European Hospitality Sector Outlook 2024 - Extended Version

First page 1 Next page Last page

Animated publication

THE TIDE IS TURNING

HOTEL FORECAST - EXTENDED REPORT

KEY TRENDS TO HELP NAVIGATE THE REAL ESTATE MARKET IN 2024

THE TIDE IS TURNING

EXTENDED REPORT

THE TIDE IS TURNING

TOURISM VS ECONOMY TRENDS - EUROPE (INDEX, 2000 BASE)

In recent years, the hotel sector has undergone a tumultuous journey, facing complete closures during the pandemic, followed by a robust recovery driven by revenge travel. Despite the sector's strong operational rebound, the European hotel investment market has been impacted by unprecedented increases in financing costs as well as economic and geopolitical challenges. Nevertheless, the decrease in transaction activity has been less pronounced compared to the broader real estate sector. This resilience can be attributed to various factors, with a key driver being the ongoing trend of investors shifting towards alternative asset classes, benefiting from structural changes in the economy and society, which, in the case of hotels, has been reinforced by the exceptional performance recovery, surpassing the pre-pandemic levels across most markets. Looking ahead, while the robust performance growth is expected to ease in 2024 amid economic and geopolitical challenges, it is anticipated to endure. Additionally, investment activity is projected to increase gradually, particularly in the second half of the year.

350%

300%

250%

Despite the sector's strong operational rebound, the European hotel investment market has been impacted by unprecedented increases in financing costs as well as economic and geopolitical challenges.

200%

150%

100%

50%

2011

2017

2012

2021

2015

2013

2031

2018

2016

2019

2014

2001

2010

2027

2022

2025

2023

2032

2033

2028

2026

2029

2024

2007

2002

2020

2005

2003

2030

2008

2006

2009

2004

2000

OVERNIGHT TOURIST ARRIVALS

GDP, REAL US$, 2021 PRICE

5.0%

3.5%

1.8%

1.5%

CAGR 2000 - 2019

CAGR 2023 - 2033

OVERNIGHT TOURIST ARRIVALS

GDP, REAL US$, 2021 PRICE

Source: Oxford Economics

4 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 5

BETTER THAN MOST YTD Q3 2023 VS Q3 2022 HOTEL RETAIL INDUSTRIAL 0%

HOTEL TRANSACTION ACTIVITY IS AMONG THE LEAST IMPACTED IN EUROPE (% CHANGE, BASED ON VALUES IN EUR)

YTD Q3 2023 VS 5-YEAR AVERAGE

OFFICE

ALL PROPERTY

-10%

-20%

-26%

-29%

“IN THE LAND OF THE BLIND, THE ONE-EYED MAN IS KING”

-36%

-42%

-40%

-47%

-54%

-58%

-61% -59%

-60%

Hotel transaction activity in Europe surpassed EUR 10B during the first 9 months of 2023, a drop of 10% YOY and 26% below the 5-year average (2018-2022). While a negative trend, it makes the hotels one of the least impacted sub-sectors within real estate, which recorded an overall 54% drop in transaction volumes over the same 5-year period. Country breakdown reveals Spain, France and Portugal, have even witnessed a surge in hotel transaction activity. Investors are especially interested in acquiring resorts and hotels in prominent gateway cities with robust tourism demand, such as Paris, Barcelona, Madrid and Rome. The primary attraction lies in the flexibility of hotels to enhance income in a higher inflation environment, coupled with the long-term prospects of capitalizing on structural shifts. These shifts include a growing population with increased leisure time, technological advancements improving operational efficiencies and transportation, a shift from expenditure on goods to experiences, and the evolving mobile lifestyle, leading to more time spent in transient forms of accommodation.

