European hotel industry looks east for 2017 investment opportunities

• New research from Deloitte reveals hotel investors’ appetite for UK and Europe in the next 12 months. Two-thirds anticipate strong inbound investment from China;
• Amsterdam replaces London as Europe’s most attractive hotel investment destination;
• Regional UK investment looks set to remain resilient, but rising labour cost is a key concern.

Chinese and North American investors are expected to dominate the European hotel investment market in 2017, according to an annual survey of more than 100 senior hospitality industry leaders by Deloitte, the business advisory firm.

According to the research, published ahead of the 28th annual European Hotel Investment Conference, 62% of respondents see China as the biggest source of inbound investment into Europe, up from 51% last year. This is followed by North America (46%).

Following 2015’s bumper year for hospitality M&A, deal flow in 2016 has been more subdued. Nevertheless, hotel executives are optimistic about the investment opportunities that lie ahead, with more than a third (34%) believing that the European investment cycle is 12-18 months way from peaking. Close to 60% of respondents see disposals and consolidation as prominent investment themes in the next year.

Industry concerns
More than half (52%) of hotel investors cited geopolitical instability in Europe as their number one concern for 2017, followed by deflation and lack of economic growth on the Continent (47%). Significantly, only a quarter were worried about the UK’s decision to leave the European Union, with the various European elections scheduled for 2017 generating greater unease (37%). With these concerns in mind, one-third of respondents cited the budget segment of the market as being the most attractive for investment in 2017, followed by the upscale (24%) and midscale (20%) segments.

Nikola Reid, Director in Deloitte’s Hospitality Advisory team, commented: “The fact that 2016 has been a comparatively subdued year of hotel transactions is due to a confluence of factors. Not only is the industry having to contend with political and economic uncertainty in the UK and Europe, but there is also a lack of product.

“It is reassuring to still see clear signs of optimism. Investors from China and North America are likely to capitalise on the weakness of sterling and still see the Continent as offering potential.”

Dutch masters
Amsterdam has usurped London’s position as the most attractive hotel investment destination in Europe after more than a third (34%) of respondents ranked the Dutch capital in the top spot. London (32%) had held the #1 ranking for the last two years. Barcelona (28%) and Dublin (24%) followed, with Berlin and Madrid (both 18%) joint-fifth.

Reid added: “Concerns around supply and uncertainty as to corporate sentiment in particular led to London narrowly missing a hat trick; nevertheless, the city remains a standout destination. The UK capital has seen several years of phenomenal inbound investment as investors from all over the globe have sought to capitalise on the city’s unrivalled position as a proven destination for both business and leisure.”

Resilience in the Regions
For the third year in succession, industry leaders have named Edinburgh (47%) the most attractive hotel investment destination in the UK outside of London, closely followed by Manchester (46%, up from 40% last year) and a resurgent Birmingham (22%, up from 9%). In Europe, respondents believe that the Scottish capital is now as attractive to investors as the likes of Rome and Lisbon.

Reid added: “Similar to the Continent, deal activity in Regional UK has been behind 2015’s record year (c. £8bn in transactions) and a number of deals that were in progress or anticipated to come to market were delayed due to the uncertainty surrounding Brexit. Whilst domestic buyers have dominated investment, there simply hasn’t been enough stock to repeat last year’s trend for large portfolio deals.

“In the Regions, however, trading is up as the UK becomes a more affordable and accessible place to visit for overseas tourists. Furthermore, despite initial uncertainty in the immediate aftermath of the Brexit vote, we have recently seen a rejuvenation of interest from foreign capital driven by their appetite for income and the opportunity to capitalise on sterling’s depreciation. As well as expectations for Asian capital to dominate activity, industry leaders have also highlighted domestic investment as a key driver of regional deal flow in 2017.”

Slowing economic growth (66%) and increased employee costs (52%), are the principal concerns in the Regional UK, followed by the fallout from Brexit (42%). Two-thirds (64%) of respondents believe that owners will focus on improving profitability as part of a 2017 strategy.

Reid concluded: “Increasing labour costs have long been a concern to UK hotel investors. Assuming Article 50 is triggered (and the negotiation process begins), any restrictions on the employment of EU nationals could prompt a tighter labour market with potential cost implications.”

Despite these concerns, half of industry leaders expect Regional UK RevPAR growth to be between 3-5% in 2017, and more than a third of respondents (38%) expect to see multiples of 10x, with 20% expecting pricing to be higher at 12x or more.

End

Notes to editors

About the research
More than 100 senior hospitality figures from across the world, including owners, lenders, developers and investors answered a series of questions on the European hotel investment market to ascertain their views of key trends and how these will shape the industry in 2017.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited.