(2) Low level of new supply

On the one hand, demand is recovering, but on the other, hardly any new hotels are coming onto the market at present. Increased construction costs and more difficult financing conditions have led to some construction delays and cancellation of projects. The growth of the hotel stock in Europe in 2022 was already low, at less than 2% of the existing stock. The most hotels were completed in Spain, France and Germany in 2022. While a few more hotel openings, about 2.5% of the stock, are expected in 2023, the growth of new supply in Europe remains very moderate (source: Cushman & Wakefield). If demand is maintained, this will lead to higher room prices in the medium term and boost the attractiveness of hotel properties in the investment market.

(3) Long-term and stable cash flow

In comparison with other use types, such as office or logistics real estate, hotel properties have particularly long-term rental or lease contracts with terms between ten and more than twenty years (different from hotels with management contracts without operators and the owner directly participating in the hotel performance). For this reason, hotel investments are particularly suitable to stabilise real estate portfolios in the long-term by means of steady cash flows. Lease contracts offer the advantage of a relatively high level of security and a low management burden for the property owner. There is a clear distinction between hotel property and hotel management. All in all, lease contracts are useful for a high level of stability in investor portfolios. This aspect is also seen as positive by lenders.

(4) ESG compliance

Hotels have a high CO₂ footprint compared to other asset classes. This is why ESG standards are particularly important in the hotel market. The ESG factor must be taken into account at every stage of the life-cycle, including by operators, developers and investors alike. For example, higher building efficiency can lead to lower operating costs, thus increasing operators' profit margin. Nevertheless, the majority of the life-cycle and therefore the highest savings potential lies in the day-to-day operation of the hotel.

ESG criteria are also becoming increasingly important for travellers. More than half of tourists are willing to pay a higher price for sustainable hotel services/products, according to a survey by travel service provider Skift. Likewise, sustainable hotel products/services lead to higher customer satisfaction, which is likely to have a positive impact on demand.

So ESG-compliant assets can not only generate higher cash flows for investors during the holding period, but also raise the value of the property and thus produce higher sales proceeds.

(5) Liquid and sought-after asset class

In 2021 and 2022, an average of about EUR 17.7 billion was invested in hotel properties in Europe. Although this volume was still 30% below the average of about EUR 25 billion achieved annually from 2015 to 2019, a rise in hotel investments is nevertheless noticeable. Despite the increased cost of financing and current economic and geopolitical uncertainties, investment activity in hotel properties continued to rise in the first quarter of 2023. At EUR 4.1 billion, investment in hotels in Europe in the first quarter of 2023 was approx. 18% higher than in the same quarter of the previous year (source: Cushman & Wakefield). So, there is strong interest. Investment activity is currently only being held back by the difference between sellers' and buyers' expectations.

Apart from the United Kingdom in first place, the top hotel investment markets in Europe are Spain, Germany, France and Italy (see Figure 2). Almost 75% of total investment in hotel properties flowed into these five countries in 2021 and 2022. The eurozone countries Portugal, the Netherlands, Austria and Ireland are also liquid and attractive markets.

(6) Attractive yield opportunities

According to Cushman & Wakefield, hotel yields in Europe in the first quarter of 2023 were on average around 70 basis points higher than at the end of 2019, due to the rise in interest rates. In the top 10 hotel markets in Europe, prime yields for hotels with lease contracts were between 4.4 percent and 5.5 percent in the first quarter of 2023 (see figure 3; source: CBRE). The highest prime yields of 5.5% are currently returned by hotel investments in Portugal and the Netherlands. At 4.7%, Germany is in the midfield of achievable yields in the A cities. In German B cities, initial yields are around 5.0% to 5.3%, and in C cities even 5.6% to 5.8%. (source: Immozeit).

This positions the yields on hotel properties above other types of use. In Germany, for example, hotel yields have a risk premium of 80 basis points compared to prime office yields. Compared to the prime yields of the residential property use type, the premium is as high as 170 basis points (source: CBRE)

(7) Low volatility in the portfolio performance

The higher the proportion of hotel properties in a mixed-use portfolio (with additional office, retail, logistics and residential properties), the lower the risk of major fluctuations in the overall investment performance – at least up to a certain level. This is shown by analysis of the total return (= sum of return on capital growth and cash flow return) of real estate portfolios in the eurozone.

The historical performance indicators from data provider MSCI were evaluated and the weighting of hotel properties in the overall portfolio was varied between 0 and 100%. The results show that the volatility of the portfolio decreases as the share of hotel properties increases (see figure 4).