BERLIN — The business of hotels isn't easy, European hoteliers said, and part of what's complicating it is the need to be "green."
Jan Hein Simons, director of hotels at business advisory Colliers Alternative Real Estate, said during the International Hospitality Investment Forum that hotel operations “will stay complex. Our business is no longer simple.”
Carine Bonnejean, managing director of hotels at business advisory Christie & Co., said the push for environmental, social and governance — and the need to budget for those initiatives — is growing.
She said 90% of the European hotel industry is not where it needs to be in terms of ESG underwriting.
The European Union will soon unveil a new set of ESG regulations known as the Corporate Sustainability Reporting Directive. Bonnejean said major public companies will be required to disclose information on ESG risks and opportunities, with a particular focus on the impact of their activities on people and the environment.
She added this will put pressure on older hotel buildings.
“ESG is a time bomb, and the hotel industry is really in the Middle Ages,” she said.
Robin Rossmann, managing director of CoStar’s hospitality analytics division STR, said one concern is that consumers still do not have sufficient clarity as to what makes a hotel product sustainable.
“There is not enough visibility for consumers in booking,” he said.
Simons said hoteliers must jump on ESG with both feet firmly planted.
“Investment needs to be spent, and if you do not, you will be penalized not just by governments but also by your guests,” he said.
Other worries facing the European hotel industry include sluggish hotel transactions activity and the continued hunt for labor, panelists said.
Simons said European governments have not done enough to help the hotel industry.
“Individual businesses have already gone through every step they can on keeping their profit-and-loss healthy,” he said.
Bonnejean there are currently 400 hotels in the U.K. that are dependent on pandemic-era government contracts, which will soon end.
Liquidity
Hotel transactions in Europe are falling behind as distress has not appeared in pricing, and the gap between buyers and sellers does not seem to be narrowing.
Bonnejean said investment volumes in the first quarter of 2023 totaled 3.3 billion euros ($2.54 billion), while in the same period in 2022 they were higher by approximately 26%, totaling 4.48 billion euros. Investment volume in both years was considerably below the 2019 total of approximately 5.5 million euros.
She added U.S. investors were quiet due to the landscape not being overly attractive to private equity and because of the considerable level of corporate mortgage-backed securities needing to be repaid later this year.
Overall, she added, the “relationship between lenders and borrowers has worsened” due to a complex array of factors such as earnings before interest, taxes, depreciation and amortization pressure, a wave of refinancing at higher margins, a softening of yields, the often frustrating hunt for value-add propositions, and the presence of opportunistic capital and stress-related covenant breaches.
What the Data Says
The bright side is that hotels in Europe are recovering, STR's Rossmann said. Hotel performance in April and the first half of May “has turned things around across Europe,” he said, noting that “gateway cities had been lagging but their performance is now aligned with that of secondary cities.”
“Most of Europe within the next month or so will be above 100% of 2019 occupancy or at 95% of it,” he added.
While past performance is not indicative of future performance, Rossmann said that overall, the hotel industry is outperforming other real estate assets due to its ability to grow rate.
Rossmann said the relative health of the luxury and economy sectors continues in Europe and he is optimistic about European hotel performance for the remainder of the year.
“Resorts overtook staycations in 2022 and will outperform that niche in 2023. … If you want to stay in luxury in Europe, you will have to pay more for it, considerably more, some 45% more,” he said.
Rossmann said the next highest percentage increase in the cost of investment and operations is in the economy sector, where the premium is approximately 20%.
“Hotels in gateway cities in all sectors will increasingly be able to raise rates; COVID-19 closed approximately 4.5% of hotels, but new openings equal approximately 4%, and supply growth is approximately 1%.
“Brand conversions have tripled, business and group travel are recovering and leisure is resilient. Occupancy on the books is stronger,” he said.
He added outliers are the Germany, Austria and Switzerland and Benelux markets, where domestic demand is more conservative and there is a lack of luxury moving in.
“When it comes to service levels at an individual property level, if you get it wrong, it will hurt, but on the market level, that is not how it works.
“At airlines, rates have gone up 40%, but service levels have not improved. Three pretzels in a bag of air. In terms of business on the books, [the hotel industry is] to have another good year, which will sustain rate,” he said.