The UK hotel market remains firmly at the top in Europe, but uncertainty over Brexit is weighing on investors’ minds, delegates heard at the PropertyEU European Hotels Investment Briefing, which was held in London this week.
Some investors like the UK because it has become cheaper with the devaluing of sterling and tourist numbers have increased, but many more are cautious about the long-term prospects, especially for the corporate market as many banks and companies are re-locating teams to EU cities.
‘Now there is less emphasis on the opportunities thrown up by Brexit and more focus on the uncertainties than six months ago,’ said David Ryland, partner, Paul Hastings. ‘I personally would stay clear of the UK. There are concerns over imported inflation, the operating costs of hotels and the availability of staff, which tends to be foreign. In contracts that straddle the date for Brexit, it is now standard to allocate the risk between the parties.’
Political considerations are having a bigger impact on investment decisions, agreed Michelle Weiss, head of hotel properties, special property finance, Aareal Bank: ‘We are still in the UK, but we are much more picky. We have learnt to live with uncertainty.’
Continental Europe, by contrast, appears attractively stable. Germany has become expensive but remains a very sought-after market, experts agreed. ‘Look beyond the obvious,’ said Andreas Locher, head of acquisitions and sales, investment management hotels at Union Investment Real Estate. ‘If I had to choose one place to invest I would opt for Hamburg, which has recorded the best RevPAR (revenue per available room) growth over the last two years and still offers great potential.’
A similar narrative can be found in France, said Asli Kutlucan, chief development officer, Cycas Hospitality: ‘I would opt for Lyon over Paris because there is a lot of business in the city, it is the second biggest powerhouse in the country. Copenhagen is interesting too.’
The beautiful south
Southern European countries are increasingly being targeted by investors, including institutional investors, because the attractions, such as booming tourism, outweigh any disadvantages. ‘Looking ahead Spain, Portugal, Italy and Greece will become even more interesting for investors,’ said Weiss.
The same cannot be said for Turkey, where risk is high and currency hedging costs are even higher. ‘I would not invest there until after the 2019 election,’ said Kutlucan. ‘Many hotels have gone bankrupt. As a Turk, I say this with a heavy heart, but I would advise investors to stay away.’
As investors focus on Continental Europe, two trends are taking hold, delegates heard: dual branding and extended stay hotels. Dual branding is pure common sense, said Ryland, as putting in a single brand can be too risky, especially if it is a large asset.
To maximise the value of the asset, it makes sense to split the space between a higher and a lower-segment hotel, thereby appealing to two types of clientele or customer profiles. The two hotels will have two distinct names and two separate entrances, Kutlucan said, ‘but on the inside they are run like one hotel, which leads to savings and operational efficiencies.’
As for the branded extended stay concept, aimed at the business market, in the US it has been successful for three decades and it accounts for 10% of the hotel market, while in Europe it is still at 2%, so ‘there is a lot of growth potential, which is why we are bringing the concept here and rolling it out on behalf of clients like Intercontinental, Marriott and Hyatt,’ said Kutlucan. ‘Another positive is that it is the only segment that performed well even during the last financial crisis.’
