The European hotel industry staged a recovery in 2004, having experienced significant instability in recent times as a result of unprecedented worldwide events, including the Iraq war, the outbreak of SARS, terrorist attacks, weak economic growth, corporate cutbacks and Middle East uncertainty. Having weathered these disturbances through driving new revenue sources, improved operating efficiencies and restructuring of debt obligations, the resilience of the industry has been undoubtedly proven. With a recovery now well underway in the majority of European markets, significant enthusiasm to invest in the hotel sector exists, fuelled by the expectation of significant growth opportunities and a certain upside on the horizon.

In 2004, Spain succeeded at being the most active market for hotel transactions, continuing the trend set the previous year. Spain recorded a total of 40 qualifying transactions representing over 8,100 rooms and totalling over €1 billion, some 25% of the total single asset transactional activity in terms of investment volume. The UK also enjoyed very strong liquidity but, with 33 qualifying transactions totalling approximately €980 million and representing some 24% of total transactional activity, was beaten into second place. Meanwhile, Germany continued to enjoy a buoyant hotel investment market, recording 14 qualifying transactions totalling around €365 million, representing some 9% of total transactional activity. Meanwhile, Monaco recorded the largest single asset sale, understood to be over €200 million, with the sale of the 619-room Monte Carlo Grand Hotel. The landmark property was acquired by Cedar Capital Partners on behalf of FHR European Ventures, an equity fund backed by the Bank of Scotland, Fairmont Hotels and Kingdom Hotels International. The Monte Carlo Grand Hotel has been rebranded as a Fairmont Hotel and will undergo a €40 million renovation.

Meanwhile, Italy, France and the Netherlands recorded strong sales activity in terms of the number of transactions; however, due to a trophy asset transacting within each of these markets in 2003 (the Principe de Savoia, the Marriott Champs Elysée and the Sofitel Grand), there was a decline in investment volume in 2004 for each of these markets.

A significant trend occurring in 2004 is the increase in the number of hotel transactions taking place in Eastern Europe. A total of 11 qualifying transactions took place in this region, representing 7% of total European investment volume, with transactions in Croatia (4), the Czech Republic (2), Hungary (2), Lithuania (1), Slovakia (1) and Slovenia (1).

Figure 1 : Sales Activity by Country 2003-04
(Based on Investment Volume)


Source: HVS International Research

Approximately 28,300 rooms transacted in 2004, which is an increase on 2003 levels of approximately 42%. A flurry of disposals took place during the second half of 2004 as trading performance continued to improve, with the growth in rooms yield driven largely by improvements in demand.

The Spanish market has been the most liquid, with over 8,100 rooms transacting during the year in terms of single asset transactions. Much of the country's investment activity comes from private hotel operators focused on their domestic market. The UK, historically the most liquid European investment market, also witnessed a strong growth in the number of single asset transactions, with a 58% increase in the number of rooms transacting compared to the previous year, to a total of 5,600 rooms.

Of the other main European countries, Germany, France, Italy and the Netherlands all recorded a sizeable increase in single asset transaction activity by rooms sold in 2004. In contrast, Sweden and Belgium suffered a decrease in activity, largely as a result of a robust performance the previous year. Meanwhile, transactional activity increased in Austria, following a year of non-activity in 2003. Overall, investor sentiment remains optimistic in Western Europe as, with the continued improvements in trading, investors remain anxious to capitalise on the favourable market conditions.

Meanwhile, following the expansion of the EU (with the addition of ten new members, including eight from former communist states) investment activity in Eastern European markets was prevalent as opportunistic investors look to purchase real estate in strategic locations that have repositioning potential. The combined benefits of EU membership, a strong currency and improved means of communication thanks to the low-cost airlines, have enabled many of the Eastern European cities to be ranked among the best performing markets in Europe, in terms of RevPAR performance. Despite the Eastern European market continuing to be a higher-risk environment, 2004 has shown the potential that exists for this region, with significantly more appetite for hotel investment anticipated in 2005; although Warsaw continues to suffer from a high level of new hotel supply. A total of 11 hotels transacted in Eastern Europe in 2004, representing a 185% change in the number of rooms transacting and around 500% growth in the total investment volume compared to the previous year. Unlike in previous years, where investment was largely limited to Prague and Budapest, investment activity took place in a broader area including Lithuania, Slovakia and Slovenia.

Croatia, Turkey and Cyprus were investment hot spots during 2004; while the latter two destinations were particularly impacted by the war in Iraq in 2003, Croatia continues to redevelop its tourism industry following the Kosovo crisis in 1998. Investment appetite in all three destinations is set to be strong, as they benefit from the strong euro and are perceived as relatively cheap alternative resort destinations, a trend set to continue in the medium term.

Figure 2 : Transactions by Country/Region 2001-04
(By Sales Volume € 000,000s)


Source: HVS International Research

The total sales volume of single asset transactions in 2004 outperformed the performance of the previous year by 21%, rising to approximately €4 billion, the highest level of activity ever recorded in the HVS European Hotel Transactions survey. The high level of investment activity confirms the unbelievable amounts of money being invested into hotels as a real estate class, although there is evidence in 2004 of a difference between the bid and the asking price, as vendors price-in the upswing. This impressive level of activity, however, confirms the strong level of investor confidence in the European hotel market, with investors benefiting from counter-cyclical opportunities and their enthusiasm fuelled by the expectation of significant growth opportunities.

