When a storm makes landfall, you batten down the hatches. Some hotels shut their doors completely, and many financiers have followed suit. Investors are few and far between in this climate of uncertainty. Together with my Spanish colleague Miguel Vázquez, I take a look back over the past year in hotel investment and make some predictions about where the opportunities will be going forwards.
Investor interest in European hotels had been strong for years. The volume of transactions was on the rise, prices were high and more and more investment was flowing in from outside Europe. Major European cities and tourist destinations in Southern Europe had a special place on investors’ wish lists. But this year investment put on hold in short order, with some transactions even being cancelled.
For now, institutional investors have put their search for hotel real estate on the back burner, and they are looking much more critically at the viability of the hotels that are on the market. Meanwhile, private capital is sniffing out some of those opportunities and snapping them up. But thanks to the support provided by banks and governments, only a limited number of hotels have actually been forced to sell up. In the EMEA region, investment volume in the first three quarters of 2020 was down by 60% compared to the same period last year.
More deals expected in 2021
We expect more deals to come this year. Not every hotelier will be able to stay the course in the months to come. And now that investor confidence is recovering, that will mean a rise in the number of transactions. We all saw how much pent-up demand there is for travel in the summer of 2020, and that demand will surge as soon as it becomes possible to travel. Fortunately, the arrival of a vaccine for the coronavirus means that a return to normality seems inevitable. In our latest report, we predict that the number of hotel visits in the Netherlands will return to its pre-pandemic level by next year.
Rapid recovery in Southern Europe
People want to travel again as soon as they can, but intercontinental trips will likely remain limited to start with. Europeans who have been longing for some sunshine will head mainly for the Mediterranean. We expect tourism to recover quickly there, once the current crisis has passed – but there is a lot of ground to make up. Our March 2020 report found that these economies depend on tourism to a relatively high degree. They also have a large share of tourists from abroad. That is an unfortunate combination during the current crisis.
Dependence on business travel will also play an important role in the recovery. We expect business travel to recover more slowly than tourism, as conferences and events will simply not take place for the time being: we have all seen that online communication makes a lot of business travel unnecessary. This change is affecting Western European countries in particular. In the Netherlands last year, about half of overnight stays were booked by business guests, mainly in the cities. The picture is broadly similar in the UK and Germany.
The search for returns
Western Europe remains attractive for hotel investments, but Southern Europe provides a good alternative for serious returns. The south has only recently become more popular among institutional investors, and many hotels there continue to be in the hands of local investors or hotel operators. These are more likely to have to sell up than high-wealth international investors. A lot of value can be added through radical moves in branding, refurbishment and technology, for example. One thing is certain: the overall quality of hotels will improve once this storm has subsided. That is still some way off, but at least the end is now in sight.