The 2018 European Hotel Investment Survey from Deloitte based on responses from 122 senior hospitality figures from across the world, revealed the most attractive European cities for hotel investment.
Amsterdam continues to be seen as the most attractive hotel investment destination in Europe, with more than a third of respondents (34%) ranking the Dutch capital top. London (24%) has climbed back to the second place from fourth in 2017, ahead of Paris (22%) and Madrid (19%). Dublin (18%) and Barcelona (16%), which featured in the top three last year, have slipped to fifth and sixth, respectively.
London’s rise comes despite 70% of respondents saying that the UK is at a ‘peak’ or ‘downturn’ in its investment cycle. By contrast, investors identified France (50%), Greece (48%) and Spain (46%) as the European markets that are currently on the ‘upturn’.
Andreas Scriven, head of hospitality and leisure at Deloitte, comments: “When it comes to hotel investment, Amsterdam is head and shoulders above the rest of Europe. It remains a standout destination for business and leisure, and is strategically placed as a gateway city. Given the investor appetite and lack of supply in the Dutch capital, we expect to see further inbound investment in 2019.
“It is reassuring to see London climb back up the rankings, and somewhat curious considering the uncertainty around the manner in which the UK will exit the EU in less than five months’ time. For London to continue to remain attractive to hotel investors, it will need to address concerns around over-supply and high pricing. Investors will be keeping a close eye on currency markets in the coming months, as sterling’s weakness is likely to be a key driver of inbound investment into the UK capital.”
Investors still expect top-line growth in the Regional UK hotel market
Respondents were also asked about their investment appetite towards the UK regional hotel landscape. For the fifth year in a row, Edinburgh has been named the most attractive UK regional city for hotel investments in the next 12 months, according to 39% of respondents. Second-place sees Cambridge (30%) overtaking Manchester (28%). All three cities are also expected to see the highest growth in RevPAR (revenue per available room) in 2019.
The majority of hotel investors are optimistic about 2019 growth prospects in the Regional UK hotel market, with 52% of respondents expecting RevPAR growth to be between 1-3% across the UK, although this is down from 70% last year. Hotel investors were less confident when asked about 2019 expectations for gross operating profit per available room (GOPPAR), however. One in four respondents (25%) expect GOPPAR to enter negative territory in London over the next 12 months, while 21% expect negative GOPPAR in the Regional UK.
The research also revealed growing concern around pricing multiples, with expectations on EBITDA multiples for both London and Regional UK falling year-on-year. Despite the majority (53%) expecting multiples of 11-14x in 2019, one in four respondents (25%) expect less than 10x multiples across Regional UK, up from 11% last year. Around a third (32%), however, still expect to see EBITDA multiples of over 16x in London, falling slightly from 36% in 2017.
Two-fifths (41%) of respondents expect the primary source of investment into the Regional UK market to come domestically. More than a third (36%) of hospitality leaders expect to see inbound investment coming from Asia Pacific (excluding China and India), increasing from 26% last year. The perceived importance of North America and China as a source of investment has continued to decline, falling by five and ten percentage points respectively year-on-year.
Nikola Reid, director and head of UK hospitality at Deloitte comments: “The majority of hotel investors anticipate continued RevPAR growth in the Regional UK in 2019. However, one only has to scratch away at this surface to reveal clear concerns and intensity in operational cost pressures caused by inflation, staffing challenges and Brexit uncertainties. With significant headwinds to profitability, UK hotel owners and operators will need to continue to be more innovative with efficiency and productivity to preserve the bottom line whilst having to adapt to ever changing consumer habits and value expectations.
“Despite this, we’ve seen no shortage of capital chasing the exceptional level of portfolio activity this year fuelled by a number of new players in town and ensuing aggressive pricing. With a number of portfolios and large single assets still expected to come to market next year, and, as we move closer to a resolution on the Brexit negotiations, the strength of the transaction market may be tested.”
Economic backdrop fuelling concerns around talent retention
According to the research, 38% of respondents identified ‘lack of economic growth’ as the number one strategic risk facing the European hotel industry over the next five years. Terrorism, which was last year’s number one risk after a series of high-profile attacks across Europe in 2017, has slipped to second place (34%, down from 67%).
In order to address the staffing issue prevalent in the European hospitality sector, three-fifths of hotel investors believe increasing pay would help attract the top talent over the next three years. Ensuring a faster career progression (48%) and improving employee benefits (43%) would also help attract and retain employees, according to respondents.
Scriven added: “Hotel investors are understandably concerned about the macroeconomic environment, which has exacerbated fears about attracting and retaining talent. Understandably, hospitality leaders are thinking about how they can keep hold of their staff. This is why we are seeing evidence of the need to increase pay and improve benefits packages, in order to mitigate factors out of their control.”