The average price per room paid in 2004 of approximately €158,000 is approximately 9% lower than the average price per room paid in 2003 and 13% lower than 2001. While 2004 has seen a recovery in trading, which typically leads to increased cash flows and uplift in value, this decline in the average price per room is more reflective of the types of assets sold and the geographical location of these assets. For example, in 2003 numerous high-quality, branded or trophy assets exchanged hands, such as the three aforementioned assets in Amsterdam, Milan and Paris, as well as the Le Meridien Hotel in Barcelona, the Ritz in Madrid, Hotel des Bergues in Geneva, and the Royal Cresent, Cliveden, Dalhousie Castle, and Skibo Castle in the UK. In 2004, the highest sales price per room equated to approximately €1 million per room for the sale of the Grosvenor House Serviced Apartments in London, followed by the sale of Le Richemond Hotel in Geneva at approximately €660,000 and the Balzac and De Vigny Hotels in Paris at approximately €500,000. These were the only three assets realising a value of greater than €500,000 per room. This is in sharp contrast to 2003 where a total of 11 hotel transactions completed with a sales price per room above €500,000, of which four transactions achieved a sales price per room greater than €900,000. The decline in the average price per room in 2004 is therefore attributed to a reduction in high-quality assets transacting, with the majority of assets positioned in the mid-market sector. Furthermore, the increased transactional activity in Eastern Europe, together with hotel assets in Cyprus and Turkey, typically command a lower sales price per room.

We do not anticipate this trend to be a lasting phenomenon; indeed, an increase of new investment opportunities is expected as current owners realise profits on capital uplifts and take advantage of improving values to reshape their portfolios. Investment activity at the start of 2005 has been very strong, with the sale of the 263-room Savoy Hotel in London for over €1.3 million per room and the 190-room Shelbourne Hotel in Dublin for over €630,000 per room.

Figure 3 : Average Price per Room by Country/Region 2000-04 (€ 000s)


Source: HVS International Research

Cross-Border Activity

European hotel investment is increasingly becoming a global affair. Cross-border deals continue to be facilitated by the euro, as it has allowed greater transparency and increased the pool of potential lenders and investors seeking to invest in European markets. The continued desire to diversify risk as well as to reap the benefit of growth opportunities in different hotel markets has further enticed inter- and intra-regional investment.

In 2004, approximately 41% of single asset acquisitions took place outside of the buyer's country of origin; this is in line with the level of foreign investment in 2003. In contrast, portfolio activity in 2004 was equally apportioned between domestic and foreign purchases, which shows a sharp increase in the number of acquisitions outside the investors' country of origin compared to 2003 levels. In 2004, trans-European single asset investment totalled approximately €1.6 billion, an increase of 39% on the previous year. Meanwhile, trans-European portfolio activity totalled almost €2.5 billion, increasing by around 67% upon the level of foreign portfolio activity in 2003.

In 2005, we consider that there will be increased inter-regional investment, with an increase in capital investment from both Middle Eastern and Asian investors, particularly in key gateway cities where barriers to entry are high.

Figure 4 : Cross-Border Activity of Single Asset and Portfolio Transactions 2001-04


Source: HVS International Research

Conclusions and Outlook

The European hotel industry has witnessed a good recovery in 2004, although certain markets remain more challenging than others. London and the UK regions have shown robust RevPAR growth, and Scandinavia has shown a good performance. Meanwhile, the fundamentals for Eastern Europe remain positive following the EU enlargement. Performance in Continental Europe remains varied, with a number of markets witnessing only a marginal recovery, impacted by low economic growth. In particular, Spain's performance has been particularly weak despite a strong economy, impacted by the high increase in supply and the Madrid Al Qaeda bombings.

Nevertheless, the resilience of the hotel market, as proven over the last three years, has resulted in hotel real estate now being considered as a mainstream asset class. While the anticipated yields of hotel investments have fallen over the past few years, the yields derived from more traditional real estate have experienced an even greater decline. Moreover, the upside of hotels in a recovering market is very appealing, with the positive leverage resulting from improved profitability, creating a very attractive environment for investors. In 2004, the hotel investment market has witnessed a strong recovery, with the total sales volume of both single asset and portfolio transactions significantly outperforming the previous year. Single asset transactions increased by 21% to approximately €4 billion, while portfolio transactions increased by 39% to approximately €4.9 billion.

In 2005, we envisage the strong level of investment activity to continue, driven by the continued weight of money targeting hotel real estate. Single asset investment is likely to witness a greater number of quality assets coming to the market as trading performance improves and as prudent owners who have endured the turmoil of the past few years realise uplift in value. In addition, the trend to separate the hotel operation from the ownership is also likely to drive a significant proportion of investment activity; furthermore, private equity and specialist hotel investors are likely to become more prominent, acquiring assets with strong growth potential. Meanwhile, in the drive for continued industry consolidation, major branded operators and private owners will relentlessly reassess and shape their portfolios, divesting non-core assets in order to raise capital to help finance future acquisitions.

With respect to specific hotel markets for future investment, we consider that the UK will remain a strong investment market, although investment activity in Spain may dampen as investors exhibit fear over future trading prospects due to the unstable supply levels. Meanwhile, Germany and Central Europe are likely to become hot markets, with the first substantial signs of investment activity in Russia, Turkey, Slovakia and Slovenia.

Philippa Bock is a Senior Associate with HVS International’s London Office. She joined HVS International in February 2000 having worked in various management roles within the European hotel industry and holds a first class BSc (Hons) degree in Hotel and Catering Management at Oxford Brookes University. Philippa was responsible for the Research department before joining the consultancy team in September 2001, during which time she pioneered the successful news journal HVS Hospitality Enews. Since then, she has conducted several valuation and consultancy assignments in the UK and Europe. More...

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