JLL: Why hotels are still a good choice for investment

Berlin at sunset

Hotels are a good choice for investors seeking good yield returns, achieving higher yields than more mainstream property assets including offices, warehouses or retail according to new data from JLL.

Given their popularity as business and leisure destinations, European capitals such as London and Paris will continue to offer deep and liquid markets, and JLL predicts that Europe will see the most significant improvement of all global regions in 2017. The company expects the Spanish, Irish, Portuguese and German markets to be particularly active, following on recent trends.

Top Markets

The strength of Germany’s economy means that it is a safe haven when it comes to investment in the hotel sector. While Berlin and Munich are the standout performers other cities including  Hamburg, Frankfurt, Cologne, Dusseldorf and Stuttgart are also worth consideration due to reliable business demand from conferences and industry. On average, they offer yields ranging between 5 percent and 6 percent depending on asset quality, tenant and location which represents a substantial return in the current market.

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Spain’s hotel market has been emerging steadily from the economic downturn, and saw a spike as its reputation for safety made it an appealing alternative to countries .  With a growth rate of 3-4 percent GDP compared to 1 percent and 2.2 percent on France and the UK respectively, the country is attracting more business visits and the native population is getting richer. Madrid made it into the top ten list of city destinations that investors are most positive about globally for hotel operating performance according to JLL’s recent Hotel Investor Sentiment Survey. 

Growth & Disruption

Across the Europe, Middle East and Africa region, JLL expects volume growth from approximately $20.5 billion in 2016 to $22.5 billion in 2017. Last year, transaction volumes by institutional investors secured 20 percent of market share—four times the proportion seen in 2015. Institutional investors’ buyer share is expected to stay strong in 2017, with an increase in private equity buyers also expected.

While Airbnb is a disruption to the traditional operator model, JLL believe it is also a spur for more hospitality brands to diversify their portfolios to capture a share in the emerging serviced apartment and aparthotel market.  

“Major economies scheduled to hold elections in 2017 include Germany, France and the Netherlands,” Philip Ward, EMEA CEO of JLL Hotels & Hospitality Group said in a statement. “As the outcome of these is determined throughout the year, we expect investment volumes to gradually intensify. Hotel owners’ expectations have reset and there’s an increasing proportion who want to sell now, as many markets are still expected to see a sharpening of yields, as opposed to waiting for one or two more years when hotel performance might plateau.”

Construction

According to data from STR, almost 40,000 new hotel rooms opened in Europe last year, and another 69,000 are currently under construction. Most construction activity has been concentrated in the upper midscale segment of the market, securing around 25 percent of all construction projects, followed by the upscale segment at 23 percent. JLL predicts that this trend is set to continue.

In the UK, hotel construction activity reached £2.5 billion in the fourth quarter of 2016 (up 2.4 percent quarter-on-quarter), marking the second consecutive increase over the quarter. JLL believes that further depreciation of the pound against the dollar and euro is likely to be good news for the hotel industry, making the UK a more affordable place to visit. 

According to JLL, hotel investment volumes into the sector are also expected to rise from $20.5 billion in 2016 to $22-£23 billion in 2017 across the Europe and Middle East region.
 
“This strong construction pipeline demonstrates the strength of the sector in the face of global economic headwinds and challenges from disruptors such as Airbnb,” Richard Harris, managing director in JLL’s Capital Works team, said. “There has been an extraordinary growth in consumers looking to discover new experiences, including choosing to rent apartments as their travel accommodation which means that hotel buildings will continue to evolve to stay at the cutting edge of travelers’ needs.”

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