By Simon Mallinson on March 3rd, 2017
After a tame first nine months of 2016 European hotel transaction activity rebounded in the fourth quarter to register the third strongest quarter on record. European institutional investors were the primary source of capital responsible for the fourth quarter bounce and helped sustain activity earlier in the year too.
These investors were likely attracted to the strong income characteristics of the sector given the sharp fall in yields across the traditional real estate sectors. Activity by European investors was up 28% YOY in 2016 and was the only identified source of capital that saw growth: activity from Asian investors declined 65% YOY and North American activity dropped 76%.
For the year, hotel transaction volume of €20.8b ($22.0b) was 45% above the 10-year average for the sector, though down 22% on the 2015 levels.
Of the hotel sub-sectors, budget hotels saw the strongest growth, recording a 28% YOY increase in transaction volume. Of the €2.2b in activity logged in budget hotels, a record €700 million was in Germany. The U.K., a long-established budget market, saw €1.2 billion in transactions. The budget sub-sector now represents 10% of the overall hotels market, up from 2% in 2007, a possible reflection of Europe’s economic austerity over the last decade. Upscale hotels eked out a 4% YOY increase in 2016, while midscale and luxury activity fell 26% and 9%, respectively.
The largest transaction of 2016 was the €810m Interhotel Portfolio, bought by a joint venture between Fonciere des Murs of France and the Event Hotels of Germany in August. Fonciere des Murs tops the list of hotel investors in Europe because of this portfolio and a €535m 19-property portfolio bought from Spanish REIT Merlin. Middle Eastern sovereign wealth funds, who in recent years were notable buyers of the largest luxury hotels, were absent from the list of top ten hotel investors in Europe in 2016.
As for 2017, the first two months have started off weaker than in the previous few years, with just €1.3b of hotels traded. Still, there are €2b of hotels under offer. With mainstream hotels trading at new low yield levels (at 5.6% in Q4’16, the average hotel sector yield was the same as the European retail sector yield), investors are starting to explore other accommodation sectors such as hostels, holiday parks and aparthotels. We expect to see more trading in these smaller niche sectors during 2017.