European hotel real estate delivers stable returns: IPD

The European hotel sector continued to move from an “alternative” asset class to a mainstream sector with the sample from commercial real estate performance measurement firm IPD reaching a total capital value of €10.2 billion (US$12.5 billion) as of December 2011.

Graham Craggs, Jones Lang LaSalle Hotels, points out that, “Hotels have continued to see strengthening capital flows from institutional investors attracted to long-term income profiles. However, underlying asset quality and supportability of rent remains a priority.”

Returns in 2011 were 6%, and although slightly lower than the 6.6% delivered by European commercial property, hotels still benefited from positive capital growth (0.3%), in an otherwise uncertain market, according to the IPD Pan-European Hotel Performance Report.

Of the 11 countries measured, the UK saw the strongest performance in 2011, delivering a 10. 4% local currency return, while Italy was the worst performing country, with a negative return of -4.9%. The Italian market suffered considerably from heavy capital declines, -10.3%, while in the UK values continued to grow, at 3.7%.

Greg Mansell, IPD, explained, “Hotel performance across Europe is driven by a number of factors, thus, despite the lower GDP growth of the UK in comparison to some of its neighbours, other factors specific to the UK market, notably competition amongst investors for fixed leases and the strength of London, boosted returns.”

France and Germany, the two largest markets aside from the UK, returned 9.3% and 4.9% respectively.

Gael Le Lay, AXA Real Estate, explained, “The French market is well balanced between fixed leases, variable leases with minimum guarantees and full variable leases, while the German market is mainly fixed rent.”

“France delivered the strongest 10 year returns off the back of this – especially due to the strong income returns delivered as a result.”

Marc Socker, Invesco Real Estate, commented, “The hotel sector has proven to deliver strong long-term returns with lower volatility when compared against other commercial real estate, which is extremely attractive to investors in the current market environment.” 

The headline results were:

  • All hotels across Europe delivered a 10 year return of 7.4%, against commercial property’s 6%.  On a five year basis, hotels returned 5.1% and commercial property 3.5%, highlighting the strength of the sector as a long term asset class.
  • The highest 10 year return of any European country was in France, at 11%.
  • The strongest five year returns were in Finland, at 9.1%.
  • The highest income returns were also delivered in France and Finland, 6.9% for both over 10 years. France also delivered the highest income return in 2011, at 7%, hinting at the sustainability of the variable lease.

Tim Smith, HVS, concluded that “The hotel sector is poised to benefit greatly from increasing visitors to Europe over the next 10 years and is a sector that reacts quickly to improving GDP. The IPD report provides further evidence of the true risk reward profile and should encourage existing and first time investors to consider the sector.”