-80%

HOTEL TRANSACTION ACTIVITY IS AMONG THE LEAST IMPACTED IN EUROPE (% CHANGE, BASED ON VALUES IN EUR)

-100%

Q3 2023 VS 5-YEAR AVERAGE

Q3 2023 VS Q3 2022

HOTEL

RETAIL

INDUSTRIAL

OFFICE

ALL PROPERTY

-7%

-20%

-34%

-34% -37%

-40%

-46%

-55% -54%

-59%

-60%

-65% -66%

-80%

Source: MSCI Real Capital Analytics

-100%

POLARISED HOTEL TRANSACTION ACTIVITY ACROSS EUROPE

YTD SEPTEMBER 2023 CHANGE VS 2019

COUNTRY

VOLUME (€BN)

CHANGE VS 2022

+19%

2.40

+92%

SPAIN

2.39

+11%

+79%

FRANCE

UNITED KINGDOM

1.41

-66%

-52%

0.97

-62%

-25%

GERMANY

0.51

-71%

-24%

ITALY

Source: MSCI Real Capital Analytics (change is versus the same period in a respective year)

6 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 7

THE QUEST FOR HIGHER YIELDS

THE QUEST

IT TAKES TWO TO TANGO

YIELD DECOMPRESSION ACROSS MOST MARKETS

Despite a considerable amount of capital waiting on the sidelines, finding a product in the market with the right price and income growth potential for sufficient returns has proven challenging. This difficulty arises from the notable yield decompression driven by the cost of financing and owners' reluctance to realise losses. Consequently, when owners need to dispose of assets in a challenging environment, for example, to deleverage their balance sheet, respond to fund redemptions, address the denominator effect, or raise capital for later acquisitions, they may opt to dispose of well-performing assets. This somewhat puts a bull's eye on hotels that, being higher-yield real estate, are less sensitive to yield increases. Moreover, hotels have been experiencing robust income growth in many markets, allowing for yield decompression without a significant reduction in value, thereby narrowing the bid-ask spread. Current trends, as indicated by the hedonic data series from RCA, suggest that hotel yields in Q3 2023 in Europe have already expanded by approximately 125 basis points relative to 2019 levels, with the UK leading the way (an increase of 178 basis points), excluding London, which continues to hold its value. Although hotel yield decompression in the UK is expected to slow down with increased activity, considering the market has nearly reached a record spread going back 15 years, the rest of Western Europe has been lagging and may witness further decompression.

While long-term convictions take precedence, the inherently "higher yield" nature of hotels as operational real estate holds significant importance. In the current high-interest rate landscape, deals must offer an appealing yield premium to justify financing costs and achieve positive leverage. This somewhat favours hotels, given their range of risk and return opportunities, spanning from fixed leases to fully variable income structures. Moreover, hotels, being operationally intensive and complex, provide ample chances to unlock value through active asset management. With increased financing costs, deals must present both a healthy initial yield and a notable upside opportunity to be financially viable. Given the limited distress sales in most sectors, investors are directing their available capital to operational real estate, particularly hotels, with a focus on value add transactions. Although such opportunities are scarce, they appear more prevalent in the hotel sector compared to others. Unsurprisingly, markets characterised by a broader array of hotel operating structures, like Spain or France, continue to maintain investment activity. In contrast, markets dominated by "dry" leases, such as Germany, remain subdued, a trend likely to persist into the next year until interest rates decline and values are rebased.

7.0%

6.7%

6.5%

6.4%

6.3%

6.0%

5.6%

5.5%

4.9%

5.0%

4.9%

4.7%

4.6%

4.5%

4.4%

4.0%

Q1 Q4

Q1 Q3

WESTERN EUROPE GREATER LONDON

ALL EUROPE

UNITED KINGDOM

Source: MSCI Real Capital Analytics (hedonic data series)

With increased financing costs, deals must present both a healthy initial yield and a notable upside opportunity to be financially viable. "

8 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 9

THE RESILIENT NATURE HOTEL PRICE PER ROOM INDEX (HEDONIC SERIES, INDEX VS 10YR AVERAGE) RESILIENT HOTEL VALUES IN EUROPE SELECTED COUNTRIES

