Article

European Hotels: Checking in for the Recovery

European Hotels: Checking in for the Recovery
Key takeaways
1.
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We believe that the recent repricing in European hotels could represent a good opportunity to acquire either core hotels for a long-term hold or value-add projects following a manage-to-core strategy.
2.
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Although the sector has been hit hard by the COVID-19 pandemic, we believe this is a short-term shock rather than a reversal of long-term trends.
3.
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We expect the post-COVID recovery to be led by leisure visitors initially with business travel following. Our strategy remains focused on major cities that have balanced demand drivers and constrained supply.

We believe that the recent repricing in European hotels could represent a good opportunity to acquire either core hotels for a long-term hold or value-add projects following a manage-to-core strategy.

Valuations are down 10-15%1 from the 2019 peak and prime yields have shifted out by 25-50 basis points, in contrast to the office, logistics and residential sectors, further increasing the relative yields from hotels2.

Although the sector has been hit hard by the COVID-19 pandemic, we believe this is a short-term shock rather than a reversal of long-term positive trends where revenues historically grew by approximately 3% p.a. vs CPI of 2%3 (between 2000 and 2019).

Investing into the hospitality sector today certainly requires conviction that the sector will recover, but it doesn’t necessarily need to recover in full or particularly quickly to make investments into the sector potentially attractive and profitable for investors.

The uncertainty over the timing and nature of the recovery means that investing into hospitality requires a thorough assessment of the fundamentals behind each investment and the potential risks and rewards that go with it.

Our analysis suggests that cities with a higher share of leisure demand with a limited pipeline of new supply may recover quickly. Within those markets, hotels in micro locations that benefit from the recovery trends combined with a strong brand may be the “first to fill” and rebuild business.

We expect the post-COVID recovery to be led by leisure visitors initially with business travel following. Our strategy remains focused on major cities that have balanced demand drivers and constrained supply, and hence we believe that are positioned to capture early rebound in travel.

Within those markets, we like hotels with a clear consumer proposition run by trusted operating partners, avoiding the undifferentiated mid-market.

As such, we see a clear benefit from investing into hotels despite the current uncertainty, but this needs to be balanced with a clear understanding of the risks that were already in place before the pandemic as well as those which have been amplified by it.

In this paper, we highlight the key investment themes for the post-pandemic recovery alongside the continued importance of a focused investment strategy.

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Footnotes

  • 1 Source: HVS, Invesco Real Estate.

    2 Source: CBRE, Invesco Real Estate.

    3 Source: Oxford Economics.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

  • This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.


    Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.