LONDON—Hotels in the Pan-European region outperformed all property classes during seven of the past 11 years, making the hotel risk/return profile one of the strongest segments over the period, according to Investment Property Databank’s “Pan-European Hotel Performance report.”
All hotels across Europe delivered a 10-year total return of 7.4% against commercial property’s 6%. On a five-year basis, hotels returned 5% and commercial property 3.5%.
The results were announced 12 July during the IPD Pan-European Hotel Investor Briefing, which brought together hotel executives and investors from throughout the region.
“The results of the Index over the last two years indicate actual volatility is not as prevalent in hotels as people think, and when compared to other real-estate classes … we believe it’s one of the most opportune and attractive times to be investing in the sector, for reasons such as yield premiums and also global supply/demand imbalance,” said Marc Socker, director of Invesco Real Estate’s Hotel Fund Management team.
“Demand is very strong, occupancy at hotels is at near or historic highs in a lot of markets, and global tourism is growing at exceptional rates. Recent figures from the United Nations World Tourism Organization show very strong growth so far for 2012, against the backdrop of record numbers for 2011. People continue to travel more, and at the same time supply is at an all-time low and development financing is very scarce.
“Whilst many people see hotel real estate as an alternative asset class, it is very important to us that indexes such as this will help hotel real-estate investment be seen as more of a mainstream asset class,” Socker added.
Andrew Shaw, development director at Accor, said the results of the Index are key as hotels “need to be able to track hotel values and understand where they are going, understand yields and have a proper grasp of the market.”
IPD, which provides real-estate performance data, counts 475 properties valued at approximately €10 billion ($12.2 billion) across 11 countries in its hotel sample.
Consistency of hotel real estate
IPD’s results for 2011 showed total returns of 6% for the Pan-European region (a slight decline on 6.9% during 2010). Capital growth was 0.3% (compared to 1.3% during 2010).
However “hotels weathered the storm particularly well compared to commercial property,” Greg Mansell, research manager at IPD, said. Income return was up 5.7% from 5.5% during 2010.
“The U.K. has seen stable total returns of 10.4% and, as a result, is the top-performing sector for the market. France just about managed to avoid negative returns in 2008/2009 and 2011 figures are up (9.3%).”
Germany, meanwhile, reported an increase in total returns of 4.9% and has proven a stable market in general, particularly in the luxury segment. Spain, Portugal and Italy reported slight decreases, Mansell said.
“Hotels have really performed as mainstream class for quite some time now,” he added. “What really has happened during this recession is that there has been a bit of a move away from offices, and investors really have been looking elsewhere … There has been a consistency of hotel performance, second only to retail … (with a) lack of volatility versus strong returns.”
Growth despite poor economic conditions
Tim Smith, director at HVS, considered the potential driving forces behind European hotel investment: “The people who stay in hotels are driven by the economy, and we’ve seen hotels have performed better than expected throughout a nasty recession.
“Our research shows continued (gross-domestic-product) growth in key sectors. There’s continued importance of the new markets, particularly in gateways cities. We’re also now starting to see the BRIC (Brazil, Russia, India and China) countries becoming increasingly important for the European hotel sector. …
“A big move has been with Malaysia, which has come into the top 10 at the expense of the Ukraine. Growth in China continues to steam ahead. The hope is that those Chinese will also start also coming back into Europe whether for business or pleasure,” Smith said.
Performance and investment trends
With occupancy slightly up in 2011 and for the first part of 2012, Smith said “any concerns we had have been dissipated over the last couple of months, and we are looking now at comparable levels to last year. In terms of (revenue per available room) year on year, Northern Europe has done incredibly well. There was a fallback in Western Europe, but we are not concerned as this was down from a record high. And we see a growth of 2.8% for Europe overall.”
“2011 saw an increase in total investment transactions of about 9%, with 264 hotels changing hands.”
Single asset transactions took over half the overall volume of sales, something Smith hopes will change.
“Overall, the single asset transactions are pretty steady over a 10-year period, and in 2011 we are ahead, but it is the portfolios that are really lacking. That is the area which needs to boost to really grow within the sector. In the U.K. there have not been the big transactions that we have all been hoping for,” he said.
Trading has been on a general upward trend, which Smith saw as the driver for an overall increase on returns.
“With all markets but two gaining RevPAR growth in 2011, we expect continued growth in 2012, but at a slower pace. Value is likely to be driven by improved hotel performance rather than by investment sentiment. Investors are likely to remain risk-averse and focus on gateway cities.”
