The rising costs of operating a hotel are likely to erode profitability in the United Kingdom and the rest of Europe, and could also cause potential buyers and investors in the hotel sector to think twice, according to speakers at the 18th Whitebridge New Year Hotel Investment Summit.

Nick Pattie, managing director of London-based Whitebridge Hospitality, said for most hotels in 2022, "revenues were up on those of 2019, not necessarily by volume, but certainly by [average daily rate]."

But as labor and operating costs continue to rise, hotel managers are likely to be more preoccupied by expenses in 2023, he said.

"Operating costs have accelerated significantly," he said. "What we’re seeing in the operations we look after, [the principal issue] is that wage inflation — if you can find someone to employ — is rampant, and we’re seeing [wage] costs sufficiently more than can be read officially anywhere."

Similarly, electricity costs are "two to three times higher than they were last year," Pattie said, adding that higher energy costs will weigh on the bottom line.

"[Regarding] budgeting in 2023, gross operating profit margins are being squeezed down, we predict, by between six and seven percentage points, which is quite significantly, and that is despite forecasting higher revenues," he said.

Philip Camble, director at Whitebridge Hospitality, said the volume of hotel transactions in U.K. and mainland Europe increased in 2022, but “more inflation, more recession, more interest rate rises” will result in a deals hangover in the continent.

Deals will happen, but a lot of due diligence will be required, Camble said.

Hotel performance gains also are likely to be challenged in 2023, he added.

In Qatar, hotels got a big boost in business from soccer’s FIFA World Cup in November and December, but for 2023, revenue per available room there “could drop by about as much as 30%,” he said.

Camble said revenue per available room at London hotels will grow, but by no more than 15%, due in part to a weak pound.

"And the continuing conflict in Ukraine remains too important to ignore," he added.

Investors in the Middle East will spend money in 2023, but private equity will likely remain cautious, Camble said.

"There are clear signs of rising oil wealth being invested in our beautiful industry," Camble said, "but last year, buyers from North America fell away dramatically because of headwinds, interest rates and a lack of supply. Private equity fell away after a very busy 2021."

Pattie and Camble said this vacuum will allow other capital sources to become bigger players.

"Much will be oil-related, and [real estate investment trust] activity remains very much a minor-league player at the moment," Camble said.

Pattie said that in terms of business models, the appetite for leases will remain the same as they were in 2021, but management agreements will continue to fall out of favor.

Fewer hotels than expected sold at distressed pricing in 2022, and that will likely continue to be the case, Camble said. He added the largest market for distressed hotels is Western Europe, excluding the U.K. and Ireland.

The three most active European markets for hotel transactions in 2022 were Italy, the regional U.K. and Spain, Camble said. In Italy, a standout deal was Mexico’s Palace Resorts' acquisition of luxury group Baglioni Hotels for approximately 500 million pounds sterling ($607 million). In the regional U.K, seaside-vacation operator Butlins was sold first to pension fund Universities Superannuation Scheme, then to the Harris Family Trust — for approximately 300 million pounds sterling per stage. In Spain, KKR and Dunas Capital sold six hotels in the Balearic Islands to Israeli hotel group Fattal for approximately 165 million euros ($177 million).

Camble said London will be a highly active market for deals in 2023, which might include the sale of Generator Hostels, which is in discussions to be bought by French investor PAI Partners, according to Bisnow.

The biggest single-asset deal of 2022 in Europe — one that was solely for bricks and mortar — was Cascade Investments's acquisition of the W Rome for $170 million, Camble said.

“Our favorite deal of 2022, however, is sovereign wealth fund [Public Investment Fund]’s 30% acquisition in Aman Resorts,” he said.

Cain International and the Saudi fund invested in a joint venture valued at $900 million for its share in the Swiss firm.

“Expect more PIF deals in 2023, and not just ones involving Cristiano Ronaldo,” Camble said, referring to the sovereign wealth fund’s November deal to bring the soccer player to Saudi Arabian club Al Nassr, based in Riyadh, in a 30-month contract worth $215 million.

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