Compressed yields in some European markets still not turning off investors

Sahara Group has sold its second hotel to pay back India's Supreme Court following fraud charges.
Grosvenor House, a JW Marriott Hotel, London, changed hands last year. Photo credit: Marriott International

According to the latest stats from CBRE, 2017 was a record year for transactions in Europe, with a 16-percent increase year-over-year in volumes, reaching €21.6 billion. This surpassed the previous peak set in 2015, when €21.2 billion was transacted. 

CBRE said that yields for leased assets compressed by as much as 50 basis points in Germany and Ireland, but also noted that this was unlikely to act as a dampener to investors.  

“As strong revenue and profitability growth across Europe has driven hotel values upwards, the lack of yield in other asset classes has rallied investors around the sector," said Kristen Kozlowski, head of hotel investment properties in Europe, the Middle East and Africa. "This, when combined with the increasing transparency of hotel market data, the growing number of trusted third-party hotel operators and the increasing availability of leases, has brought new global institutional investors to the market. This is besides traditional European hotel investors, who continued to increase their investments in the hotel sector in 2017, a trend that is likely to continue in 2018." 

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Looking at the position of the market in the cycle, Kozlowski said that CBRE is closely monitoring bond yields. "There is so much demand in the fixed-income space and as U.S. bond yields increase, with an anticipation of the same in the eurozone, we are looking to see where things have to get to for investors to switch back to bonds. We’re not expecting a dramatic shift—you can still get attractive returns from the hotel sector," she said. "The fundamentals are still strong, there are no signs of danger. There could be an external shock, but hotels are not as highly leveraged as they were in the previous cycle so are less vulnerable."

Flexibility has been a hallmark of recent activity. 

“The interesting thing about Europe is that all the markets have been moving at different speeds, so people who, for instance, now can’t play in Germany have been investing in other markets," Kozlowski said. "There are a number of different types of capital in the market at the moment, with different needs.” 

The UK registered the highest actual investment volume of all the European countries at €6.2 billion, up 39 percent year-on-year. The growth was driven by the sale of nationwide portfolios and major single assets; notably the sale of the Hilton Metropoles, the Jurys Inn portfolio and QHotels, as well as single-asset deals including the JW Marriott Grosvenor House. 

Words of Warning

Within the UK, PwC sounded a note of caution, forecasting a slowdown in performance, with occupancy growth of 0.4 percent this year in London and 0.3 percent next year as weak demand continued and increased room supply weighed down growth. Average daily rate was also expected to slow, with a 0.2-percent gain in 2018 against 4.3 percent seen last year. Revenue per available room was poised to see only 0.6-percent growth this year compared to 4.6 percent. In 2019, a 1.9-percent gain was predicted. 

“The boost to inbound holidays from the weak pound has started to fizzle out and ongoing uncertainty around Brexit and the fragile economy is a recipe for some tough year-on-year comparisons for the next few months," said Liz Hall, head of hospitality and leisure research at PwC. “This year, one of the main challenges to growth is demand. With more rooms potentially set to open in London than the Olympic year, that will mean a lot of rooms to fill. Hotels will be looking to events such as the royal wedding in May to provide an uplift while other events like the Farnborough International Air Show and additional unique sporting events will do the same for the regions.” 

According to data from STR, a potential 9,000 new rooms could open in London in 2018, well ahead of the 8,000 that opened in 2012, the Olympic year. Other cities with large pipelines for 2018 include Manchester; Belfast, Ireland; and Glasgow and Edinburgh in Scotland. 

While insiders talk of enthusiastic bidding for the UK portfolio being sold by Starwood Capital, there are few such portfolios due to come to market and, with performance waning, the UK may see itself diverging from Europe in the eyes of investors.  

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