130% SELECTED REGIONS AND LONDON

90% 100% 110% 130% 120%

120%

Whilst there has been notable yield decompression, the values of hotels across Europe are somewhat enduring. According to the hedonic data series by RCA, the values of hotels across Europe have increased by 14% in Q3 2023, relative to 2019. This seems too good to be true, but in some markets, it is plausible, thanks to healthy income growth that exceeded 20%, despite the intense cost pressures, especially in the case of utilities and wages. As hotels typically command relatively high operating margins, frequently above 35%, the costs would have to grow substantially faster than the revenues to start reducing profits. So far, this has been the case only in markets suffering from constrained revenue growth, such as in the CEE region affected by the Russian war against Ukraine. But even in this area, the latest figures show continued performance recovery. However, the RCA data indicating growing hotel values across Europe may be optimistic. Many recent sales were prime assets in core markets, and several were trophy hotels with high prices per room. This is likely skewing the data upwards, as in many markets, the hotel yield decompression has been stronger than income growth.

90% 100% 110%

80%

70%

60%

Many recent sales were prime assets in core markets, and several were trophy hotels with high price per room.

50%

Q1 Q3

‘08 ‘10 ‘12 ‘14 ‘16

‘18

‘20 ‘22 ‘23

‘08 ‘10 ‘12 ‘14 ‘16 ‘18 ‘20 ‘22 ‘23

SPAIN

UK FRANCE

GERMANY

ITALY

ALL EUROPE WESTERN EUROPE

GREATER LONDON

Source: MSCI Real Capital Analytics (Hedonic series)

HOTEL REVENUES ARE ABOVE 2019 LEVELS IN MOST MAJOR CITIES ACROSS EUROPE

(REVPAR YTD OCT 2023 VS YTD OCT 2019, INDEX)

PARIS

ROME

MILAN

BERLIN

LISBON

DUBLIN

VIENNA

ATHENS

MADRID

EUROPE

PRAGUE

LONDON

HELSINKI

WARSAW

ISTANBUL

BRUSSELS

BUDAPEST

BARCELONA

AMSTERDAM

MANCHESTER

COPENHAGEN

158

154

143

144

135

126

121

125

122

119

118

115

114

113

112

122

108

107

Source: STR Global (based on data in EUR except UK markets that are based on values in GBP)

HOTEL OPERATING PROFITS ARE ABOVE OR NEAR 2019 LEVELS IN MAJORITY OF MAJOR CITIES ACROSS EUROPE

PROFIT (GOP) CHANGE % REVENUE CHANGE %

(31%)

(41%)

LONDON (41%)

(45%)

DUBLIN (37%)

MADRID* (35%)

(39%)

WARSAW (29%)

EUROPE (37%)

BRUSSELS (24%)

(42%)

MUNICH (43%)

VIENNA (45%)

(29%)

PARIS

(43%)

(29%)

CITIES

MILAN

BERLIN

EASTERN

ALL MAJOR

EDINBURGH

BARCELONA

AMSTERDAM

MANCHESTER

-1

-5

-7

-8

-10

-17

-18

-20

(Based on PAR values for YTD Oct 2023 vs YTD Oct 2019)

Source: HotStats (based on Gross Operating Profit per available room (PAR) in EUR, sample of full-service branded hotels in city centres, data in brackets represent GOP margin in YTD October 2023, *whole market)

10 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 11

GAS LEFT IN THE TANK

AIR CAPACITY IN EUROPE IS RECOVERING, DRIVEN BY DOMESTIC DEMAND

AIR SEAT CAPACITY AND DEMAND INDEX 2023 VS 2019 EUROPEAN AIR SEAT CAPACITY & DEMAND INDEX

130

121%

120

115%

110

With the economies slowing down, inflation eroding real disposable income and surplus savings depleting, there are obvious concerns about hotel performance going forward. While these are serious headwinds, there are several reasons for optimism: • The labour market remains healthy, and consumers still have some excess savings. The unemployment rate across the euro area in September 2023 remained relatively low at 6.5%, just a 0.1pp increase from August and 0.2pp below the same time last year. Nominal wages in H1 2023 grew by 4.5% in Europe and by 5.3% in US (important source markets). Plus, according to analysis by Financial Times i , there still may be over 25% of excess savings left in the US, and Europeans are reported to hold even more surplus savings ii , albeit partially in illiquid assets. • Euro currency is likely to regain some ground against USD, but visits to Europe will continue to be attractive for American travellers compared to pre-Covid era of strong euro. The real winners are likely to be UK hoteliers, with Sterling expected to remain weak, making the country less pricey for both European and US visitors.

