Has the hospitality sector in Europe turned a corner

In this issue, we take a look at the European hospitality industry and explore its prospects for growth in the face of the continued impact of the COVID-19 pandemic. The sector has been particularly hard-hit, with hotel performance declining significantly throughout 2020 and 2021. Recovery is not expected until 2024, with continuing uncertainty facing the sector as nations take steps to put their national economies on a sustainable footing in the face of continued challenges from the pandemic.

The scale of the challenge facing the hospitality industry has been enormous. In the UK, Whitbread, the UK’s largest hotel group, reported that total accommodation sales were down by 70.4% in the 2020/21 financial year. PwC’s forecast is that, by the end of 2022, revenue per available room in London will return to between 43% and 86% of pre-pandemic levels. Regionally, this figure is higher – the forecast being between 64% and 100% of pre-pandemic levels.

With travel only viable for parts of the year in 2020 and 2021, those countries with a more accessible domestic tourism market saw average occupancy surpass the regional average. As a result, France, Germany and the UK all exceeded the European occupancy average of 26.6%, while Spain and Italy – being more directly dependent on overseas demand – saw occupancy fall far short of the regional average.

This decline is in stark contrast to the period of high sector growth and strong market performance that characterised the sector prior to the pandemic. In the period 2016-2019 the hotels share of total commercial real estate investment across Europe increased, driven by the strong market performance and increasing popularity of the asset class among investors seeking to diversify their portfolios. We saw a significant drop in hotel investment in 2020, resulting from a lack of stock on the market and a significant delta in buyer and seller pricing expectations.

However, it is clear that the hospitality sector remains of strong interest to a range of investors. Significant additional capital was raised in 2020 to target hotel opportunities, and although European hotel investment volumes in Q1 2021 remained historically low – reaching €2.16 billion, down -49.7% year-on-year – this does represent the least severe quarterly year-on-year decline since the onset of the pandemic.

The outlook for recovery and challenges

Domestic demand will drive the initial phase of recovery for the sector. This became clear in the months of 2020 and 2021 when restrictions were lifted. Further recovery will depend on the pace and size of the return of tourism, international and domestic business events and easing of government restrictions on travel.

Those countries that have typically strong domestic leisure demand and less exposure to inbound travel markets (particularly long-haul) are likely to bounce back sooner. Germany and the UK, for example, have a huge domestic source-base coupled with historic demand for the population to travel. Of the largest tourism markets in Europe, Germany and the UK boast the highest share of domestic travellers as a proportion of total visitation, at 79.3% and 74.4% respectively. As the two largest suppliers of outbound travellers in Europe as well, both markets therefore also have the potential to further boost domestic demand through the conversion of typical outbound travel towards their domestic markets.

The boom in the staycation market in the UK is supported by research from Barclays Corporate Banking, which forecasts a growth in the UK staycation market next year, with 45% of consumers choosing UK holidays over holidays abroad. Some regional areas have seen occupancy and average daily rates actually exceeding preCovid highs. Hoteliers currently focusing on the business market should therefore consider trying to capture a stronger domestic tourism market, particularly considering many businesses have publicly stated their ambition to cut business travel.

A challenge for the UK is labour shortages and costs. Staff shortages threaten to significantly stunt growth for the UK hotel industry. One in four hospitality businesses has been forced to reduce opening times or close venues due to an inability to service the volume of business. The impact of Brexit is evident: as of October, almost 300,000 hospitality workers have already left their jobs. Inflationary pressures will also see labour costs increasingly adding to the challenge.

Green shoots ahead

According to the latest research by Cushman & Wakefield, more than one-third of real estate investors want more hotel investments in Europe. Despite the disruption to the travel and tourism industry caused by the COVID-19 pandemic, only 21% of investors plan to scale down hotel investments and only 10% have suspended their acquisition plans.

Looking forward, any increase in investor transactions in the hospitality sector is likely to be driven by sellers revising their pricing based on further pressure on working capital, and investors taking a more aggressive stance based on greater clarity on recovery. Given the challenging short-to-medium-term performance outlook and the reduction and increased cost of debt, capital values are expected to remain lower compared with 2019. However, the ‘discount’ will vary depending on the physical and operational characteristics of each hotel, with limited-service hotels and aparthotels predicted to be the least volatile.

In terms of development, with over 100,000 new rooms planned for this year, many countries in Europe have a material development pipeline of hotels already under construction.

Looking at the speed of recovery and the market outlook we have to take account of the fact that, in many countries, government initiatives have provided a degree of support to the industry. In the UK, furlough schemes and rates relief have perhaps delayed widespread distress, although this may change since support has been withdrawn.

The UK saw the highest investment volumes by country in Q1 2021, totalling €746.5 million and accounting for a 34.6% share of total European volumes. The UK and Ireland top the list of target regions for investors, followed by Germany, the Iberian Peninsula, France and Benelux. For urban hotel investments, the top five locations are dominated by Barcelona, closely followed by London, Paris, Amsterdam and Munich. These European geographic regions and cities are seen as safe investment markets. In particular, Barcelona remains an important European location that benefits from its popularity among tourists, and the current moratorium on hotel developments in this city is pushing it to the top position in the rankings.

It starts with cities

In terms of recovery, the Cushman & Wakefield research shows an expectation that the performance of tourism-oriented cities will be fully back to pre-Covid levels by 2023. Regional cities are expected to follow, with recovery to pre-Covid levels expected between 2023 and 2024. Europe’s top cities – which tend to rely more on international travel – are expected to recover more slowly. This is a more optimistic picture of the recovery than in 2008/2009 after the global financial crisis when it took on average more than five years for hotels in major European cities to recover to pre-crisis levels.

While prime trophy assets continue to dominate investment volumes, it is smaller deals (sub-€10 million) that are driving the bulk of sales in terms of deal count. This is largely steered by private buyers seeking investment opportunities on assets boasting a relatively positive operational outlook, in key coastal and country staycation markets. Confidence in this segment has also sparked interest among bigger players, with Blackstone acquiring Butlin’s parent company, Bourne Leisure, in February, driven largely by confidence in the British staycation market. Although the hospitality sector remains challenged, the continued easing of travel restrictions and the latent demand for travel and leisure opportunities among the world’s population will drive renewed growth in the industry over the next two to three years.