European hotels to resume long-term trend of strong annual growth, says new study by Invesco
The European hotels sector will resume its long-term trend of strong annual growth as the market recovers from the impact of Covid-19, according to a new study by Invesco Real Estate.
As such, the repricing seen in European hotels over the past two years represents a strong opportunity for investors to acquire either core hotels for a long-term hold or undertake value-add projects as part of a manage-to-core strategy. This is in contrast to the European office, logistics and residential sectors, notes the firm, further increasing the relative yields from hotels.
David Kellett, Senior Director, Head of Hotel Transactions at Invesco Real Estate, says: “We see a clear benefit from investing into hotels. We expect the post-Covid recovery to be led by leisure visitors initially with business travel following, with our analysis suggesting that cities with a higher share of leisure demand with a limited pipeline of new supply will recover quickly.”
According to the study, within those markets, hotels in micro locations that benefit from the recovery trends combined with a strong brand will be the ‘first to fill’ and rebuild business.
“Our European hotels investment strategy remains focused on major cities that have balanced demand drivers and constrained supply,” notes Chris Brassington, Senior Director, Fund Management at Invesco Real Estate. “Within those markets, we like hotels with a clear consumer proposition run by trusted operating partners, avoiding the undifferentiated mid-market.”
As the major hotel companies continue to deal with the pandemic and pursue asset-light growth, Invesco Real Estate believes that niche operators and specialist brands will be attractive acquisition targets, with further consolidation likely. Brands which meet a clearly identified consumer need, ideally with a global loyalty programme, can be successful but the firm remains cautious of investing in new brands and those without relevant scale.
In addition, ESG considerations will accelerate in importance, offering challenges and opportunities to operators and stakeholders in the market. Covid-19 has seen a sharp reduction in air travel and is likely to lead to a consumer reappraisal of volume and frequency of international travel for both personal and sustainability reasons. It has been estimated, according to the study, that 1 per cent of the global population created half of the airline industry’s carbon emissions in 2018.
“Within Invesco Real Estate’s hotel portfolio, we are proactively improving the environmental aspect of our assets. We monitor ESG performance by endorsing green building certifications, and the fund rating system GRESB,” says Brassington. “Ninety per cent of our hotel portfolio achieved BREEAM scores between Good and Excellent, our European hotel portfolio was 5-star rated in the GRESB 2020 review, reflecting our solid ESG leadership and practices.”
Kellett continues: “It remains too early to tell how quickly travellers will return post-pandemic; however, we note that historically travel has rebounded. International travel grew by 117 per cent between 2000 and 2019, despite setbacks including 9/11, SARS and the global financial crisis[ii]. Whilst sustainability trends are growing with consumers, technology disruption and the push to more sustainability-focused behaviour will not, in my view, remove the need for hotels. However, the sector must ensure hotels remain truly relevant to the needs of their guests and provide them with a clear and differentiated value proposition.”
Overall, Invesco Real Estate’s report concludes that Covid-19 should be viewed as a shock to the previously strong growth trajectory in the travel and tourism market rather than a reversal of a long-term positive trend.
Mike Bessell, Managing Director, European Investment Strategist at Invesco Real Estate, adds: “We continue to believe in the recovery and growth, while in the short term see an opportunity to access the sector at a reduced value and realise short-term value gains as well as access to long-term income. In our view, hotel real estate investment potentially offers investors with a yield premium to most other real estate asset classes on long-term, sustainable leases with further upside potential in the recovery.”