UK Hotel values only 12.7% from their pre-recession peak
The IPD European Hotel Performance Report – sponsored by Jones Lang LaSalle Hotels, Invesco Real Estate and HVS and launched for the first time this year – shows the 2010 all hotels return across Europe to be 6.9% in local currencies, while UK hotels returned 14.9% reports Property Funds World.
The report, which includes 373 hotels from nine constituent countries, worth EUR7.6bn, aims to bring transparency to a sector relatively unknown to the average commercial property investor. As Tim Smith, Director at HVS explains: “Hotels are seen as a challenging investment class that requires detailed knowledge to understand the risk and reward profile. This initiative is a good first step to widen that knowledge, and therefore broaden the acceptance of hotels as a main stream asset class.”
European leased hotel performance has been varied. The recession took its toll on investment values, seeing negative growth in both 2008 and 2009, though in the majority of countries this was less than the declines seen at the all commercial property level. Attractive yields for the prime assets have increased demand in 2010, especially when coupled with the difficulty in accessing prime real estate assets across Europe and the continuing desire of most investors to diversify portfolios. Capital growth was 1.3%, while income return was 5.5% in 2010.
Increasingly, the hotels market across Europe has seen a growth in “chain hotels,” with budget hotels seeing the largest growth. “Chains add value through branding,distribution and standardisation, making investments more liquid,” explains Marc Socker, Director at Invesco Real Estate. “Many in the hotel sector view investing in chains as critical to success, while simultaneously chain operators are looking for stable institutional investors as strategic partners to help their international expansion plans.”
Leased hotel returns in the UK were slightly lower than those for all commercial property. However, when considering hotel returns it is important to note that the report covers leased hotels only. Values fell 19.1% in the sector from the end of 2006 to December 2009, but have since recovered to only 12.7% from their peak.
Greg Mansell, Research Manager at IPD, says: ”As in the commercial property market, there was a considerable divide between London and the rest of the UK, with returns in the capital just under 20%, while the rest of the market returned just over 7%. The considerably milder effects of the recession in the capital, strong investor appetite for leased London assets, not to mention London’s status as a major tourist, conference and cultural location, contributed to this strong performance.
“The main driver behind hotel demand is tourism and business travel. The second half of 2010 saw a recovery in visits to the UK by overseas residents; according to the figures published by the Office of National Statistics the UK received 29.6 million visitors in 2010. However, the reliance on recreational tourism, especially from Europe, may fall away if there are stringent austerity cuts in the EU.”
According to Graham Craggs, Managing Director of Pan-EMEA Advisory, at Jones Lang LaSalle Hotels: “In analysing country specific returns it is important to have an understanding of the types of lease structures prevalent in the market and the degree of operational exposure imbedded within each type. German leases usually have a high fixed element, whilst French leases are typically more variable. Pricing assets accordingly requires extensive experience and market knowledge.”
German hotel returns were more muted than their UK counterparts, and were the second lowest out of the nine constituent countries in the report, ahead of only Austria. The sector returned 3.8% pa in 2010, a decline from 2009, though income return remained steady at 5.1%. At the all property level Germany returned 4.2% in 2010.
The French hotel sector, which ranked fifth in the analysis, saw recovering returns in 2010, of 9.7%. Capital growth remained relatively low at 2.7%, while income return made up the majority of the return, at 6.8%.
However, French hotel returns remained positive throughout the downturn, with France itself maintaining its place as a leading world tourism destination.