• For many consumer groups, travel is moving away from being just “nice-to-have” discretionary spending and leaning towards the basic-needs category. This changes the views on how radically the economic slowdown could impact the hospitality sector and, to some extent, explains the recent resilience. Several consumer surveys indicate a continued desire to travel despite the economic challenges. According to the European Travel Commission’s (ETC) latest report, 71% of Europeans choose SiteMinder found that 91% of travellers intend to travel over the next 12 months at least the same amount as they did over the year past. Most (57%) intend to travel more iv . Another study by Hilton Worldwide v found that 64% of global travellers would reduce their personal spending to prioritise leisure travel in 2024. This is reflected in the latest hotel performance and positive tourism outlook despite the headwinds. to either maintain or boost their travel expenditures iii . Hotel commerce platform

• Hotel occupancy in Europe reached 76% in Q3 2023, just 3pp below 2019, while average room prices climbed to EUR 158, impressively 33% higher than in 2019, surpassing the Euro inflation. This is unlikely to reverse anytime soon. According to the latest CityDNA Barometer Report, vi which is based on the most recent air ticketing data, tourism activity in the key European markets is reaching pre-pandemic levels in Q4 2023, with Madrid experiencing a 9% increase in international arrivals compared to the same period in 2019. London (-2%), Dublin (-2%), and Rome (-3%) are projected to reach almost pre-pandemic arrival levels. Urban markets in southern Europe, such as Lisbon and Athens, are set to see double-digit growth in Q4, increasing by 13%, with Istanbul and London also rising strongly on the list of most recovered cities. • Also air seat capacity for inbound travel to Europe nearly reached pre-pandemic levels during Q3 and is on an upward trend ahead of Q4, reaching 96% and 82% of 2019 levels in Western and Eastern Europe, respectively (mid-November). According to Airport Council International, European airport passenger traffic is expected to surpass 2019 by 1.4% in 2024 and 3.9% in 2025 Vii .

100

92%

90%

JAN FEB MAR APR MAY JUN JUL AUG CAPACITY DOMESTIC CAPACITY INTERNATIONAL DEMAND DOMESTIC DEMAND INTERNATIONAL

Source: IATA / UNWTO / ACT

PASSENGER TRAFFIC RECOVERY INDEX AUG 2023 VS AUG 2019

100%

124% 119% 114% 112% 111% 111% 110% 109% 108% 105% 102% 101% 101% 98% 89% 87% 85%

NAPLES PORTO MILAN BGY ISTANBUL IST PARIS-ORLY MARSEILLE MALAGA ISTANBUL SAW

ATHENS LISBON PALMA DE MALLORCA ANTALYA DUBLIN LONDON HEATHROW AMSTERDAM-SCHIPHOL PARIS-CDG FRANKFURT

Source: IATA / UNWTO / ACT

12 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 13

Driven by remote and hybrid work arrangements, more people are adding leisure stays ahead or after their business trips. "

• The impact of China's re-opening in mid 2023 has so far not been as robust as expected due to their domestic economic challenges. However, as Chinese travelers have not released their “revenge travel” to Europe yet, the arrivals are forecasted to increase by 82% in 2024, according to Oxford Economics, generating over 33 million overnights. This is likely to boost the hotel performance in key tourism hotspots for Chinese travellers, such as London, Edinburgh, Rome and Paris. • While video calls and virtual meetings are here to stay, business travel and conferences are recovering, fueled by the need to meet clients and remote colleagues in person. According to a recent white paper by MasterCard, 88% of travel decision-makers believe that business travel is critical for driving their organization’s growth, and 90% believe that their growing hybrid/remote workforce will significantly increase their business travel viii . Thus, it should be less surprising that despite the current economic and geopolitical challenges, operators are reporting growth of corporate business in their hotels. For example, Hyatt Hotels’ recently announced that third-quarter transient business travel revenue increased 19% year over year and has recovered to approximately 90 per cent of 2019 levels ix . This is confirmed by the data from our sample of 93 full-service branded hotels in the 14 key European markets. In YTD September 2023, the revenue generated by corporate travelers has reached 87% of 2019 levels while conference revenue already surpassed it by 7%.

