Date: October 12th, 2017 in London
An illustrious panel of speakers presented the case for hotel investments in Europe, relative to the USA and Asia, Global institutions have discovered the beauty of hotels and they are investing more and more in the sector, with a particular focus on European cities, experts agreed at the PropertyEU Hotels Investment Briefing, which was held in London in October 2017, at Paul Hastings’ City headquarters.
What they said: ‘All our investors compare Europe to the US and Asia and they see more value in Europe,’ said Patrick Saade, co-head, Hotels & Hospitality Group, JLL. ‘From a flight to safety point of view, the European cities will continue being attractive.’
Investments into London, which is the top city in Europe, have grown 30% in the last ten years, but other cities are catching up fast, with Paris recording 77% growth, Amsterdam 100%, Prague 273% and Madrid 314%. In many cases, further growth has only been hindered by lack of stock, as supply has been stable in Europe while demand has increased.
European institutions, from Deka to Aviva, from Union to Swiss Life, are extremely active in the hotel sector. ‘Even French institutional investors are now becoming interested in the hotels for the first time,’ said Asli Kutlucan, chief development officer, Cycas Hospitality.
Some focus on their own markets, but some opt for a pan-European strategy. Domestic investment still accounts for 56% of total transactions, followed by European buyers and then Asian investors, according to JLL.
Mainland Chinese investors are thin on the ground, as they are waiting for clearer directions from Bejing on foreign investments, but Asian money keeps pouring into European hotels. ‘Thai, Singaporean and Hong Kong investors have all increased their allocation to Europe, each with a different strategy, and this flow of capital will not stop over the next twelve months,’ said Saade.
The UK hotel market remains firmly at the top in Europe, but uncertainty over Brexit is weighing on investors’ minds. Some investors like the UK because it has become cheaper with the devaluing of sterling and tourist numbers have increased, but many more are cautious about the long-term prospects, especially for the corporate market as many banks and companies are re-locating teams to EU cities.
‘Now there is less emphasis on the opportunities thrown up by Brexit and more focus on the uncertainties than six months ago,’ said David Ryland, partner, Paul Hastings. ‘I personally would stay clear of the UK. There are concerns over imported inflation, the operating costs of hotels and the availability of staff, which tends to be foreign. In contracts that straddle the date for Brexit, it is now standard to allocate the risk between the parties.’
Political considerations are having a bigger impact on investment decisions, agreed Michelle Weiss, head of hotel properties, special property finance, Aareal Bank: ‘We are still in the UK, but we are much more picky. We have learnt to live with uncertainty.’
Continental Europe, by contrast, appears attractively stable. Germany has become expensive but remains a very sought-after market, experts agreed. ‘Look beyond the obvious,’ said Andreas Locher, head of acquisitions and sales, investment management hotels at Union Investment Real Estate. ‘If I had to choose one place to invest I would opt for Hamburg, which has recorded the best RevPAR (revenue per available room) growth over the last two years and still offers great potential.’
A similar narrative can be found in France, said Asli Kutlucan, chief development officer, Cycas Hospitality: ‘I would opt for Lyon over Paris because there is a lot of business in the city, it is the second biggest powerhouse in the country. Copenhagen is interesting too.’
Southern European countries are increasingly being targeted by investors, including institutional investors, because the attractions, such as booming tourism, outweigh any disadvantages. ‘Looking ahead Spain, Portugal, Italy and Greece will become even more interesting for investors,’ said Weiss.
The same cannot be said for Turkey, where risk is high and currency hedging costs are even higher. ‘I would not invest there until after the 2019 election,’ said Kutlucan. ‘Many hotels have gone bankrupt. As a Turk, I say this with a heavy heart, but I would advise investors to stay away.’
As investors focus on Continental Europe, two trends are taking hold, delegates heard: dual branding and extended stay hotels. Dual branding is pure common sense, said Ryland, as putting in a single brand can be too risky, especially if it is a large asset.
To maximise the value of the asset, it makes sense to split the space between a higher and a lower-segment hotel, thereby appealing to two types of clientele or customer profiles. The two hotels will have two distinct names and two separate entrances, Kutlucan said, ‘but on the inside they are run like one hotel, which leads to savings and operational efficiencies.’
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As for the branded extended stay concept, aimed at the business market, in the US it has been successful for three decades and it accounts for 10% of the hotel market, while in Europe it is still at 2%, so ‘there is a lot of growth potential, which is why we are bringing the concept here and rolling it out on behalf of clients like Intercontinental, Marriott and Hyatt,’ said Kutlucan. ‘Another positive is that it is the only segment that performed well even during the last financial crisis.’
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