As the impact of Brexit becomes clearer in 2018, coupled with the European Central Bank’s continued roll back of its quantitative easing program, the hotel industry is primed for a strong year.
The president of the ECB, Mario Draghi, recently pointed to the “strong pace of economic expansion and a significant improvement in the growth outlook.”
That optimism is funneling down into the hotel industry.
“I am upbeat,” said Russell Kett, chairman of HVS’ London office. “There continues to be huge interest by investors in acquiring hotels and strong market dynamics and operating fundamentals.”
Kett noted some pressure on profitability from rising payroll costs, particularly in UK hotels fueled by the effects of the Brexit negotiations. However, he added, “Most of the outstanding questions concerning Brexit should be answered during 2018, so at least we won’t have to use this as an excuse for the uncertainty of certain outcomes.”
Chris Day, global managing director at Christie & Co., touted hotels as a core investment option, reflecting the rising returns the sector offers versus other asset classes.
Inbound travel should also be strong, Day said. “We may see the euro weakening against the dollar, and, in general, there is a positive outlook for the northern European economies,” he said, also noting that Spain should see pickup due to turmoil in the Middle East.
“Therefore, we don’t expect to see a huge impact of the ECB exiting QE,” Day said.
Strong travel trends, however, could be negatively impacted by some cities that are increasingly averse to too much tourism.
“A worrying trend, which needs to be addressed, is the number of tourism destinations whose local inhabitants are exhibiting hostility to the tourist boom in their locations, urging the reduction of visitors and limiting the expansion of hotels and other amenities,” Kett said, pointing to cities such as Venice, Barcelona, San Sebastian and Amsterdam that have come under this microscope. Local authorities, Kett continued, need to make more of an effort to minimize the effects of such views. “These locations thrive on the economic benefits of tourism and there is little to be gained by the views of those exhibiting a ‘not in my back yard’ mentality prevailing or gaining traction.
On the deal side, while appetite for hotels remains strong, Kett noted that there are only a limited number of assets for sale, which could broaden bid-ask spreads.
“There are strong market dynamics and operating fundamentals,” Kett said. “Occupancy is growing in most locations that haven’t already plateaued, and room rates are also rising.”
This will be a year of global growth, Day predicted, and in spite of Brexit, the UK’s economy is still strong. “The pound is moving forward against the dollar and we are seeing a steady increase in interest rates back to a more stable position,” he said. “Asian investors particularly view the UK as an attractive investment opportunity thanks to this stability and relatively low value of the pound.”
Expectations are that there will be more consolidation within the sector this year and beyond. “Names like IHG and Hyatt seem to be top of people’s minds at present—and no one is sure whether they could be ‘dining’ or ‘dinner’), but other companies with a distinctly European flavor, such as Rezidor, NH and Barcelo, may well be under scrutiny,” Kett said. “With Marriott having publicized the financial benefits of consolidation, other companies will be sure to follow suit as investors put them under pressure to improve earnings.”
While London, Paris, Rome and Amsterdam are evergreen for investment, secondary capitals and more regional locations also are attracting increased attention, Kett said. “Pretty much all European hotel locations could be under someone’s microscope this year,” he said.
While the UK is still the largest and most active market for Christie & Co., Spain has grown the most this year, Day said. “We expect that trend to continue as investors continue to capitalize on new opportunities.”
The German and Eastern European markets remain strong, Day said, and the company is seeing an increase in investor interest in the French, Italian and Greek markets. “Activity in the Nordics is also rising, although some are finding it difficult to penetrate the market,” he added.
The Nordic region is also generating interest across the brands and investment community overall, but Sweden stands out with strong revenue-per-available-room growth forecast and an active transactional market. “Portugal is also one to watch and is currently offering great performance uplift potential and is fairly liquid, with prices per key remaining below the European average in 2016,” Day said.
For the Mediterranean region, Day also expects to see growing interest in Greece and Italy. “Italy is one of the top destinations in Europe, but also home to the largest bed supply, resulting in a low overnight-to-bed ratio,” he said. “Bed supply has decreased since 2010 as a number of small one- and two-star independent hotels failed to survive the aftermath of the recession, particularly as other hotels went through renovation programs. This has improved the hotel stock overall, and strong opportunities remain for international brands to enter the market, as hotel chains are still under-represented in Italy compared to most other European markets.”
Greece, meanwhile, “is a highly seasonal market, which results in a low overnight-to-bed ratio,” Day said. “Recent development is likely to put further pressure on underperforming hotels and leave room for high-quality branded supply.