• Hotel deals up, while profits fall

Hotel investment increased by 5.3% on the year to the second quarter in Europe, while total commercial real estate investment fell by 7.8%, according to CBRE.
The growth came despite falling profits at mainland European hotels, as costs outpaced revenue.
CBRE reported that hotel investment reached Eur24.3bn for the period, led by the UK, where volumes were down 26% on the same period of the previous year, although it captured 26% of capital deployed. Single asset sales rose by 44.5%, while portfolio sales dropped by 53%.
In Europe, all major markets saw an increase in transaction volumes except the UK, Germany and Benelux.
Spain remained the second-largest hotel investment market in Europe, with deals worth Eur4.3bn, up 67.2% on the same period last year, with Madrid and Barcelona remaining stable and accounting for 4.5% and 4.6% of activity respectively. Investment in provincial Spain increased by 75.5% on the previous year, mainly resulting from transactions in leisure and resort markets.
Germany experienced supply constraints in portfolio deals and large asset deals, resulting in a reduction in volumes. Deal volumes across the big five cities were down from 68% to 46.3% from the previous year, suggesting, CBRE said, that investors were turning to secondary locations and regional cities for opportunities.
Miguel Casas, head of investment properties, Continental Europe, CBRE, said: “European hotel investment volumes have remained strong despite the slowdown in wider commercial real estate. Operational and alternative property types remain in high demand, and there is expectation that this trend will continue due to sustained income growth. Investors have notably become more active in secondary locations when availability of large asset deals and portfolio deals have been scarce, and single asset sales have especially been a driver in this successful quarter for the hotel market.”
While transactions continued, and revpar rose, Hotstats reported a fall in goppar, hit by falling ancillary revenues and rising costs. The company said that revpar in June of Eur158.82, was a high for 2019 and exceeded the previous peak of Eur157.09 from June 2018.
The increase was led by a 1.4-percentage-point year-on-year increase in room occupancy to 82.5%, and was in spite of a 0.5% decline in achieved average room rate, which fell to Eur192.61.
The growth in Revpar was cancelled out by falling ancillary revenues, which included a decline in F&b (down 3.2%) and conference & banqueting (down 11.2%), on a per-available-room basis. This contributed to the 0.5% year-on-year decline in trevpar to Eur226.66, which was further hit by rising costs that included a 2.2% increase in payroll to Eur62.25 per available room. As a result, profit per room fell by 2.8% in the month to Eur101.00.
“June was the perfect example of why strong rooms revenue doesn’t always equate into a strong bottom line,” said Michael Grove, managing director, EMEA, at HotStats. “It’s never enough to rely on top-line growth. Hoteliers have to keep an eye on cost and focus on growing revenue streams in areas beyond rooms.”
Paris bucked the profit trend in June, with goppar levels growing by 23.5% on the back of the 53rd Paris Air Show, the largest air show and aerospace-industry exhibition in the world.
The biennial event welcomed more than 315,000 visitors and helped hoteliers in the city leverage a 16.4% year-on-year increase in achieved average room rate, which hit Eur472.86. This was more than Eur120 above the year-to-date average at Eur352.26.
A 19.5% increase in revpar fuelled a 10.6% year-on-year increase in trevpar to Eur568.66, and came despite an 8.2% decline in ancillary revenues, which fell to Eur151.43. The goppar growth came against relatively high payroll levels at Eur191.01 per available room, equivalent to 33.5% of total revenue.
HVS was confident that the French capital was back on track after a rocky start to the year, commenting: “The business environment in France has experienced positive change with a decrease in unemployment rate and an increase in purchasing power, following the ‘gilets jaunes’ disruption”.

HA Perspective [by Katherine Doggrell]: One minute the sector’s brokers were complaining about a lack of portfolios coming onto the market and the next minute Meininger pops onto the block. OK, something of a complex deal in terms of where the value lies and to whom, but something to keep the masses off the streets.
And compared to offices and retail, hotels are just that bit more interesting to the investor, if you can work them. The third-party operators are stepping in to help with that, as the brands step back to provide flags and comfort. While an empty office block is an empty office block (until EasyHotel shows up, anyway) a flagging hotel has many levers which can be pulled – including shared office space. And while offices are moving to the sofa and retail has gone online, Airbnb has yet to make a dent in the ever-rising demand of travellers for a bed.
Which brings us to distress. Several brokers this correspondent spoke to this week commented on dollar-heavy funds massing, targeting London with enthusiasm as the pound quaked under the impact of our fluffy-haired leader. But despite the opportunities for arbitrage, they have yet to strike, due to lack of product at a decent yield and a lack of distress. The suffering which had been pencilled in has yet to materialise.
It would help everyone if hotels could at least keep costs under control. The UK already has this well in hand by deterring any staff from mainland Europe from joining the payroll and we hear it’s being very effective, less so in terms of service, but who doesn’t know how to make their own bed? It’s only a duvet, for crying out loud.

Additional comment [by Andrew Sangster]: It is not always easy to understand why prices remain so buoyant in the face of difficult trading numbers. But what matters is not so much the absolute numbers but the comparatives – and hotels continue to offer a comparatively competitive return.
In August, Goldman Sachs Asset Management’s Global Fixed Income team put out a note entitled “A low yield world”. It shows that not only are central bank policy rates at or close to all-time lows the market is pricing in a further decline.
Already, the Euro area, Switzerland, Sweden and Japan have policy rates which are negative. Only the US and Canada have rates that are significantly above previous lows and then they are barely into rates which in previous cycles were considered low points.
With central banks still buying bonds, or at least holding onto the bonds they have bought, and these all-time low interest rates, investors have little choice but to venture further afield to obtain income producing assets.
Hotels are now widely viewed as a mainstream asset class and they remain a relative bargain. In this context, robust pricing is likely to remain the norm.

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