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Sustained growth in market performance, along with notable landmark transactions as well as an anticipated fall in the cost of capital have fuelled a 13.7 per cent increase in the overall index score this quarter, according to the results of the latest Hospitality Investor Sentiment Index.
The survey score has surged by 10.7 points since the start of the year, reaching 60.2 - another high watermark since the survey's relaunch nearly two years ago, with the acceleration in upward movement this quarter signifying a growing optimism among respondents.
The big movements in index scores this quarter all point towards an easing in the previously challenging market conditions, including a shift into neutral territory for the investment focus on development, which finally hit an index score of 50.0, as well as the price of debt (margin) which has dropped by 17.5 pts to just 43.9 and the hurdle rate (total cost of capital), which fell by 8.2 pts to 64.6.
“The range of robust index scores this quarter suggests a notable surge in upward momentum. Unlike previous periods where hopes of growth were often dashed by external factors, this time around, there's a real sense that this momentum could be more resilient and enduring," said Joe Stather, market lead for Questex's operational real estate portfolio.
It goes without saying that the biggest noise this quarter was made by Hilton with their first acquisitions since their IPO almost a decade ago. The focus of their acquisitions in the lifestyle space provides a clear indication of the direction of travel Hilton is expecting in the hotel market over the next few years."
There were further big shifts recorded in the index score for the availability of investable hospitality stock, up by 6.1 pts to 61.0, the competition to acquire hospitality investment opportunities up by 4.8 to 72.0, as well as the price of hospitality investment opportunities, which finally tipped into positive territory for the first time, up by 11.2 pts to a score of 51.2.
An uptick in these key metrics as well as the notable activity from key players suggests we have now seen the bottom of the market and the expectation is that values will start to recover, notwithstanding downside risks.
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A Major Shift in Outlook for Operations
A key contributor to the dramatic uplift in the overall index score was the surge in opinion on hotel operating metrics over the next 12 months.
The positive sentiment from our investor council on the growth in accommodation demand contributed to an increase in the index score for the leisure (+7.3 pts, to 57.3) as well as corporate (+14.6 pts, to 64.6) segment over the next 12 months.
While major elections in the UK, Europe, and the US have historically caused substantial disruption to international travel, there's a prevailing sense this year that they will likely amount to nothing more than minor inconveniences for operations. After enduring far greater challenges in recent years, the industry has developed a resilience to such disruptions.
Furthermore, as well as corporate demand finally getting back to business as usual, the leisure segment is set to be buoyed by the long-awaited return of the Asian markets, which Oxford Economics predict could see a doubling of the number of international outbound trips taken by Chinese travellers in 2024, against 2023.
For our investor panel, the robust demand levels will help fuel an increase in top and bottom-line hotel performance, reflected in the index scores for revenue (+14.4 pts, to 65.9) and profit (+12.4 pts, to 52.4) growth over the next 12 months. It has been some time since the sentiment regarding profit growth was in positive territory.
But We’re Not Out of the Woods Just Yet
Whilst the overall sentiment score low, at just 44.3 in Q4 2022, now seems like a long-forgotten memory, it’s important not to lose sight of the challenges which still remain in the market and it would be naïve to not expect there not to be a few more twists to this story.
Whilst the relative easing of inflation across the major economies in late 2023 will be seen as a positive signal for demand levels, recent news of an inflation shock in the US is dimming the likelihood of interest rate cuts in the near-term.
This quarter, one notable outlier among our metrics was the sentiment of our investor panel regarding their unallocated capital for investment in hospitality (dry powder), which fell by 6.1 points, to an index score of 52.4. This marks the lowest level since the survey's relaunch, although it's worth noting that this score has been gradually decreasing since its peak at 65.9 in Q1 2023.
However, before we push the panic button, it's worth noting that many investment firms are currently holding less capital compared to pre-pandemic. Rather than stockpiling funds for prospective opportunities, they're opting to raise finance against existing live opportunities. This shift in strategy might explain the decrease in unallocated capital for some investors.
And based on the current dynamics of the market (ie lack of stock and unstable cost of capital profile), this is a trend which is likely to stick around for the short term.