• The data based on traditional segmentation of guests into leisure and corporate might not tell the full picture. Driven by remote and hybrid work arrangements, more people are either adding leisure stays ahead or after their business trips (“blended travel”), working while on holidays (“workcations”). Increasing shoulder night occupancy and a lengthening of the average transient stay indicate these trends are enduring x . Marriott recently reported that the share of corporate arrivals to their hotels on Wednesday or Thursday and staying past Saturday grew to 18% in the second quarter, up 5pp from the same period in 2019. Hilton has seen the length of stay for transient business travellers increase by 15% compared to 2019. According to PhocusWire, people who intend to work while travelling plan on taking twice the number of trips than they would if working remotely wasn’t an option. According to a Deloitte survey, on average, travellers will add five travel days across the holiday season if able to work remotely viii . stay hotels, that should benefit from further growth in coming years. A recent report from the Global Business Travel Association (GBTA) predicts that the business travel industry will exceed 2019 travel levels by 2024, which is two years earlier than its previous forecast . A Morgan Stanley survey of 135 corporate travel managers showed that they expect 2024 travel budgets to be, on average, 8% above 2023. The forecast by Oxford Economics expects even stronger double-digit growth of business arrivals and spending in 2024. staying in hotels due to long-distance commuting (“super-commuting”) or This is boosting demand for hotels with amenities allowing work and extended

BUSINESS TRAVEL AND SPENDING IS EXPECTED TO RECOVER (BUSINESS TRAVEL TO EUROPE)

CORPORATE HOTEL DEMAND IS CATCHING UP (RECOVERY INDEX - YTD SEP 2023 VS YTD SEP 2019, FULL-SERVICE BRANDED HOTELS IN 14 KEY EUROPEAN CITIES)

180%

Domestic Spending Inbound Spending Overnight Arrivals

Corporate Conference All Segments

140%

160%

140%

114%

120%

119%

100%

107%

80%

95%

93%

87%

60%

71%

40%

20%

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

ROOM NIGHTS

REVENUE

Source: HotStats

Source: Oxford Economics

• On the cost side, we can expect to see an easing of utility rates into 2024 as declines in wholesale energy prices trickle through into commercial contracts as renewals occur. The pressure on salaries will remain, especially in the UK, where National Living Wage increases are anticipated to grow by nearly 7% in April 2024.

However, hoteliers have learned during the pandemic to operate with a leaner staffing structure, and there are opportunities to deploy technology to counter payroll pressures and further reduce energy costs.

14 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 15

HOTEL ROOMS SUPPLY GROWTH - KEY MARKETS IN EUROPE

PARIS

ROME

MILAN

BERLIN

LISBON

DUBLIN

VIENNA

ATHENS

MADRID

PRAGUE

LONDON

WARSAW

ISTANBUL

BRUSSELS

BUDAPEST

FRANKFURT

BARCELONA

AMSTERDAM

MANCHESTER

COPENHAGEN

6.5%

6.1%

5.6%

5.3%

5.0%

4.5%

4.1%

4.2%

4.1%

1.5%

4.0%

1.8%

1.7%

0.6%

1.7%

1.6%

1.5%

1.6%

1.3%

3.1%

3.3%

1.2%

3.2%

2.9%

3.0%

2.8%

2.7%

2.6%

0.6%

0.5%

2.4%

2.2%

-0.3%

SEP. 2022-23 (% CHANGE)

SEP. 2019-23 (% CAGR)

Source: C&W Research

HOTEL ROOM SUPPLY FORECAST (CAGR 2023-2025)

PARIS

ROME

MILAN

BERLIN

TOP 20 2.10%

LISBON

DUBLIN

VIENNA

ATHENS

MADRID

PRAGUE

LONDON

WARSAW

MARKETS

ISTANBUL

UTILITIES HAVE BEEN THE MOST GROWING HOTEL OPERATING EXPENSE (YTD OCT 2023 VS YTD OCT 2019, % CHANGE) UTILITIES % % PAYROLL COST OF SALES

