The European hotel investment market is worth some €10.7 billion – quite a way below the heady levels we saw before the pandemic, but still a sizeable share of the overall real estate investment market.
The investors responsible for that transaction volume include banks, pension funds, insurance companies, sovereign wealth funds, private equity firms, specialised real estate vehicles such as real estate investment trusts, investment arms of hotel companies such as AccorInvest, and high net worth individuals or family offices.
Each of these will have different investment objectives, risk profiles, target markets, and strategic approaches. But all of them are united in the goal of portfolio diversification.
Types of hotel investment
The different types of hotel property to invest in match the different types of hotel we can stay in as guests; so everything from budget to ultra-luxury, from city centre to beachside resort, and from a traditional brand to a funkier, more lifestyle experience.
All of these hotel real estate assets have their own attractions for investors; but before making a purchase an investor will have to focus on a number of specific considerations in order to make an informed decision.
Take resorts, for example. These are usually large-scale premises and can quite often be in remote locations. This means that developing (or buying) a resort will generally require heavy up-front capital investment, making it more suited to an investor who is interested in a longer-term strategy.
Luxury hotels, too, are generally subject to high up-front costs due to the high-end design and fit-out specifications they need in order to meet the expectations of wealthy clients. Take for example the magnificent Raffles OWO hotel and residences in London, which has reportedly cost its investor, the Hinduja family, £1.3 billion to create by transforming a former government office in the heart of London.
On a more down-to-earth level, budget and mid-market hotels have also been a popular market segment among investors, as these are seen as more resilient to economic downturns (the same, of course, is true for the ultra-luxury segment).
How to identify a good opportunity
As with making any investment decision, the process starts with in-depth research. Before committing what could be billions of pounds (or equivalent) it’s vital to have a solid understanding of the local market conditions, as well as an idea of future market trends.
For a development project, this includes the historical evolution of supply and demand dynamics, current tourism market analysis, competitor analysis (including daily rates), property valuations in the area, to name just a few.
For the purchase of an existing hotel real estate asset, the research must also cover the financial and commercial profile of the hotel operation: i.e. revenue, profitability, operating costs, and other elements of that nature.
Increasingly, an investor must also factor in the hotel’s ESG performance, as this is becoming a consideration in obtaining finance at competitive rates – or even at all (some lenders no longer provide credit for an asset that underperforms on ESG measures).
Once the asset is under ownership, sustainability performance in areas such as energy consumption and other eco-friendly practices will also impact the bottom line, particularly in a period where – in Europe at least – energy prices are higher than has historically been the case.
Key stages of investment
We’ve already covered the research element – often called ‘due diligence’ among the financial community – but the next step in the real estate investment process is the acquisition of the property itself, or in the case of a development project it could mean acquiring the land on which to build, if this is not already in the investor’s ownership.
For a hotel development, there are additional stages such as securing planning permission to build, as well as acquiring a business license to operate a hotel on the site in question. The latter is far from a formality, as the authorities will consider the risk to the environment from overtourism and of disturbing the competitive balance in the market, among other factors.
At the acquisition stage, financing the transaction becomes the priority. A lot of the time, this means getting a bank involved, and they will have a special team to evaluate the risk and prepare the financing offer accordingly. Once the transaction is agreed and completed, the hotel may simply continue trading or the new owner may wish to make changes. These differ depending on what the overarching investment strategy dictates.
For a development project, once the construction and fit-out is nearing completion, the hotel will enter pre-opening mode, with a team installed to deal with hiring staff, implementing IT systems, choosing daily rates and working on revenue management plans.
Further down the line, once the hotel has been trading successfully (and with enhanced revenues) the investor may well look for an exit strategy. This isn’t always the case – for global landmark hotels like The Savoy in London or the George V in Paris, the status of owning a ‘trophy’ asset overcomes the usual cycle of invest>hold>exit that most investors pursue.
Edouard Louapre is Head of the Bachelor International Hotel Development and Finance Specialisation at Glion Institute of Higher Education. Glion also offers a Master’s in Real Estate, Finance and Hotel Development.
Be part of our well-respected network, get trusted advice and take a positive approach to your learning and development.
Your business card may take a moment to be generated. You can save your business card by right clicking -> save image as, or holding down on the image on your phone.
