UK hotel values only 12.7% from pre-recession peak

The IPD European Hotel index, which launched this year and is sponsored by Jones Lang LaSalle Hotels, Invesco Real Estate and HVS, shows the all-hotels return across Europe to be 6.9% in local currencies, while U.K. hotels returned 14.9%.

The index, which includes 373 hotels from nine European countries, worth US$10.2 billion (€7.6 billion), aims to bring transparency to a sector that the average commercial property investor has little knowledge of.

“Hotels are seen as a challenging investment class, that requires detailed knowledge to understand the risk and reward profile. This initiative is a good first step to widen that knowledge, and therefore broaden the acceptance of hotels as a mainstream asset class,” said Tim Smith, director at the London office of HVS.

Europe’s leased hotel performance has been varied. The recession took its toll on investment values, seeing negative growth in both 2008 and 2009, though in the majority of countries this was less than the declines seen at the all-commercial property level. Attractive yields for the prime assets have increased demand in 2010, especially when coupled with the difficulty in accessing prime real estate assets across Europe and the continuing desire of most investors to diversify portfolios. Capital growth was 1.3%, while income return was 5.5% in 2010.

Increasingly, the hotels market across Europe has seen a growth in “chain hotels,” with budget hotels seeing the largest growth. “Chains add value through branding, distribution and standardization, making investments more liquid,” said Marc Socker, director at the Europe office of Invesco Real Estate. “Many in the hotel sector view investing in chains as critical to success, while simultaneously chain operators are looking for stable institutional investors as strategic partners to help their international expansion plans.”

Volatile UK

Leased hotel returns in the U.K. were slightly lower than that of the all-commercial property performance figures. However, when considering hotel returns it is important to note that the index comprises leased hotels only. Values fell 19.6% in the sector from the end of 2006 to December 2009, but have since recovered to only 12.7% from their peak.   

“As in the commercial property market, there was a considerable divide between London and the rest of the U.K., with returns in the capital just under 20%, while the rest of the market returned just over 7%,” said Greg Mansell, research manager at IPD. “The main driver behind hotel demand is tourism and business travel. The second half of 2010 saw a recovery in visits to the U.K. by overseas residents. However, the reliance on recreational tourism, especially from Europe, may fall away if there are stringent austerity cuts in the EU.”

German stability

German hotel returns were more muted than their U.K. counterparts, and were the second-lowest out of the nine constituent countries in the index, ahead of only Austria. The sector returned 3.8% pa in 2010, a decline from 2009, though income return remained steady at 5.1%. At the all property level Germany returned 4.2% in 2010. 

French outperformance

The French hotel sector, ranked fifth in the index, saw recovering returns in 2010, of 9.7%. Capital growth remained relatively low in the sector, at 2.7%, while income return made up the majority of the return, at 6.8%. However, French hotel returns remained positive throughout the downturn, with France itself maintaining its place as a leading world tourism destination.