For anyone paying even a cursory amount of attention to the news right now, it’s hard to avoid the sense that Europe is in the middle of some profound, epochal shift. Until the first week of March, Marine Le Pen, president of the far-right Front National, had been leading polls for the first-round of voting in France’s presidential elections.
Meanwhile, next door in supposedly centrist Netherlands, Geert Wilders, founder and leader of the far-right Freedom party (PVV) may have underperformed against expectations in March’s elections, but his campaign promises to withdraw from the EU and ban the Quran were reported extensively in the Anglophile press – unprecedented international coverage for Dutch politics – and the PVV still emerged as the country’s second-biggest party.
Add this to events of last year, when 52% of the British voting public came out in favour of Brexit, a spate of terrorist attacks shook Europe and Donald Trump won the US presidential election, and you have a world that appears much harder to predict and much riskier than before.
“Whether perceived or real, I think there are clearly a lot more threats to projecting revenue over the next couple of years than there were at the beginning of last year,” says Mark Wynne Smith, global CEO at Jones Lang LaSalle. “If you look back at 2015, there just wasn’t the same kind of in-depth analysis of geopolitical variables as we are seeing now.”
Despite the seemingly endless political uncertainty, however, international travel remains on a remarkably strong, upwards trajectory. According to figures from the World Travel and Tourism Council, international visitors around the globe grew by 3% in 2016 with Japan, South Korea, Vietnam, Spain, Portugal and Ireland all recording double-digit growth.
“Some markets are going to be up and some down, but underlying growth in travelling and corporate demand are holding firm at the moment,” he adds.
Cause and effect
The effect this had on hotel performance is plain to see, with all three key performance metrics up on 2016, according to data from STR published in January this year. European occupancy rose by 5.1 to 57.1%, RevPAR by 7.6% to €54.66 and ADR by 2.4% to €99.25. Hotel construction is also booming, with around 40,000 new hotel rooms opened in Europe last year and 69,000 currently under construction.
“If you look back at 2016, a number of things that were considered to be huge can easily become obsolete within
the course of a year,” says Nikola Reid, director of the travel, hospitality and leisure advisory group at Deloitte.
Take the Brexit vote, for example. While investor confidence and RevPAR dipped in the run-up and aftermath of the EU referendum, London still dominated Europe’s transaction market in 2016 after rebounding in the fourth quarter.
“Q4 2016 saw a noticeable surge in investment following a sluggish third quarter due to a marked return to confidence” Reid says.
You could argue something similar is also happening in Paris. Despite a tough year for performance, the city still managed to achieve second place in Colliers International’s inaugural Hotel Investment Attractiveness Index. Like London, Paris’s reputation as a strong gateway city means it is unlikely to deter investors in the long run, even if tourists temporarily go elsewhere.
“Both cities have seen several years of phenomenal inbound investment from all over the globe,” says Reid. “Investors have sought to capitalise on their unrivalled positions as proven destinations for business and leisure. We don’t see this ending.”
For Reid, the precedent set by London and Paris in the face of considerable adversity should be cause for optimism as voters go to the polls.
“The eurozone will see more political surprises ahead, but I think the negative effect will be more about short-term hesitation,” she says. “Certainly, with most of the investors we have been speaking to, it’s not going to deter their long-term plans, especially in the gateway cities and for assets that offer income security.
“Germany [where federal elections will be held in September], for example, was the frontrunner for European hotel liquidity in 2016. It’s got strong market fundamentals, an abundance of quality hotel assets and we saw a significant uptick in portfolio transactions.
“The appetite for the Netherlands is similar. In our European Hotel Investment Conference survey, which goes out to a number of leading investors, Amsterdam was rated as the most attractive city for investment for 2017.”
A considered approach
While nobody expects a return to 2015 levels, when record tourist arrivals in Europe combined with a spate of big portfolio transactions, transaction volumes for the continent are forecast to rise from $20.5 billion in 2016 to $23.0 billion in 2017.
“Alongside the geopolitical uncertainty, last year there was a lack of opportunities and stock on the market characterised by a lack of portfolios on the market [compared with previous years],” says Reid. “While the short-term pipeline looks strong, it’s not yet clear if we will see higher investment volumes this year but, either way, appetite remains robust.”
Institutional investors, who made up 20% of the market share in 2016 – four times larger than the year before – are expected to remain active throughout the year, while private equity buyers, whose share of acquisitions decreased from 40 to 25% in 2016, are likely to remain relatively quiet.
Appetite from foreign capital, particularly the Chinese – who spent around $30 billion in real estate last year including $10 billion in travel and tourism – will also remain strong.
“We will certainly continue to see interest in gateway cities from the likes of Chinese investors that, despite facing tighter capital controls, are still on the lookout for trophy assets,” says Reid.
“Opportunistic investors – particularly US-based funds – will focus on secondary and tertiary markets in their quest for yield with a particular focus on the southern European countries of Portugal, Italy, Greece and Spain.
“I think we will see that if lending tightens, other sources of debt may well become available,” Reid adds. “For now, debt for hotel acquisitions remains readily available, driven by low interest rates and strong market fundamentals. Investors will be looking to take advantage of this before the lending environment changes.”
Capital controls aiming to stop the mass exodus of Chinese funds may limit the extent of their involvement though, Wynne Smith cautions. “What we are seeing now is a slowing of outbound capital from China,” he says. “The aspiration to invest among Chinese companies doesn’t change, and I think that capital will come eventually. But it is going to be stretched out over a much longer period of time than we have experienced in previous years.
That may leave more space for domestic investors, who played a much more prominent role in the European hotel market in 2016 – accounting for 12% of European hotel deals, according to the global commercial property adviser CBRE.
“At the moment, I think we are seeing a domestic shift in terms of the percentage of local and national buyers to global investors,” says Wynne Smith. “Institutional capital is certainly aiding that increase.”
Eye on the market
Sources of funding for investors may also change over the coming months. In February, eurozone inflation was above
the European Central Bank’s (ECB) target for the first time in four years. As a result, analysts expect the ECB will follow the Fed’s lead with a rate hike later this year.
“I think we will see that, as lending tightens, others sources of debt will become available,” says Reid. “For now, debt for hotel acquisitions remains readily available, and I think investors will be looking to take advantage of that before the lending environment changes.”
Even with a hike, the overall interest rate environment in Europe is expected to remain relatively low, however, with little impact on investment decisions and the wider hotel market.
“I think the market generally is very conservatively financed,” Wynne Smith says. “So, as we see in the US, the minute there is any thought that base rates may go up, investors are very quickly pricing it in because they are sensibly cautious in their underwriting.”
While opportunities for mergers and acquisitions are reducing, a report by Deloitte argues that “disposals and consolidation” will be another “prominent investment theme” in 2017.
“It’s no longer as easy as everyone thinks, but we will certainly see hotel companies broaden their portfolios and form potentially new partnerships with disrupters that will help them diversify their demand base,” says Reid. “It’s being driven by hotel companies looking to grow and achieve greater efficiency in all areas, such as technology, marketing and operations.”
As ever, the question of where exactly we are in the hotel cycle will linger throughout the year. A recent Deloitte survey of 100 senior industry leaders found that a third predict the peak will be reached in the next 12 to 18 months. For Wynne Smith though, if global growth – projected to be 2.7% by the World Bank – continues, the cycle could last for longer.
“We haven’t seen some of the percentage increases that we have seen over previous cycles, and we haven’t
seen aggressive lending at all,” he says. “Provided we see this gentle growth going through, I think this cycle can run for several more years.”
