Invesco study on European hotels sees return to long-term trend

As the market recovers from the effects of the Covid 19 crisis, the European hotel sector will resume its long-term trend path and record high annual growth rates again, according to a brand new study by asset manager Invesco Real Estate (IRE).

The repricing of European hotel assets represents a good opportunity for investors to acquire either core hotels for a long-term hold, or to undertake value-add projects as part of a manage-to-core strategy. This can help investors increase their relative yields from hotels, in contrast to the European office, logistics and residential sectors, says Invesco.

According to David Kellett, senior director and head of hotel transactions at Invesco Real Estate, "In our view, investing in hotels offers clear benefits. We expect leisure travellers to lead the post-pandemic recovery first, followed by business travellers, with our analysis suggesting a faster recovery for urban hotel markets with a higher tourist share of hotel demand and limited new supply."

“It remains too early to tell how quickly travellers will return post-pandemic; however, we note that historically travel has rebounded. International travel grew by 117 per cent between 2000 and 2019, despite setbacks including 9/11, SARS and the global financial crisis[ii].

Initially, hotels with a strong brand in correspondingly well-positioned micro-locations are likely to benefit the most. These hotels should be the first to record noticeably better occupancy rates and be able to rebuild their business more quickly.

The Invesco researchers see, in particular, niche operators and specialised brands as potentially attractive acquisition targets and they consider further consolidation likely. Brands that focus on a clearly defined customer need and ideally have global loyalty programmes could thrive in this environment.

In future, consumers are likely to be more concerned about the amount and frequency of their international travel, both for personal and sustainability reasons. As the authors point out, it has been estimated that 1% of the global population created half of the airline industry’s carbon emissions in 2018.

Chris Brassington, senior director for fund management at IRE: "Consumers are increasingly concerned about sustainability. But I don't believe that more environmentally conscious behaviour or disruptive technologies will make hotels obsolete. However, the sector needs to ensure that hotels truly meet the needs of their guests and convince them with a clear and differentiated value proposition."

Overall, the IRE report concludes that Covid-19 should be viewed as a shock to the previously strong growth trajectory in the travel and tourism market rather than a reversal of a long-term positive trend.

"We continue to believe in the recovery and growth of the hotel sector. In the short term, we see attractive investment opportunities here at the current lower valuation levels, with potential for short-term appreciation and stable long-term income," emphasised Mike Bessell, Managing Director and European Investment Strategist at IRE. "In our view, hotel real estate can offer investors a yield premium over most other property classes - with long-term leases and additional potential for capital growth on the upswing." 

REFIRE: An upbeat and optimistic report from real estate giant Invesco Real Estate, whose own recent deal in Europe saw it entering a new tie-up with hotel owner Westmont Hospitality Group. That involved taking over a portfolio of 13 hotels in Germany and the Netherlands after the incumbent tenant and Invesco's co-investment partner Event Holdings filed for insolvency with the portfolio. So, to some extent, Invesco is talking up its own book.

Nonetheless, the big question remains within the hotel sector - how will the recovery phase after the pandemic and a changed business environment affect business models and sustainable rents in the long term, and how deep will fundamental changes in user behaviour transform the hotel industry.

This could, in Germany's case, involve wholesale root-and-branch shifts in behaviour, penalising the traditional four-star German hotel chain offering in a move to a much more youthful and cheaper model, including different forms of accomodation such as no-frills EasyJet-type sleeping capsules to AirBnB-style medium to longer-term stays. Many of these models were still only in their infancy when COVID arrived, and there is a lot of dust yet to settle on the sector.