The European hotel sector suffered significantly during the recent financial crisis, but in 2010 the industry began its slow recovery. The pace of improvement across the region has been mixed, with some areas experiencing growth more quickly than others; however, experts agree that confidence is returning, with transactions gathering pace and investment volumes set to grow this year.
Mark Wynne Smith, CEO for Europe, Middle East and Africa at Jones Lang LaSalle Hotels, thinks the picture is becoming increasingly bright.
"Things are looking a lot better, and the pace of transactions has certainly picked up by as much as 157% from the first quarter of 2010, although we have to remember that the beginning of last year was still very quiet," he says. "Countries like the UK, France, Germany and, to a lesser extent, Spain are driving the increase."
Supporting this trend, recent figures compiled by Jones Lang LaSalle show that investment volumes across Europe in 2010 totalled €7.7bn compared with €3bn in 2009. The year began with a 36% increase in investment volumes in the first quarter year-on-year and continued to gather pace into 2011.
Data from STR Global shows that in the first quarter of this year, Europe experienced increases in all three key performance metrics. Occupancy rose by 3% to 56.4%, ADR grew by 5.7% to €98.30 and revPAR increased by 8.9% to €55.44.
In March, Venice achieved the highest year-on-year occupancy increase, rising by 32.5% to 65.7%. Cologne, Istanbul, Vienna and Zurich all reported ADR growth of more than 20%, while Venice, Cologne, Oslo, Vienna, Gothenburg and Istanbul all experienced revPAR increases of more than 30%. But not all areas fared as well. Malmo and Salzberg both reported occupancy decreases of more than 5%. Tel Aviv fell 6% in ADR terms, and Salzberg experienced revPAR drops of 9.7%.
Investor confidence returns to hospitality
Hugh Taylor, chief executive at asset management firm Michels and Taylor, thinks significant improvements have been made.
"2010 proved to be a year of decent performance against the background of where we were," he says. "The big difference is that the banks are starting to take a position on the assets they have, and are now looking for sales or some sort of trade. There is more activity and product out there, although it is still patchy across Europe."
Investor confidence is also returning to the sector.
"On the back of far better trading performance through the second half of 2010, our investor base is now comfortable that volumes have re-established themselves," says Wynne Smith. "There has even been rate growth in some markets. Our expectation is that there will be more product in the second half of the year, but we are certainly seeing more investors returning to the market now."
The return of confidence has been driven in part by increased availability of lending, although not at pre-recession levels.
"The offers are different to during the heady days," he says. "Banks are only lending on trading assets, and they are most comfortable with those that don’t require big capital expenditure investment or repositioning; however, leading investors are returning and there is more confidence about acquisitions."
Taylor agrees that the investment climate is better. "People are looking for really great deals," he says. "However, the recession hasn’t identified the deals we would have expected from previous experiences. Because the banks have their own issues, we aren’t seeing distressed assets at very low prices as before."
Taylor now expects to see secondary assets coming to market at lower prices, which he believes will increase the appetite of interested investors.
Transactions are also beginning to increase. In 2010, single asset activity was driven by a number of trophy properties that appeared on the market and attracted strong interest from Asian and Middle-Eastern high net-worth individuals. But deal sizes were often small, with just over 70% of transactions below €50m. Only seven deals came with a price tag of more than €200m. At the beginning of 2011, a forecast by Jones Lang LaSalle predicted a steady increase in transactions, with a figure of €8.3bn expected by the end of the year.
"This figure could change because of the number of portfolios we are seeing," adds Wynne Smith. "We were concerned whether there would be an appetite for portfolio deals, so this is a demonstration of confidence."
According to Taylor, investor profile is mixed.
"The normal investment community is playing the game and looking at opportunities," he says. "In terms of trophy assets, the normal players are interested; however, we don’t seem to be seeing as many consortiums and institutions – it still doesn’t seem to be happening. I think this is unlikely to change in the short term."
Despite improving conditions, the speed of recovery across Europe continues to be varied.
"There are undoubtedly some areas of great strength, such as London, Paris and Germany," says Taylor. "But there are also areas of weakness; for example Ireland. Financing is still very tight, but 2011 is undoubtedly a stronger period."
Wynne Smith agrees: "London and Paris are always sought after and that hasn’t changed; however, it is difficult to predict what is going to appear. There was a large transaction in the first quarter and there will be a couple of others coming by the end of the second quarter. We are also noting an uptick in other cities including Barcelona, and investor focus has also increased in Rome. In addition, no one would look at central Europe 12 months ago, but now these markets have gone through the bottom. There will be a greater recovery out there over the next three or four years, and the interest is significantly local."
Despite this mixed picture, Wynne Smith believes the sector’s fortunes will continue to improve as the year progresses.
"There is a lot more to come, and there is still sufficient demand for the amount of product that is likely to come forward," he says.
"If trading continues the way it is, more sellers will bring forward offers. There is a risk of oversupply of transactions in the medium term, but we will definitely see increased levels of activity in place for 2012."
While Taylor also believes the recovery will continue, he issues a word of warning.
"It is difficult and it will continue at different speeds in different areas," he says. "In the UK, I think the pick-up is not as strong as expected, therefore investment opportunities might also be below expected levels.
"Having said that, the right asset in the right location will always have a lot of interest. London in particular is extremely sought after, and when assets become available, activity will increase."