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European hotel investment eclipses €20 billion

European hotel investment hit €22.8 billion (US$25 billion) in 2015, an increase of 79% year-over-year. A monumental fourth quarter saw 31% (€6.946 billion) of capital allocated to hotels, an increase of 101% versus Q4 2014, with Western European markets leading the activity, reports CBRE Hotels.

The sector is now set to transition into mainstream property investment after the hotels’ share of European real estate investment has increased by 6% since the last market peak in 2007. Recent confidence has been fuelled by the strength of the sector across many of the key Western European markets, in particular, the UK with €9.3 billion of investment in 2015 (+134% Y-o-Y), Germany €4.4 billion (+47% Y-o-Y) and France €2 billion (+96% Y-o-Y).

“A heightened allocation of capital into the sector has led to strong pricing and yield contraction against a backdrop of operating performance recovery,” said Dominic Murray, head of EMEA Brokerage, CBRE Hotels. “Hotel operators are finding the opportunity to drive average room rates owing to robust levels of occupancy and continued growth in demand.”

In terms of flow, North American capital deployed mainly by private equity funds represented 35% of European hotel investment during the past 12 months – typically targeting value-add opportunities. European hotel investment (18%) has included a growing amount of institutional capital and Middle Eastern (28%) investors continue to target luxury assets in capital cities for the preservation of wealth.

In 2015, Spain was one of the strongest growth markets thanks to attractive currency rates, security concerns in other destinations and the wider European economic recovery.

“I am confident that these trends will continue through 2016 and that the Spanish hotels market will also benefit from resurgence in domestic demand,” said Jorge Ruiz, head of CBRE Hotels in Spain. “Corporate confidence is beginning to return and unemployment has dropped to its pre-crisis low which has increased the opportunity in regional markets such as Valencia and Bilbao where a significant yield premium exists.”

Looking forward, CBRE said the outlook for operating performance in 2016 looks largely positive based on good supply, forecasted economic growth and low inflation.

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