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European hotel investment down 56% – occupancy ticks up

Richard Dawes, Savills.

European hotel investment activity in the first three quarters of the year decreased by -56.3% YoY, reaching €7.2bn. Furthermore, pre-Covid transactions accounted for 43.8% of the total according to Savills.

Germany recorded a far less pronounced YoY decline of -34%, and has accounted for a fifth of the total European hotel investment in 2020 YTD, totalling €1.43bn, the firm reported in its European Hotel Trends Outlook report.

Cross-border transactions continue to dominate the investment landscape, accountable for a 60.4% share of 2020 volumes. This exceeds the 54.4% share witnessed in 2019, despite ongoing travel restrictions limiting opportunities for long-haul investors

Meanwhile, European hotel occupancy rates grew to 38.6% on average in Q3 2020, which the firm said represented a marked improvement on historic lows of 15.3% recorded at the height of the pandemic.

Domestic demand the main reason for recovery

International travel was “somewhat suppressed” through the summer and domestic demand was the chief reason for the recovery across much of Europe, the firm said.

Germany’s comparatively quick response to the pandemic led to a much quicker reopening of hotels compared to the rest of the continent. This, coupled with a large domestic traveller base, resulted in hotel occupancy rates in Germany outperforming the European average through Q3. 

The firm said that leisure-led domestic travel laid the foundation for recovery, acting as a confidence booster to the hotel sector, at a time when the investment market had been adversely impacted by the pandemic.

“Difficulties in obtaining debt amidst weak operational performance has acted as a significant barrier to entry for many investors,” said Richard Dawes, director in Savills hotels team, EMEA.

There is a flight to quality and a retrenchment to prime cities, Savills reports, adding that London, Paris and Berlin have recorded the highest investment volumes this year.

Prime yields on leased assets remain sharpest, averaging 4.46% across Europe. Thereafter, the average yield spread to vacant possession/franchise and management contracts has widened to 114bps and 157bps respectively.