European leased hotel cap rates reach historic low

Martha Elwell By Martha Elwell
04 December 2017 | Updated 04 December 2017

UK: A new HVS HWE report reveals that European leased hotel cap rates have reached an historic low whilst the investor pool has expanded

Capitalisation rates for fixed income prime hotel investments have reached sub 5%, according to property experts HVS Hodges Ward Elliott.

The number of investors buying into leased hotels has also trebled since 2009 as the asset class has become a more attractive investment target for institutional investors.

Whilst chains such as Marriott, Hilton, IHG and Accor have avoided lease contracts in the past, operators such as Deutsche Hospitality, Mövenpick Hotels & Resorts and Dalata Hotel Group are continuing to opt for lease deals.

Peter Szabo, associate at HVS HWE and author of the report said: "Leases remain an attractive operating format in Europe for many brands, particularly in the budget sector with operators such as Premier Inn in the UK or Motel One in Germany most commonly seen to sign lease contracts due to their low risk operating model enabling them to take on long-term, index-linked fixed leases. They are an effective way to separate the risk associated with hotel operations and real estate ownership - and the new-found popularity of leases now makes commercial sense for both developers and long-term owners, particularly in this economic cycle."

A number of upscale operators such as CitizenM and 25hours hotels are increasingly adopting leases as a way to initially prove their concept. These operators might have a long-term view of expanding into management contracts.

The re-emergence of hotel leases is also likely to lead investors to consider alternative lease-based investments such as those outside the budget sector or turnover-based rent structures, as well as the emergence of sandwich and ground leases.

Szabo added: "Operators' willingness to commit to long-term indexed lease agreements and investors' readiness to buy as well as forward-fund hotel projects has enabled the fixed-income hotel market to become far more commoditised in this cycle than ever before. While hotels being accepted as an asset class of their own has benefited the hotel industry, investors and developers should keep in mind that hotels are ultimately trading assets and well-timed investment decisions must be supported by professional advice when it comes to lease term negotiations, rent coverage and the hotel's income generating ability."

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