Stronger-than-expected eurozone growth just the motivation hotel investors need

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The eurozone is firing on all cylinders as growth in the 19-country, single-currency bloc rose 2.2 percent in the second quarter of 2017, ahead of analyst expectations.

Seasonally adjusted gross domestic product rose by 0.6 percent in both the euro area and the EU28 during Q2, according to a flash estimate from Eurostat, the statistical office of the European Union. This is the fastest rate of growth in the eurozone since 2011.

In contrast, the British GDP increased by 0.3 percent in the same period.

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The growth is a sure sign that stimulus moves put forth by the European Central Bank have had impact. In March 2015, the ECB launched a quantitative-easing program, the action of buying back bonds that tends to lead to a weakening currency that invites investment, boosts stocks and lowers interest rates. The supposition is that the QE program could extend into 2019

The Going is Good

For hotel and real estate investors, the eurozone's expansion is welcomed news, giving many the impetus to place more bets in the region. 

"Lodging fundamentals are heavily tied to economic growth," said Ryan Meliker, a managing director covering lodging at Canaccord Genuity. He alluded to STR numbers that note European RevPAR up 4 percent in euros year-to-date through June, "so the fundamentals are tying nicely with solid GDP growth."

According to Meliker, the auspicious numbers emanating from the eurozone give confidence for investors and lenders, alike. Boldness breeds action.
"The more conviction investors and developers have in economic growth, the less risk on industry fundamentals they underwrite into hotel deals, that allows them to be more aggressive on pricing," he said, though allowing that other factors, including supply, interest rates and alternative uses for capital all impact deal volumes and pricing. 
"If anything, I would call the improving economic outlook a more attractive time to invest in European hotel real estate and de-risks the climate a bit rather than vice versa," he concluded.

He's not alone. Commenting on economic growth in the eurozone coming in ahead of expectations, Emmanuel Lumineau, CEO at online property platform BrickVest, said: "Investment into the Eurozone and net trade remain strong as the euro depreciates and international demand strengthens. Moreover, demand for real estate investment across Europe has seen an abundance of inward international capital. Almost every major European institutional investor globally has been increasing their portfolio allocation to real estate over the last five years."

The low-interest-rate environment generated by quantitative easing is proving to make real estate investment that much more appealing. 

“In a low-interest-rate environment, real estate yields look attractive and the sector serves as a good alternative to fixed income," Lumineau said. "In this property cycle, European real estate investors are using debt more cautiously compared to the leverage levels we saw running up to the global financial crisis. Institutional investors are now going into less liquid secondary- and third-level cities to get acceptable going-in cap rates."

How investment will pan out is still unclear, but the environment is welcoming. Specific to hotels, most say that the current cycle is long in the tooth, but that doesn't preclude any let up in deals and development.

"In Europe, there has been a shift from the opportunistic investment we saw post 2009 and 2010 to a more stabilized environment," said Kevin Mallory, senior managing director at CBRE, a testament that the ECB's strategy has helped to steady the region. "We are seeing the investment cycle move into later-cycle characteristics."

Mallory's European colleague, Keith Lindsay, managing director for CBRE Hotels EMEA, said that the assumption of better economic numbers served as the basis for escalation of hospitality-focused activity. "Capital formation in the hotel sector in Europe has been building significantly in the last 12 to 18 months, based on the expectation of improved economic performance and given some strong political underpinning with election results in Spain, The Netherlands and France," he said.

Notably, Brexit, Lindsay added, is having relatively no influence on investment-related decisions in the UK, which continues to show positive growth in the hospitality sector. "[It is] is not having an impact on investment intentions into the UK and hotel trading numbers are improving off the weaker pound," he said. "Interestingly, the European institutions are leading the transaction volumes by a long way. This doesn’t mean waning interest by U.S. or Asia-pacific investors; just that they are not getting to the pricing levels in the second rounds of most disposal processes we are seeing."

Country by Country

German GDP grew by 0.6 percent in the quarter, Spain’s by 0.9 percent, France’s by 0.5 percent and the Netherlands by an even stronger 1.5 percent. “While some countries remain laggards in the eurozone, the good news at the moment is that poorer performers are also exceeding expectations," ING economist Bert Colijn told The Telegraph. 

In spite of the eurozone's good fortune, many analysts believe that it won't change the ECB's monetary policy anytime soon. “The strong euro might soon start to weigh on eurozone exports and inflation,” HSBC economist Fabio Balboni told The Telegraph. “So we still expect the ECB to be extra cautious in announcing its next steps in terms of winding down quantitative easing.”