A new report from CBRE suggests that European hotel investment transaction volumes are on a decline. Volumes reached €6.885 billion in the first half of the year, a decline in deal volumes of 41 percent year-on-year and in line with the slowdown across all mainstream European commercial property transactions in the second quarter of 2016.
Germany
But not all markets are in the same boat. Germany’s economy has been famously strong in recent years, and the country’s hotel investment saw an increase of 34 percent year-on-year, with transaction volumes reaching €2.02 billion in the first half.
The German hotel investment market has been one of the strongest in the continent, offering consistently high levels of liquidity and strong market fundamentals. The large number of hotel assets encumbered by operational leases has continued to add to Germany’s appeal, particularly with the growing number of European institutional investors seeking low-risk investment opportunities.
In July, CBRE Hotels advised a joint venture of institutional and private investors in Germany on the sale of the Hyatt Regency Dusseldorf (pictured above) to Primotel Europe, a European hotel fund, and Algonguin. With a volume exceeding €100 million, the deal was the biggest single-asset transaction in Germany of the year at the time of its closing. The hotel is operated under a management agreement, a “relative rarity” in the predominantly lease-focused German hotel landscape. “This deal highlights the strong demand for assets offering upside exposure through management agreements and franchise opportunities in markets with solid fundamentals and good potential for performance growth,” CBRE said in its report.
“Germany remains a hot market for hotel investment and has taken the long-standing mantle from the UK which has dominated investment volumes in the last decade,” Joe Stather, information and intelligence manager EMEA for CBRE Hotels, said in a statement. “The strong growth has been driven by over ten notable deals in Q2 including a significant portfolio transaction. Interest is coming from a diverse array of investors, including REITs, institutions, private equity and dedicated real estate investors.”
The United Kingdom
Year-on-year, the UK hotel real estate investment volumes dropped 76 percent, some of which could be credited to Brexit fears in anticipation of the late-June vote (which is poised to have its own far-reaching impact—not all of it necessarily bad).
In spite of this decline, fixed-income investment remained buoyant as investors are attracted by the security of income. The UK leased-hotel environment includes a number of hotel operators with highly regarded covenants and offering 25-year index-linked leases. Recent deals to reflect this trend include the sale of the Travelodge hotel in Liverpool Street, London for €48.5 million, which was one of the few transactions post the UK’s EU referendum and demonstrates the high and resilient demand for leased-hotel assets.
The hotel development pipeline expects that over €2.3 billion of fixed-income stock is due to enter the regional UK market in the next three years.
France
France recorded 25-percent year-on-year growth in the second quarter of 2016 with deal volume reaching €508 million in the first six months of 2016. Transaction volumes were largely boosted by a number of deals on assets outside Paris. Recent investment activity has been focused on resort locations and the more leisure driven South of France region. The UEFA Euro 2016 football championship—held in France in June—also gave an uptick to hotel cash flows in many cities, particularly in Paris.
Recent terrorist activity in France, however, may affect the value of hotel assets. Last month, AccorHotels reported a 4.2-percent decline in earnings for its hotels in France, blaming the November 2015 Paris attacks for the decline. (Revenue per available room was down 14 percent in the Paris region over the first half of the year.) In the wake of the Nice attacks in mid-July, AccorHotels’ sales in the city dropped by 10 percent by the end of the month.
As such, transaction values across France may also see a decline if visitors stay away. Should tourism see a rebound, however, hotels in major cities will be poised to increase in value.