Only one direction to go for stifled European deal market

EUROPEAN REPORT – Hotel values in Europe rose modestly by 1.1% in 2023, according to HVS' 2024 European Hotel Valuation Index. The modest result somewhat mirrored the modest transaction volume on the continent, which led HVS to suggest there’s really only one direction for investment volumes in 2024.

“Over the past few years, investors have adopted a ‘wait and see’ approach to hotel investment, meaning that substantial amounts of capital remain available and, as has been demonstrated again in 2023, hotels remain a strong investment option as a good hedge against inflation,” said Clemence Sennavoine, an associate at HVS London and co-author of the HVS 2024 European Hotel Valuation Index.

Overall, there were 17 fewer hotel transactions in Europe than in 2022, and the volume of €10.7 billion was a 19% decrease year-over-year, 40% lower than the volume in 2019.

The most notable single-asset transactions were London-based Henderson Park’s sale of the 428-key The Westin Paris – Vendôme to Dubai Holding for €325 million in February, London-based Orion Capital’s sale of the 96-key Six Senses Rome to Italy-based Gruppo Statuto for €245 million in October, and Andorra-based Reig Capital Group’s sales of the 120-key Mandarin Oriental Barcelona to Saudi Arabia-based The Olayan Group for €200 million in July. The 2:1 ratio of individual transactions to portfolio transactions remained consistent for the last four years in 2023, with the largest portfolio transaction of the year, Abu Dhabi Investment Authority’s acquisition of 17 hotels in Spain for an undisclosed amount, including six Melia hotels, eight Trpy hotels and three Sol hotels.

Spain and France were the hottest two markets and accounted for almost €4.7 billion (44% of the total transaction volume) in 2023, both representing 21% improvements over the 2022 volume. Institutional investors and hotel operators were the largest net buyers, accounting for €2.7 billion more than they sold, while private equity firms were the largest net sellers, with €630 million in net disposals.

European investors remained the most active in acquisitions and disposals, representing 75% of the transaction volume. Paris replaced London as the most liquid hotel market in Europe, with €914 million in transaction volume, a 22% increase year-over-year.

Recovery to 2019 values

Hotel values in Europe now sit at 97% of values in 2019. The report further showed that increases in revenue and profit recovery still resulted in marginal gains for European hotel value year-over-year, but the 1.1% increase was still much smaller than the gains in 2021 (+3.8%) and 2022 (+4.5%).

Leisure continued to be the main driver of hotel demand, although the report found that group travel continues to recover and is now around 80% to 90% of pre-pandemic levels. Like elsewhere around the globe, occupancy continues to lag in Europe, but ADR and RevPAR continue to make gains. Despite the persistent inflation and debt concerns, most hotel markets in Europe continued to show modest gains in values.

“Revenue and profit recovery still resulted in marginal gains in value over the year, despite the still challenging outlook on valuations parameters,” said co-author Julia Dzerkach, an associate with HVS London, “but the elevated cost of debt in the first half of 2023 and the persisting macroeconomic challenges have resulted in a subdued market for hotel transactions, with a wide bid-ask spread for sales and acquisitions.”

Hotels in Athens saw the largest value growth in 2023, with an 11.2% gain year-over-year. Warsaw, Poland, was the second highest at 5.3%, with Zurich (+5%), Florence, Italy (+4.7%) and Prague (+4.7%) rounding out the top five. The German markets of Berlin (-0.2%), Hamburg (-0.4%), Munich (-1.6%) and Frankfurt (-7.5%) were amongst those seeing a large decline in hotel values for 2023. Stockholm also saw a -3.4% value change in 2023. The Russian cities of St. Petersburg (-23.7%) and Moscow (-29.4%) saw substantial changes in hotel value because of the dearth of transactional activity in Russia and economic sanctions because of its war in Ukraine.

For hotels outside of the Eurozone and judged by their local currency, Istanbul (+74%) saw the largest increase in hotel value, followed by Edinburgh (+5.5%), Prague (+4.3%), Manchester (+3.7%) and Birmingham (+2.9%). 

Only Amsterdam, Athens, Dublin and Paris markets have seen values return to 2019 levels.

2024 outlook

The HVS report said in 2024 that because interest rates are expected to have peaked and cuts are expected to happen, optimism remains for the volume of loans due for refinancing throughout 2024. Price stability is expected to return in 2024, and hotel demand is expected to remain robust, with events like the Summer Olympics in Paris and Taylor Swift’s Eras Tour expected to generate additional revenue for hotels in those markets.

Travel continues to be increasingly skewed to experiential, and there is a continued appetite for blended indoor and outdoor spaces and an ever-increasing focus on sustainability, with enthusiasm expected to continue for concepts like luxury glamping and destination resorts.

In addition, the report said there would be more visibility around the cost of debt-reduced inflation expectations, which should result in increased flexibility in dealmaking.

A copy of the HVS 2024 European Hotel Valuation Index can be downloaded here.