BRUSSELS

BUDAPEST

FRANKFURT

BARCELONA

AMSTERDAM

MANCHESTER

COPENHAGEN

5.8%

TOTAL EXPENSE

4.2%

3.8%

3.4%

1.3%

1.4%

3.0%

1.1%

111

112

1.0%

2.7%

2.5%

0.5%

1.9%

1.7%

100

102

Source: C&W Research

102

-4

-6

-7

-19

• The supply squeeze is also reinforced by the increasing crackdown of authorities on short term rentals, in order to avoid the displacement of residents from city centres and protect the long-term rental market. Barcelona banned all short-term room rentals in private homes, while other cities such as London, Paris, Amsterdam, Vienna or Copenhagen capped the number of nights a property can be rented out in a year. Austria plans to introduce the cap in 2024, and Italy is also considering tightening rules nationwide.

Also, taxes are being chased more forcefully, reducing the commercial attractiveness of the rental business. While the enforcement of the regulations continues to be challenging, authorities are escalating their efforts, deploying technology, that are becoming effective in stopping the short-term supply growth, curbing the growing professionalization of the market and even reducing the number of entire apartments listed for short term rental by up to 30% xvi .

MUNICH PARIS

PARIS

MILAN

MUNICH MILAN

MILAN

BERLIN

WARSAW DUBLIN

DUBLIN

VIENNA

LONDON EDINBURGH VIENNA

MUNICH

LONDON

WARSAW

AVERAGE

BRUSSELS

MANCHESTER EDINBURGH

EDINBURGH

BARCELONA

AMSTERDAM

MANCHESTER

Source: HotStats (based on expenses per available room (PAR) in EUR, sample of full-service branded hotels in city centres, Other Expenses not displayed but included in Total Expense)

• One of the best news for hotel owners and investors is that hotel supply growth remains constrained in most markets, underpinned by elevated construction and financing costs. So far, the total hotel room capacity in Europe grew only by 2.1% (YTD Sep 2023 vs YTD Sep 2022), with the strongest gains recorded in Madrid, Paris and Rome, fortunately also accompanied by strong demand growth. Our research indicates that supply growth in the top 20 largest European markets from the rest of 2023 to 2025 is projected to reach approximately 56,000 rooms , representing a Compound Annual Growth Rate (CAGR)

of 2.1%. Dublin, Frankfurt, Vienna and Lisbon are expected to grow most rapidly, while cities like Barcelona, Amsterdam and Milan have minimal hotel construction underway. In specific markets such as UK, a number of hotels are being used for asylum seekers, which helped to constrain supply in 2022 and 2023, but this use is likely to reduce in 2024. In UK, this may return 380 hotels xv back to market, with estimated 2-4% supply increase mostly at lower-end class. Also the conversion of obsolete office buildings into hotels is starting to emerge, but it is unlikely to be a significant supply driver due to its complexity and the limited number of suitable office buildings.

One of the best news for hotel owners and investors is that hotel supply growth remains constrained in most markets.

16 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 17

LOOKING INTO A CRYSTAL BALL

LOOKING AT CRYSTAL BALL

Austria and Greece leading the growth, granting all countries are expected to overpass 2019 volumes. A constrained supply should provide room for price increases in most markets, except in those that anticipate a more notable pipeline influx. Amex GBT Hotel Monitor indicates that hotel prices are trending upwards in 2024 (7% on average), albeit with reduced velocity compared to 2023.

