While hotel performance in most U.K. and European hotel markets has recovered much faster than expected post-pandemic, operators are facing ongoing challenges in 2023. Those include persistent geopolitical factors and an uncertain economic climate, together with labor shortages, increased utility and operating costs and high interest rates.
As a result, the disconnect between hotel average daily rate and revenue per available room recovery, asset pricing and financing challenges, and a lack of stock coming to market have continued to affect deal flow. For the first half of 2023, hotel transaction volumes across the top five U.K. and European markets, including France, Germany, Spain and Italy, present a mixed picture.
UK
The U.K. market has historically been the backbone of the European hotel investment market. Hotels have continued to change hands in 2023, although there has been a noticeable decline in transactions since the second half of 2022. In addition, the bid-ask spread has widened between sellers seeking value for their record performance and buyers having to factor increased debt costs into their pricing.
Single deals have dominated market activity due to the challenges of financing portfolios in particular. However, there remains no shortage of capital looking to invest in hotels as they have proven to be a good hedge against inflation, underpinned by demand growth, with operators often able to pass on increased operating costs to customers through higher room rates. Hotels are therefore very popular with investors compared to other commercial property. However, the lack of deal flow, particularly for value-add opportunities, continues to be a factor in their decision to remain on the sidelines.
Up to 5% of the room supply in the U.K. is being requisitioned each day by the Home Office to house asylum seekers, which may explain why not as many hotels are coming to the market for sale.
France
France is currently leading the European hotel transaction market, with over €1.8 billion ($1.92 billion) of transactions to date. With no signs of this activity slowing, it is set to be the most active hotel market in 2023, supported by a strong calendar of events including the 2023 Rugby World Cup and the 2024 Olympic Games.
Two notable transactions in Paris since January include Dubai Holding's purchase of its joint venture partner Henderson Park's stake in the 428-room Westin Paris - Vendôme and the sale of the 172-room Hôtel California close to the Champs-Elysees to Tikehau Capital.
The market is mainly driven by single transactions, with only two small portfolios changing hands: a group of four Campanile hotels acquired by the Eternam group and another portfolio of Mercure hotels acquired by a syndicate of investors — Extendam, Bpifrance and Atypio.
Spain
The year got off to a slow start in Spain, but the first half of 2023 ended up being quite dynamic in terms of hotel investment, with transactions totaling around €1.3 billion, on a par with the first half of 2022. This figure was driven by some spectacular transactions, such as the acquisition of the Sofia Barcelona hotel by Blasson Property and Axa, the purchase of two Believe hotels by Stoneweg, two transactions involving the Abu Dhabi Investment Authority — 17 hotels for Equity Inmuebles and a portfolio of seven hotels operated by Meliá in Calviá — and the purchase of an 80% stake in another Meliá hotel portfolio in the Canary Islands and Ibiza by Banco March.
There is increased interest in resort hotels, especially in the luxury segment, as the boundaries between people's work and leisure time become increasingly blurred.
Germany
Transaction market activity in Germany slowed in the first quarter of 2023 after picking up slightly in the fourth quarter of 2022. This was the slowest start to the year since 2010 and was likely due to a lack of portfolio transactions as well as the gap between sellers' and buyers' price expectations. This trend is also due to the fact that the German hotel market is dominated by business-oriented hotels and the German economy has recently experienced a significant slowdown.
As a result, prime yields have softened slightly to around 5%. Activity picked up in the second quarter of 2023, largely driven by single-asset transactions, particularly in German leisure destinations, but to date hotel investment volumes are still around 30% lower than in 2022.
The largest transaction so far this year was the sale of the Steigenberger Hotel de Saxe in Dresden, which was acquired by Commerz Real AG. Other major transactions included the sale of the Steigenberger Grandhotel & Spa Heringsdorf, acquired by Union Investment, and the sale of TUI Fleesensee, acquired by Lohbeck Privathotels.
Italy
Investment volumes in Italy are highly volatile from year to year, typically characterized by trophy and large-scale transactions, but it is a market to watch and on the radar of many opportunistic investors seeking high returns. This fragmented market, with many under-invested independent hotels and limited brand penetration, offers significant value for astute investors at attractive entry pricing.
So, what can we expect over the next six months?
France is likely to overtake the U.K. as the most active European hotel transaction market in 2023. After the summer, pipeline activity in the U.K. is picking up, but continued uncertainty and recessionary fears are affecting deal volumes, particularly for large tickets. Across the U.K. and Europe, buyer appetite remains strong, with many investors waiting for more attractively priced opportunities to emerge on the back of an expected increase in the distressed market.
The hotel sector has been able to withstand the current headwinds, however the next 12 to 18 months may be different as much of the 2022 maturing debt has been pushed to refinance in 2023 and 2024.
European hotel yields have proved more resilient to inflationary pressures and rising interest rates compared to other commercial real estate, such as office or retail, where yield softening and price correction started almost 18 months ago.
The outlook for top-line performance is still healthy in most markets, with RevPAR well ahead of 2023, but pricing will need to adjust further to reflect the debt environment. We will need to see more stability before transaction market conditions improve significantly but there are plenty of reasons to remain optimistic. Several significant assets and portfolios across Europe are expected to be brought to market, which will drive an uptick in activity in the back end of the year. Other positives on the horizon are the deceleration of inflation and the consistent resilience of European hotel RevPAR performance.
Carine Bonnejean leads the hotel specialist team at Christie & Co, including corporate agency and investment teams, as well as its European advisory teams.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.