Our Hospitality People Group Advisory Services team, Dan Akhtar and Mara Cattaneo, will be attending the upcoming International Hotel Investment Forum (IHIF) in Berlin this May.
Ahead of this global forum, we explore what the current trends are in UK and European Hotel Investment.
Firstly, let’s look back on 2022.
2022 – A tale of two halves
In our UK Hotel Investment Trends – Summer Update, we explored how the UK had seen a surge in capital investment in the first half of 2022. According to Knight Frank 68% of total transactions in 2022 occurred in the first six months of the year. The easing of travel restrictions in 2021 helped drive optimism in the latter part of 2021 and this enthusiasm carried through to boost the numbers in early 2022.
However, the war in Ukraine, sky-rocketing inflation, compounded by a disastrous mini- budget late in the year, quickly turned this optimism into caution. As a result, the UK Hotel Investment market saw a final total of approximately £3B in transactions, about 30% down on the previous 5 year average.
While the UK remains the largest investment market in Europe, the gap has narrowed between the UK and other competing markets such as Spain (£2.3B), France (£2.0B) and Germany (£1.6B) coming in second, third and fourth respectively.
Although investor enthusiasm was hindered by the macroeconomic events that peppered the second half of 2022, they will have been equally assured by the industry’s financial performance. Hotels enjoyed a much better than expected year in 2022, as the pent up demand for travel and hospitality drove ADR back up close to pre-pandemic levels, earlier than previously predicted.
How do we expect the hospitality sector to perform in 2023?
While the easing of that post-pandemic, pent-up demand and the cost of living crisis continue to promote caution, operators are being challenged to carefully balance the business in order to protect profit. The recruitment challenges faced by the industry have certainly helped reduce immediate costs, but we are continuing to see the reputation of the industry being damaged. Glassdoor published their Top 50 list of employers for 2023, and for the 4th year in a row, the number of hospitality companies on that list has dropped, with Dishoom the only representative left in that top 50 list.
Interestingly, one hospitality business has suggested that the hospitality industry itself is responsible for shifting the pessimistic narrative that took place during the pandemic. Wyndham Hotels and Resorts suggests that we have much to learn from those missteps. Many people thought that the future of corporate travel and buffet breakfasts were doomed and this pessimism may have prevented the industry preparing for and reacting better to the travel chaos last year that led to flight cancellations and airport shutdowns. This experience was something that will live long in the memory for customers who may think twice about traveling with those airlines again and the employees who may now have already reconsidered their career paths.
Hospitality has always shown resilience and the pandemic proved that it is also an industry that can be hugely creative when faced with seemingly insurmountable challenges.The businesses that can continue to flex and adapt their costs, if and when when revenues drop, and demonstrate a people culture that allows them to scale back up with a full complement of experienced, well-trained employees, will prove to be extremely attractive to investors. These businesses are more likely to be able to inspire exceptional guest experiences at full capacity and therefore reap the financial rewards at peak times. These same investors are thought to have the funds available and will be eager to step back into this market, but will be extra careful to ensure great value and resilience is factored in with the continuing expectation of recession ahead.
An expected an upturn in investment levels
Henry Jackson, partner at Knight Frank, said: “While no hotel business is immune to the effects of an economic downturn, and while profit margins are likely to be squeezed in the short-term, operationally the sector has continued its recovery and an upturn in investment levels for 2023 is anticipated. We have seen an uptick in investor activity at the end of 2022 and purchasers who are proactively seeking out opportunities now are well placed to move quickly when new stock becomes available. Investors are showing renewed signs of confidence in the London hotel market, with overseas purchasers benefitting from currency plays.
“Once the economic picture is clearer and the availability of debt recalibrates, we expect transactional activity during 2023 to rebound at a more buoyant pace, exceeding 2022 levels. With hotel property offering value and resilience relative to other real estate asset classes, a wide range of investor types will seek to deploy capital into the sector.”
Speaking to Hospitality Investor, Chris Brassington, Senior Director of Fund Management at Invesco commented that “we fully expect to make additional investments with the aim of creating further value. Our intent is to create investments that have potential to deliver long-term compound growth above the market.”
HPG Advisory Services
If you would like to discuss any of these topics further, and examine how they might apply to your business or your investment portfolio, then please get in touch.
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Dan Akhtar, Managing Director of HPG Advisory Services +44 20 8600 1166 / +44 7808 157796 / email@example.com