• Yield compression in Europe

European hotel investment volumes remain robust in 2019, reaching close to Eur16bn between January and September 2019, up 4.3% on the year, according to Savills.
Increasing interest in the sector was leading to yield compression in mature markets, with more tourist cities being targeted.
Savills said that investor appetite continued to be driven by international buyers, with a number of large international investment funds such as AXA IM and Aroundtown deploying significant capital to the hotel sector with London, Paris and Germany’s key cities deemed “safer” long-term investment options.
The broker said that increasing demand from investors meant that five of the 22 markets tracked by Savills saw yield compression across all operating structures in the third quarter, including Madrid, Lisbon, Warsaw, Dublin and Copenhagen. In the second quarter, only Lisbon saw compression across the board.
Richard Dawes, director in the Savills hotels team, said: “This yield compression across the various operating structures is being driven, in part, by increasing investor appetite for hotels, lack of stock and cheaper financing, which is particularly acute within more mature markets in Germany, Paris and London.”
Savills reports that 12 cities saw a 25bps downward shift in prime yields on Vacant Possession/Franchise operating structures during the third quarter, up on the three cities that reported compression in the second quarter (averaging 5.34% across all cities). Similarly, 11 markets reported compression in Management Contract prime yields (averaging 5.81%) compared to two markets in second quarter. According to Savills, this highlights the appetite investors have to move up the risk curve by investing in non-leased assets, in the pursuit for higher yielding assets.
Prime hotel yields on leased operating structures continue to see the keenest yields, averaging 4.26% across the 22 European markets tracked by Savills, with nine markets seeing a 25bps compression in Q3 2019. As a result there were now seven cities with prime yields for leased assets at sub 4%.
Marie Hickey, director in Savills research team, added: “Investors seeking higher yields are either moving to non-leased operating structures in established markets or opting to look at growth tourist cities. This includes cities such as Prague, Lisbon, Warsaw and Vienna – all of which have experienced larger than average hotel investment volumes this year.”
The report was released as PwC published its annual hotels forecast, describing the UK as being at a “pivotal point”, where, looking ahead to 2020, “while UK performance will vary widely by geography, segment and business model, we remain more cautious in our outlook. Global and UK political and economic uncertainty, high industry cost inflation and possible difficulties in recruitment and retention of staff mean that companies need to adopt tech-enabled solutions to increase efficiency, reduce processes, manage data and enhance the customer journey”.
The UK Hotels Forecast said that, with the regions being ore reliant on UK GDP, conditions were expected to get tougher. While one-off Cricket World Cup related demand probably helped slow regional declines in the summer, it wasn’t enough to balance an overall decline in the regional business market and stop a fall in revpar for the second consecutive quarter of 2019.
The group said that 2019’s trading performance looked like turning out worse in terms of ADR and revpar than the group had anticipated in March, amending the forecast for 2020 to a 0.6% decline in occupancy growth, a slight gain in rate but a drop in revpar of 0.3%.
In London, PwC forecast some modest growth next year, buoyed by international tourism. Despite expressing concerns in the March update, the company expected London would hold on to growth for the rest of 2019, which it described as “quite a feat given a relentless supply of new rooms”, adding: “Maintaining the growth will get harder in 2020. While we anticipate occupancy growth to slip into negative territory in 2020, we still forecast 1% growth in revpar. However, inflation increases put London’s forecast of modest ADR gains under strain”.
Looking at deals, PwC said that UK hotel investment volumes had seen a decline in 2019, compared with the higher-than-average levels in 2018 due to uncertainties of Brexit becoming more acute, ongoing volatility in economic growth and weakened business sentiment. Investor appetite will remain cautious until there is further clarity on the outcome of Brexit but with an expectation for continued inward investment from Europe and Far East in 2019.
“We predict 2020 hotel transactions to continue to marginally fall to around GBP4.85bn even if a Brexit deal is secured. In such an uncertain UK market some investors are looking to protect their returns with the income stability offered by leasing their hotels to operators;while other investors are seeking to enhance their returns by taking advantage of the increasingly competitive pricing arbitrage offered on ground leases by long income funds.”

HA Perspective [by Katherine Doggrell]: As we heard last week from Jochen Schäfer-Suren CEO, Principal’s hotel and leisure division, he has no appetite for the UK until next year at the earliest, when we know more about what Brexit means (not just ‘Brexit’, one suspects).
He did sell one site in Vienna, illustrating Savills’ point and indicating that just because AXA is a large institution, that doesn’t mean it’s not down with the latest trends.
What Schäfer-Suren did have was an abiding appetite for hotels, something which is shared with an increasing number of investors, if less so in the prime locations. What will prove interesting is how many of these investors will remain cometh the next downturn, or whether hotels will prove their maturity as an asset class by serving as a sanctuary.

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