Cushman & Wakefield believes the European hotel sector is in store for an active second half after posting €4.1 bn of trades in Q1 2023.
The volume was 18% up on the same period last year, driven by several major deals including the sale of Westin in Paris, Mandarin Oriental in Bodrum and Le Richemond in Geneva.
Nevertheless, investment activity on a 12-months basis, which smooths the impact of unusually large deals, shows hotel transaction volumes in Europe grew by about 3% for the running 12 months ending Q1 2023, compared with the running 12 months ending Q1 2022.
The UK, France and Spain were the most attractive markets, accounting for 52% of the total transaction volume for the running 12 months ending Q1 2023. European buyers were behind 76% of the volume transacted, although the Middle East was the fastest growing source of capital, up by 142%, compared with the previous 12-month period. Looking purely at Q1 2023, Upscale and Upper Upscale hotels accounted for half of the quarterly transaction volumes, with resorts in high demand with investors.
Borivoj Vokrinek, strategic advisory and head of hospitality research EMEA, said: ‘The continued popularity of resort hotels among investors is underpinned by the strong recovery of leisure demand, long-term growth potential and constrained supply growth.’
‘Overall, resorts accounted for 22% of total transaction volumes in Q1 2023, and 28% when looking at data on 12-months running to March 2023. This is notably more than before Covid-19, when this type of hotel accounted only for about 13% of total hotel transaction volumes in 2019.’
The positive investment sentiment towards hotels is supported by a strong recovery performance, with Revenue Per Available Room (RevPAR) for the whole of Q1 2023 already surpassing 2019 levels by nearly 13%.
This was driven by a robust increase of hotel room prices across Europe, with Average Daily Rate (ADR) rising 19% above 2019 levels. The greatest RevPAR increases were recorded in Lithuania, Turkey, Ireland, Croatia and France, while at a city level, Paris, Belgrade, Istanbul and Vilnius experienced the strongest RevPAR growth in Q1 2023 among key urban markets relative to Q1 2019.
Low supply growth within the hotel sector (below 2% in 2022) is expected to remain, with the pipeline hampered by rising construction costs and high interest rates causing delays and cancellations. More openings are expected in 2023, including Raffles London at The OWO, Six Senses Rome, and One&Only Aesthesis in Athens, but overall Europe’s hotel pipeline is relatively moderate, with sector growth expected to remain below 2.5%.
There are several large portfolios currently on the market including Center Parcs in the UK and the Tryp portfolio in Spain, while inflation seems to be stabilising, providing visibility and hope for moderation of interest rates. In addition, there is rising pressure on some owners to sell as they face challenging refinancing terms with some funds also facing redemptions and needing to dispose of assets.
On the buyer side, the key drivers are the improving performance, the weight of dry powder and decompressing yields, which were up on average by about 70bps in Q1 2023, which should narrow the bid-ask spread.
Jonathan Hubbard, head of hospitality EMEA, explained: ‘Whilst the headline figures indicate a positive hotel investment market, activity is undoubtedly being held back across Europe by increased debt costs and inflationary cost pressures.
‘This has resulted in a degree of investor caution. Nonetheless, investment activity is expected to gain momentum in the second half of the year, supported by continued performance recovery compensating for decompressing yields, the need among many investors to deploy capital and pressure on some owners to deleverage or address fund redemptions.’
‘Hotels remain an effective hedge against inflation which, combined with the return of international capital and pricing consensus, should support activity within the sector.’