Lack of quality stock poses barrier to Med hotel investment

Riu will rebrand and renovate the Edificio España into a 24-floor Riu Plaza hotel with three floors of retail space.
Edificio España, Madrid, Spain. Photo credit: Tim Adams / CC BY 2.0

Investors remain eager to take part in the Mediterranean’s resort segment, but are being stymied by the lack of quality product coming onto the market. 

The region continues to be led by Spain, where the number of visitors to the country fell for the first time in a decade in July, with observers blaming the impact of Brexit and the move upmarket by operators. 

“Quality stock is the biggest barrier for hotel investment in the Mediterranean,” said Xavier Batlle, associate director at Christie & Co., Spain. “All type of investors are constantly screening for resort opportunities, branded or not, all along the Mediterranean. Investors are looking at Greece, Italy and Portugal.

Spain, said Batlle, is still considered the largest and most liquid resort market in the Mediterranean. “Nevertheless, due to the tightening of expected returns as a result of higher asking prices the investment volume is expected to be lower,” he said.

In the past 30 years, said Batlle, the Mediterranean has seen many changes in the profile of hotel investors, from being a local and fragmented market in the 1980s and 1990s to a more international and institutional investment market after 2010. “The leisure market has proven to be more resilient than the business segment [in] Europe. With new brands, concepts, and a higher specialization, investors are attracted to diversify in the leisure resort market.”

Batlle observed that the macro elements have been similar for all resorts in the Mediterranean and that helped investors and operators to underwrite opportunities with similar approaches. The demand profile was the same, with mostly European guests—predominantly British, German, French—who were attracted by the same brands or travel agents.

The stock in the region was seen as being of similar quality, with or without a flag. “Quality standards are similar, branded or not, and the value proposition should be the same for all resorts in regards to the product design,” said Batlle. “What will finally differ from the same branded resort located in Turkey, in Greece or Spain, will be the accessibility, demand generators and security of the destination.”

Improving Value

With quality unaffected by branding, Batlle said that having a brand, on one hand, might limit the gross operating profit level because of increased costs due to management and sales fees. On the other hand, it should increase the efficiency, the quality, the revenues, and definitely decrease the risk in the medium-long term.

“Competition has pushed improvement,” Batlle said. “In Spain, most of the resorts have repositioned and increased its value proposition, so all types of brands are now moving more and more upmarket. I consider it essential for all investors to have a trusted operating partner and also to work with a knowledgeable, professional hospitality real estate advisor who understands well the commercial, legal and technical complexities of the local market.”
Batlle identified the most popular resort locations in the Mediterranean region as: 
    1.    Balearics and Canary Islands, Spain
    2.    Costa del Sol, Spain
    3.    Algarve, Portugal
    4.    Greek islands
    5.    South coast of Turkey

Batlle also identified the most exclusive islands as: 
    1.    Formentera, Spain
    2.    Naxos, Greece
    3.    Sardinia, Italy
    4.    Cavallo, France
    5.    Corfu, Greece
    6.    Sicily, Italy
    7.    Santorini, Greece
    8.    Patmos, Greece
    9.    Ibiza, Spain
    10.    Mykonos, Greece
    11.    Zakynthos, Greece
    12.    Malta
    13.    Lefkada, Greece
    14.    Menorca, Spain
    15.    Crete, Greece
    16.    Corsica, France

Falling Numbers

The number of foreign tourists visiting Spain in July fell for the first time in since 2009, according to national statistics institute INE, as European visitors turned to cheaper destinations such as Turkey and Tunisia. 

Visitor numbers to Spain fell 4.9 percent on the year to just under 2.2 million, with the number of Britons visiting dropping 5.6 percent, with the weak pound making it more expensive to visit Eurozone nations following the EU Referendum, as ongoing concerns about Brexit kept the pound weak. 

Prime Minister Pedro Sanchez, however, told the local press that visitor numbers remained “historically high.” 

Last month saw Thomas Cook caution on its full-year forecasts, as the growth of higher-margin destinations like Turkey and Egypt failed to offset the pressure on margins in Spain. The company said that it was continuing to upgrade its offering, while performance growth in Spain showed signs of faltering. 

“We continue to experience margin pressure due to a highly competitive market for Spanish holidays,” said CEO Peter Fankhauser. “While we have seen good growth to higher-margin destinations such as Turkey and Egypt, this has not been enough to fully offset the margin pressure which has largely impacted holidays to Spain to date.”

Investors have so far shared Sanchez’s opinions on the market, with Blackstone Group due to take full control of Hispania, making the private equity group Spain’s largest hotel owner. 

Commenting on Hispania’s annual resorts, president Rafael Miranda said that the outlook in the Spanish resort segment is “very promising” and is reinforced by the good trends of the hotels in the portfolio. “For example, in the portfolio managed by the Barceló Group, which has started the first months of 2018 with an increase of 14 percent in revenues of rooms on books for January, February and March compared to the previous year, and has closed the month of January with an increase in the GOP of the hotels of 4.6 percent compared to January 2017.”

Falling visitor numbers were likely to mean greater competition. In May NH Hotels formed an alliance with Apple Leisure to bring its resort formats to Europe. The pair will work together to develop Apple’s Secrets, Dreams and Amigo resort brands in Europe. “NH Hotel Group’s expertise in Europe made them the right partner to introduce AMResorts’ brands into the continent’s Mediterranean countries, with Spain as starting point of this strategic project,” said Alex Zozaya, CEO, Apple Leisure Group.

NH Hotel Group was, at the time of writing, set to be taken over by Minor International, which has made a name for itself through its food-and-beverage expertise, including a stake in luxury group Corbin & King. The company’s influence could see the region’s resorts taking another hike up the chain scale, with prices following suit. Good news for those countries which are pushing more of a value offering and forcing those investors who are also bargain hunting to cast their net a little wider. 

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