China heads up investment in European hotel sector

George Sell By George Sell
08 November 2016 | Updated 08 November 2016

UK: China is the biggest source of inbound investment in to European hotels according to new research from Deloitte.

UK: China is the biggest source of inbound investment in to European hotels according to new research from Deloitte.
 
According to the research, published ahead of the 28th annual European Hotel Investment Conference, 62 per cent of respondents see China as the biggest source of inbound investment into Europe, up from 51 per cent last year, followed by North America in second place.
 
Following 2015's bumper year for hospitality M&A, deal flow in 2016 has been more subdued. Nevertheless, hotel executives are optimistic about the investment opportunities that lie ahead, with more than a third (34 per cent) believing that the European investment cycle is 12 to 18 months way from peaking. Close to 60 per cent of respondents see disposals and consolidation as prominent investment themes in the next year.
 
More than half (52 per cent) of hotel investors cited geopolitical instability in Europe as their number one concern for 2017, followed by deflation and lack of economic growth on the Continent (47 per cent). Significantly, only a quarter were worried about the UK's decision to leave the European Union, with the various European elections scheduled for 2017 generating greater unease (37 per cent). With these concerns in mind, one-third of respondents cited the budget segment of the market as being the most attractive for investment in 2017, followed by the upscale (24 per cent) and midscale (20 per cent) segments.
 
Nikola Reid, a director in Deloitte's hospitality advisory team, said: "The fact that 2016 has been a comparatively subdued year of hotel transactions is due to a confluence of factors. Not only is the industry having to contend with political and economic uncertainty in the UK and Europe, but there is also a lack of product. It is reassuring to still see clear signs of optimism. Investors from China and North America are likely to capitalise on the weakness of sterling and still see the Continent as offering potential."
 
Amsterdam has usurped London's position as the most attractive hotel investment destination in Europe after more than a third (34 per cent) of respondents ranked the Dutch capital in the top spot. London (32 per cent) had held the #1 ranking for the last two years. Barcelona (28 per cent) and Dublin (24 per cent) followed, with Berlin and Madrid (both 18 per cent) joint-fifth.
 
Reid added: "Concerns around supply and uncertainty as to corporate sentiment in particular led to London narrowly missing a hat trick; nevertheless, the city remains a standout destination. The UK capital has seen several years of phenomenal inbound investment as investors from all over the globe have sought to capitalise on the city's unrivalled position as a proven destination for both business and leisure."
 
For the third year in succession, industry leaders named Edinburgh (47 per cent) the most attractive hotel investment destination in the UK outside of London, closely followed by Manchester (46 per cent, up from 40 per cent last year) and a resurgent Birmingham (22 per cent, up from nine per cent). In Europe, respondents believe that the Scottish capital is now as attractive to investors as the likes of Rome and Lisbon.
 
Reid added: "Similar to the Continent, deal activity in Regional UK has been behind 2015's record year (c. £8 billion in transactions) and a number of deals that were in progress or anticipated to come to market were delayed due to the uncertainty surrounding Brexit. Whilst domestic buyers have dominated investment, there simply hasn't been enough stock to repeat last year's trend for large portfolio deals. In the Regions, however, trading is up as the UK becomes a more affordable and accessible place to visit for overseas tourists. Furthermore, despite initial uncertainty in the immediate aftermath of the Brexit vote, we have recently seen a rejuvenation of interest from foreign capital driven by their appetite for income and the opportunity to capitalise on sterling's depreciation. As well as expectations for Asian capital to dominate activity, industry leaders have also highlighted domestic investment as a key driver of regional deal flow in 2017."
 
Slowing economic growth (66 per cent) and increased employee costs (52 per cent), are the principal concerns in the Regional UK, followed by the fallout from Brexit (42 per cent). Two-thirds (64 per cent) of respondents believe that owners will focus on improving profitability as part of a 2017 strategy. Reid concluded: "Increasing labour costs have long been a concern to UK hotel investors. Assuming Article 50 is triggered (and the negotiation process begins), any restrictions on the employment of EU nationals could prompt a tighter labour market with potential cost implications."

Despite these concerns, half of industry leaders expect Regional UK RevPAR growth to be between three to five per cent in 2017, and more than a third of respondents (38 per cent) expect to see multiples of 10x, with 20 per cent expecting pricing to be higher at 12x or more.
 
www.deloitte.co.uk

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