An abundance of available capital, good economic fundamentals and strong investor interest will keep driving the hotel sector beyond the already notable level of activity seen in the market in the last two years, market experts believe.

An abundance of available capital, good economic fundamentals and strong investor interest will keep driving the hotel sector beyond the already notable level of activity seen in the market in the last two years, market experts believe.

'In the current context of record low interest rates, low inflation and exchange rate volatility there is a real hunger to invest in consumer-driven real estate,’ said Jonathan Langston, senior director of CBRE Hotels, a specialist division of the consultancy group. ‘The hotels sector has been the fastest growing, recording a year-on-year increase of 116% compared to a 39% growth for retail, and it is still regarded as an exciting asset class.’

Langston was speaking at the PropertyEU European Hotels Investment briefing, which was hosted by Paul Hastings at the law firm’s City offices in London on Tuesday.

Location
Location is key, and revenue varies markedly in different regions, as CBRE figures show. Looking at revenue per available room (RevPar), regarded as the most accurate picture of performance, Western Europe has had a growth of 6.1% in the past year, while Northern Europe, which includes the UK, has shot up by 16.9%. Southern Europe has grown by 9.2%, while Eastern Europe has declined by 5.3%.

The regional figures conceal big differences in local performance, Langston pointed out: ‘In Eastern Europe, for example, Ukraine is in crisis for well-known reasons while Budapest is absolutely booming and attracting interest from foreign investors. In Southern Europe, there is a wait-and-see attitude towards Greece while Spain is leading the pack. There are a lot of opportunistic investors out there ready to cash in on the upturn.'

Economic growth
What underpins the market is a more positive view about European economic growth shared by local as well as Asian and North Americans investors, as well as an awareness that the current situation cannot continue indefinitely. A lot of the capital targeting the sector is new money. ‘From a US standpoint looking at Europe, hotels are a very attractive play,' said Keith Evans, vicepresident of hotel acquisitions at Starwood Capital Europe Advisors.

'There is a lot of capital with similar business plans targeting Europe,' said David Ryland, partner in Paul Hastings’ real estate department. ‘Investors do not worry so much about interest rate rises, which they know will not be significant or sudden, but there is a real sensitivity about the impact of currency fluctuations. In joint ventures with hedge funds we now see arrangements to share the risks of adverse currency movements.'

The weak euro may have its drawbacks, but it is keeping Europeans in Europe, thereby boosting domestic tourism, and at the same time bringing both customers and investors in from outside the continent. 'There is a lot of money coming into Europe from Asia and the US, but very little money from Europe going into the UK, which is seen as expensive, partly because of the exchange rate,' said Erik Jacobs, director of transactions, hotel fund management at Invesco Real Estate.