As hotel investors make plans for 2018, what is the investment outlook for Europe – one of the largest and most mature hotel markets on the planet?
For European hotel investors, the recent past has been complicated by sluggish economic growth and unsettling geopolitical events. From our interviews for this article, it appears that most of these challenges are in the rearview mirror, and that 2018 could turn out to be a pretty good year for continental Europe. The U.K., on the other hand, remains a big wild card depending on how Brexit unfolds.
To understand the economic backdrop that ultimately affects deal flow, BHN talked to Tourism Economics’ director of Europe, David Goodger, who shares some surprisingly good results. According to Goodger, “The Eurozone economy is currently in the middle of a growth boom, and 2017 GDP growth was the fastest growth in a decade, exceeding prior expectations. The region benefited from resurgent world trade during 2017, but current growth is now broad-based, and strong growth is set to continue into 2018. Manufacturing output growth remains particularly high, while other sectors also continue to expand. Household income and spending is supported by robust job creation, falling unemployment and continued moderate wage growth. A dip in price inflation, related to euro strength, will further boost real incomes, while moderate price increases will not necessitate any immediate interest rate rises to support further investment growth.”
Turning to the U.K. and a less optimistic outlook, Goodger added, “The U.K. economy is bucking the wider European and global trend, as it slowed throughout 2017, and only sluggish growth is expected for the coming years. Inflation will slow during 2018, as the sterling has seemingly stabilized at around current rates. This will ease the squeeze on household incomes, but spending power remains under pressure. Businesses remain wary of investing in the U.K. due to Brexit-related uncertainty. This is also seemingly having some impact on hotel demand as inbound business travel fell sharply during the second half of 2017.”
To get a sense of what is on the hotel investment horizon for the year ahead, we talked with six leading hotel investors who participated in “The Money Hall” series at the Hotel Investment Conference Europe (Hot.E) in September 2017 in London. We asked them about Europe in 2018: Do they expect to do more or fewer deals and why; do they expect to be a net buyer or a net seller; and what locations are of interest?
Ryan Prince, vice chairman, Realstar Group, London: “I’d expect to see more deals in 2018, especially in the first half of the year. This will largely be driven by 2012-15 vintage transactions that are seeking an exit while the cycle looks OK. People are generally feeling bullish on Europe and those with U.K. assets will want to pull the trigger before being in the middle of Brexit. We sold the lion’s share of our U.K. assets in 2014 and 2015, back when the word ‘Brexit’ hadn’t even been coined.”
Addressing Europe in contrast to the U.K., and similar to what Goodger suggested, Prince said, “In the U.K. I expect London will remain a hot commodity even in the face of Brexit. I think liquidity for assets in the provinces may suffer over the next two years in the face of uncertainty. Europe is a very different story at the moment. Local and global capital seems to feel increasingly comfortable with a bullish outlook on the continent in general, so I’d expect to see more transactions there. I’d keep an eye on France.”
Prince added, “The most significant issue facing the U.K. hospitality sector in 2018 will be availability of labor – particularly in housekeeping and food & beverage. Concerns over Brexit and the weak pound have meant the traditional inbound labor markets are materially down, and many of those who are already in the U.K. are going back home to get ahead of a potential exodus.”
Lionel Benjamin, director of hotels, Topland Group, London: “We would expect more deals to happen in 2018. We see the weakness of the pound attractive to foreign investment, more stock coming to the market and different buyers with alternative strategies coming to the market and competing for the hotel stock for alternative uses. We believe some owners will be reaching the point in their ownership phase for bringing stock to the market.”
Benjamin offers a more positive view of the U.K. when he said, “We will look in all markets for where we see the most opportunities. We have been active in provincial U.K. and continue to see the opportunity in primary and secondary locations across the country. A significant focus for Topland will be on hotel development. Topland looks across the U.K., and for the purposes of hotel locations, primary and secondary refer to areas of high-density traffic, whether it be airports, major train stations, university towns and major centers for retail and commercial activity.”
Nadra Moussalem, executive director and head of Europe, Colony NorthStar, Paris: “I expect we’ll look to invest in 2018 in the hotel space. It’s hard to guess, but the pipeline currently suggests we could be doing more. We’re seeing very attractive opportunities, at a time when the outlook is sound, specifically on the continent. I expect mainly portfolio or company deals since scale is important to us. Our focus is generally Western Europe, with preference to gateway markets except as part of broader portfolios or special situations.”
How is foreign-based capital viewing Europe?
Erik Jacobs, Partner for HORECA Investment Partners, London: “We expect to do more deals in 2018, since I think private equity will continue to be a net seller, and as a family office we can benefit from picking up those assets that do not meet the requirements from the more institutional investors. This could be due to operational exposure, capex, leasehold, etc. As a family office we are a long-term holder of assets, and in Europe our portfolio is still very small. Therefore, we are definitely a net buyer.”
Identifying key markets, Jacobs said, “As an Asian family office we are only looking at the key gateway cities in Europe, such as London, Paris, Amsterdam, Barcelona, Madrid, Munich, Berlin, Frankfurt and Hamburg. Also, if we find a local partner, we would look at Milan and Rome. At the moment you see those investors with higher cost of capital (i.e., private equity) shifting further east and south in order to make the returns. As we are longer-term investors, we are only looking at the key markets and strong locations within these markets.”
David Ling, head of strategic development, CDL Hospitality Trusts, Singapore: “We will continue to acquire hotels, focusing on gateway and regional cities in Asia Pacific and Europe. The diverse landscape provides excellent opportunity to deploy capital to markets experiencing upward trends in income and underlying real estate value.
“The ongoing economic and geopolitical transitions across Europe have created windows of opportunity for astute investors making strategic moves into established markets with high barriers to entry. The availability of quality assets in prime locations adds to the appeal. The relatively transparent accounting and legal frameworks provide ease of doing business. Western Europe, particularly U.K. and Germany, have been the most sought-after markets. Limelight is spreading to France following President Emmanuel Macron’s initiative to reform the French labor system. Select markets in Eastern and Southern Europe such as Czech Republic, Hungary, Spain and Greece present good prospects for income growth.”
Baron Ah Moo, managing director, BLI Capital Group, representing private wealth sources from France, Israel, Morocco, the U.S. and Vietnam: “We hope to do more transactions in Europe in 2018 as we are quite bullish in Europe, but we believe the competition for deals will cause pricing to increase over 2017. Pending deal flow we hope to be a net buyer with the preferred structure being a JV with a clear exit, as we have limited infrastructure in Europe. With the anticipated increase in values, we will seek better yields in secondary countries and markets. We remain active in secondary markets in Spain and Germany, while we are watching gateway cities in Portugal, Austria, and the Baltic States as they are poised for growth. Should financial and economic hubs like Ireland, Switzerland, Belgium and even Gibraltar with the pending Brexit continue their stable trajectory, we would certainly pursue qualified opportunities in these locations.”
As further validation of foreign capital’s interest in Europe, Ah Moo said, “European hotels are projected to lead the sector in growth in 2018. With increased political and commercial risk in the United States and the current instability in the Middle East, BLI’s clients are actively seeking hospitality investment opportunities in the EU and place it alongside our home market of Asia as our focus for the next 12 to 24 months.”
We will be reporting back on how the year unfolds at the Hotel Investment Conference Europe (Hot.E) in September.
Contributed by Burba Hotel Network