third of respondents cited the budget segment of the market as being the most attractive for investment in 2017, followed by the upscale (24 percent) and midscale (20 percent) segments.
“The fact that 2016 has been a comparatively subdued year of hotel transactions is due to a confluence of factors,” Nikola Reid, director in Deloitte’s Hospitality Advisory team, said. “Not only is the industry having to contend with political and economic uncertainty in the UK and Europe, but there is also a lack of product.”

Still, she said, there are clear signs of optimism. “Investors from China and North America are likely to capitalize on the weakness of sterling and still see the continent as offering potential.”

Dutch masters

Amsterdam has claimed London’s former position as the most attractive hotel investment destination in Europe after more than a third (34 percent) of respondents ranked the Dutch capital in the top spot. London (32 percent) had held the No. 1 ranking for the last two years. Barcelona (28 percent) and Dublin (24 percent) followed, with Berlin and Madrid (both 18 percent) sharing fifth place.
“Concerns around supply and uncertainty as to corporate sentiment in particular led to London narrowly missing a hat trick,” Reid said. “Nevertheless, the city remains a standout destination. The UK capital has seen several years of phenomenal inbound investment as investors from all over the globe have sought to capitalize on the city’s unrivaled position as a proven destination for both business and leisure.”

Resilience in the Regions

For the third year in succession, industry leaders have named Edinburgh (47 percent) the most attractive hotel investment destination in the UK outside of London, closely followed by Manchester (46 percent, up from 40 percent last year) and a resurgent Birmingham (22 percent, up from 9 percent). In Europe, respondents believe that the Scottish capital is now as attractive to investors as the likes of Rome and Lisbon.
“Similar to the Continent, deal activity in Regional UK has been behind 2015’s record year (an estimated £8 billion in transactions) and a number of deals that were in progress or anticipated to come to market were delayed due to the uncertainty surrounding the Brexit,” Reid said. “While domestic buyers have dominated investment, there simply hasn’t been enough stock to repeat last year’s trend for large portfolio deals.
Deals have increased in the UK regions, however, as the pound’s value declines and the UK becomes more affordable for international visitors. “Furthermore, despite initial uncertainty in the immediate aftermath of the Brexit vote, we have recently seen a rejuvenation of interest from foreign capital driven by their appetite for income and the opportunity to capitalize on sterling’s depreciation,” Reid said. “As well as expectations for Asian capital to dominate activity, industry leaders have also highlighted domestic investment as a key driver of regional deal flow in 2017.”
Slowing economic growth (66 percent) and increased employee costs (52 percent), are the principal concerns in the Regional UK, followed by the fallout from Brexit (42 percent). Two-thirds (64 percent) of respondents believe that owners will focus on improving profitability as part of a 2017 strategy.

“Increasing labor costs have long been a concern to UK hotel investors,” Reid said. “Assuming Article 50 is triggered (and the negotiation process begins), any restrictions on the employment of EU nationals could prompt a tighter labor market with potential cost implications.”

Despite these concerns, half of industry leaders expect Regional UK RevPAR growth to be between 3-5 percent in 2017.

SE Hotels Profit Growth

Hoteliers in the UK’s South East region saw profit growth of 10 percent in 2014 and 8.4 percent in 2015. For 2016, year-to-date performance suggests hoteliers in the region are on course for another good year, according to the latest data from HotStats.  

Despite year-on-year growth in Gross Operating Profit per Available Room slowing to +1.1 percent in September, South East hoteliers have recorded a 5.5 percent increase for the third quarter of 2016, to £48.85, equivalent to a conversion of 39.1 percent of total revenue.  

Astute cost management has driven growth in profit per room at hotels in the South East this year as much as top line increases, with the 5.5 percent year-to-date GOPPAR increase being achieved on the back of a year-on-year TRevPAR (Total Revenue per Available Room) increase of just 2.8 percent. Despite a 1.7 percent increase in payroll on a per available room basis, to £33.13 from £32.57, savings in overheads of 1.2 percent on a per available room basis have helped to maintain the growth in profit per room.  

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