Budget segment to dominate Europe’s new hotel development

EUROPE As the hotel market starts to recover across Europe but credit for new development remains scarce, budget and limited-service hotels will continue to be the dominant sector for investment, accounting for a greater proportion of new projects than more up-market hotels.

A new report from hotel consultancy HVS and construction consultancy Davis Langdon says that lower building costs, shorter development and market penetration time and the fact that financial backers see a safer and faster return on their investment mean that developers and operators are finding it easier to attract funding for budget hotels.

HVS research for the year to August shows that business travel to Europe hotels is recovering, with many midscale and upscale hotels having registered double-digit RevPAR. However, this growth has been mainly driven by occupancy rather than ADR, indicating that the economic recovery is still fragile and that travelers remain price-sensitive.

Hotel developments have been in decline since the second half of 2008, which marked the peak of the most recent hotel development cycle. Since then, Europe’s hotel pipeline has declined at a compound annual rate of 4%, primarily due to a lack of available funding for new projects and lower confidence in the hotel investment market. This decline is expected to continue until 2013 or 2014, when recently-opened hotels start to trade profitably and development lending becomes more widely available again.

About a third of hotels in Europe’s pipeline are branded budget hotels, 242 in total, while just 100 are midmarket properties, according to Lodging Econometrics data. This will bring approximately 10,700 budget guestrooms to market. The majority of planned branded budget hotels are in mature markets such as the UK (38% of those planned), Germany (13%), Spain (13%) and Russia (10%). Mature markets are more likely to see growth in the budget sector as operators establish their core up-market brands in capital and secondary cities before expanding their limited service and budget properties to create critical mass.