HOTEL ROOM RATES TRENDING UPWARDS IN 2024 FORECASTED ROOM RATE GROWTH IN 2024 - SELECTED URBAN MARKETS

It is hard to predict the future, but so far, the forward-looking indicators, such as hotel bookings and flight reservations, are better than last year. Oxford Economics expects the demand for nights in European hotels in 2024 to surpass pre pandemic levels by 9.2% on average, with Turkey,

10.0%

9.4%

FORWARD-LOOKING INDICATORS SUGGEST HOTEL DEMAND GROWTH IN EARLY 2024 VS 2023 (% CHANGE, OCT 2023 VS OCT 2022)

PARIS

DUBLIN

LONDON

MUNICH

ROME

EDINBURGH

FLIGHT RESERVATIONS

HOTEL BOOKINGS

BRUSSELS

AMSTERDAM

BERLIN

BARCELONA

MANCHESTER

MADRID

31%

Source: Amex GBT Hotel Monitor, October 2023

28%

However, nothing lasts forever, and given the mounting economic and geopolitical headwinds, performance growth is bound to slow down. The historically strong RevPAR growth will likely moderate in 2024, with occupancy continuing on a recovery path, but gaining mostly in shoulder season, given the already high levels in high season. This, combined with the return of corporate travel will introduce lower-rated bookings into the mix and ultimately erode the overall ADR growth. Flow through to the bottom line (GOP) will be more challenging but still positive, aided by reducing energy costs. Moderating income growth might not be sufficient to compensate for continued yield decompression as the impact of increased interest rates is still filtering through the valuations. Thus pricing might remain under pressure until the interest rates start declining which is expected in the second half of 2024. Until then, smaller deals below EUR 30 million

are more likely to transact due to lower reliance on debt, flexibility in decision-making, and less IRR-driven investment strategies. Conversely, larger portfolio M&A opportunities also attract interest, as lenders and investors are keen to write larger cheques on single transactions – however, the fate of such deals launched earlier this year remains to be seen. Due to the large amount of hotel debt maturing in 2024, some activity will come from refinancing events, where lenders scrutinize loan-to-value ratios (LTVs) and debt service coverage ratios (DSCRs) amidst the ongoing repricing in the market and income volatility. The distress will not be widespread but rather manifest sporadically as loans mature, prompting case-by-case solutions to be sought.

18%

10%

SOUTHERN / MEDIT EURIOPE

CENTRAL / EASTERN EUROPE

NORTHERN EUROPE

WESTERN EUROPE

Source: UN WTO, Forward Keys, Sojern

HOTEL DEMAND IN 2024 IS EXPECTED TO SURPASS 2019 IN ALL MAJOR MARKETS (NIGHTS IN HOTELS, INDEX VS 2019)

142%

137%

100%

128%

130%

119%

122%

109.2% 116%

115%

111%

112%

113%

110%

128%

108%

107%

106%

105%

101%

105%

102%

99%

98%

94%

100%

93%

107%

TURKEY

PORTUGAL

SPAIN

FRANCE

EUROPE

GREECE

AUSTRIA NETHERLANDS

POLAND

ITALY

GERMANY

Source: Oxford Economics

2023 2024 2025

18 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 19

WHAT AND WHERE?

Leisure has been the primary leader of the recovery and investors will continue to hunt for opportunities in this sector, especially with a value-add angle. Private equity funds, family offices and owner-operators are expanding their search for assets from Iberia, France and Italy towards Greece and also Croatia that recently introduced Euro, thus removing currency risk for cross border capital. In addition to resorts, travel demand is growing rapidly in primary and second-tier urban markets with a strong cultural offering, allowing for a longer season and more balanced mix of source markets. This is likely to attract investors who want to benefit from the long-term growth of leisure travel but want to avoid the challenges with seasonality and the complex operation of resorts. The pressure on wages, lack of staff and rising operating cost is deepening investor interest into the extended stay sector that is less labour intensive, demonstrated strong resiliency during the pandemic and has long-term prospects underpinned by remote working trends and overall shift of our society towards a mobile lifestyle. On the other side of the spectrum, luxury hotels have proven to be a very effective hedge against inflation and economic downturns with the additional benefit of owning a distinctive physical asset. According to our recent survey, 85% of operators are optimistic or very optimistic about performance of luxury hotels in Europe and investors buy into this story with their capital.

For those looking for underdogs, the pandemic put a “hard-to-wash stain” on airport hotels, that used to be popular among investors. However, with passenger movements surpassing pre-pandemic levels, airport hotels are back in business and may present good opportunities. Last but not least, ESG is a major challenge for the whole real estate industry and hotels are no exception. As operational real estate, there are major opportunities for investors to deploy not only capital but also operational expertise to substantially reduce utility costs and improve the sustainability credentials of the hotels to gain a competitive advantage as corporate and transient guests increasingly demand it. Our research suggests the potential to increase the value of the asset by approximately 10% through a combination of improved income and yield compression. But the window of opportunity is closing fast as investors are only willing to pay premiums when there is limited ESG-compliant stock. The regulations are increasing, and many hotels are at risk of becoming stranded. While institutional buyers will look for assets with the highest ESG credentials, there are value-add investors that are keen to acquire hotels in need of major retrofit but with appropriate “brown” discounts.

Our research suggests that investment in ESG has the potential to increase the value of the hotel by approximately 10% through a combination of improved income and yield compression.

20 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 21

PEP TALK FOR THE END

SOURCES

i https://www.ft.com/content/02924916-ec4b-4ef1-8f7d-0af6d1c67907 ii https://www.ft.com/content/d635d247-bdd4-4036-a2eb-f9907b764adb iii https://etc-corporate.org/news/financial-pressures-shape-europeans travel-plans-in-late-2023-and-early-2024/ iv https://www.siteminder.com/changing-traveller-report/enduring explorer/ v https://stories.hilton.com/releases/2024-trends-report vi https://citydestinationsalliance.eu/citydna-forwardkeys-reveal-a positive-outlook-for-european-destinations-this-q4/?_sm_nck=1 vii https://www.aci-europe.org/downloads/resources/ACI%20 EUROPE%20Airport%20Traffic%20Forecast%20Oct23.pdf viii https://www.mastercard.com/news/insights/2023/navigating-global business-travel/ ix https://www.costar.com/article/677385865/hyatt-ceo-says-hotel demand-is-strong-across-segments x https://irday.marriottinternational.com/presentation?_sm_nck=1 xi https://irday.marriottinternational.com/presentation?_sm_nck=1 xii https://stories.hilton.com/2024trends-business-travel xiii https://www.prnewswire.com/news-releases/deloitte-holiday-travel-is cleared-for-takeoff-301973303.html xiv https://www.businesstravelexecutive.com/news/morgan-stanley research-shows-travel-managers-see-8-travel-budget-hike-in-2024 xv https://www.bbc.com/news/uk-politics-67206459 xvi https://www.sciencedirect.com/science/article/pii/S0160738323000786 xvii Amex GBT used Prophet time series modeling to generate the hotel rate forecasts in Hotel Monitor https://www.amexglobalbusinesstravel.com/the atlas/hotel-rates-by-city/

HOW MUCH IT TAKES TO BELIEVE – FORTUNE FAVOURS THE BRAVE Since the end of the pandemic, the hotel sector has been defying and surpassing expectations. First, being considered epicentres of disease transmission, it was feared that hotels would be unable to recover to the old normal. Then, when the performance surprisingly spiked after the restrictions were lifted in 2022, many attributed this to one-off revenge travel. Yet the positive trend continued in 2023, and with even stronger performance, surpassing 2019 levels, despite the economic, geopolitical challenges and unprecedented cost pressures. Yet, when we look forward to 2024, the sustained growth of hotel performance is being questioned. Yes, there are undeniable headwinds but there

are also several reasons to be optimistic. And if the recent past taught us anything, it is that hotels tend to surprise on the upside. With 2024 expected to be a pivotal year, when interest rates start to decline, economies and values stabilize, hotel transaction activity is likely to revive. However, the shift from a buyer to a seller market may occur quickly. Thus, investors need to remain ready and agile. 2024 may be a good vintage year, but those who snooze may lose.

22 HOTELS OUTLOOK 2024

THE TIDE IS TURNING AMALGAMATED | 23

Borivoj Vokrinek Strategic Advisory & Head of Hospitality Research EMEA borivoj.vokrinek@cushwake.com

Sukhdeep Dhillon Head of EMEA Forecasting Research sukhdeep.dhillon@cushwake.com

Jon Hubbard Head of Hospitality EMEA jonathan.hubbard@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.

Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24

Made with FlippingBook - professional solution for displaying marketing and sales documents online