For global hotel real estate investment, the story of the past few years has been all about interest rates.
With many deals fuelled by the post-pandemic fall in borrowing rates, which dropped to little above zero across the US Fed, the Bank of England and the European Central Bank, investors have more recently been struggling to refinance against a backdrop of higher rates introduced to cool over-heating inflation.
While a downward trajectory from recent highs has begun, caution among all three major central banks has made progress slower than anticipated and although there is increasing certainty among investors over a September fall, few expect a dramatic gear shift this year.
The ECB made its move in June, reducing interest rates from 4.0 per cent to 3.75 per cent, but it has since signalled that it plans to move slowly and fewer economic commentators expect a further cut in September.
The Bank of England finally cut its rate by 25bps to 5 per cent in August and although the committee is increasingly leaning towards a further reduction, stubborn inflationary pressures – at one point blamed on Taylor Swift’s tour boosting hotel room rates – mean that the market is divided over whether September will see the next drop.
In the US the Fed, perhaps expected to be the most bullish of the rate setters, has maintained at between 5.25 and 5.5 per cent rate but investors are increasingly expecting some movement at the Fed’s meeting next month.
So with all three interest rate setting banks moving along their own path, could their decisions point hotel investors towards one geography over another?
The UK: Inflation proves sticky
Interest rates in the UK are still forecasted to drop during the second half of 2024, although the Bank of England has moved cautiously and July’s inflation rise became the latest fly in the ointment, according to the International Monetary Fund.
But investors in the UK have started to unlock capital in anticipation of a more liquid market. Transaction volumes in the UK hotel real estate market significantly increased in the first half of 2024, reaching levels unseen since H1 2015 according to recent data from Cushman & Wakefield. The revival saw around £3.9 billion transacted by hotel investors in the first half of the year, covering almost 200 properties and 21,400 rooms.
The recent boost of the UK’s hotel investment sector during the first half of the year is in part due to the reappearance of portfolio transactions, which made up almost two-thirds of the total investment. The largest individual deal, of around £850 million, was signed on the 26 June when US investment giant Blackstone bought up hotel operator Village Hotels from KSL Capital Partners. Similarly, in January of this year Starwood Capital purchased ten of Edwardian Hotel’s Radisson Blu hotels for £800 million, while Project Cobalt (LXi REIT Travelodge Portfolio, 66 hotels), and the Project Leopard (Landsec Accor Portfolio, 21 hotels) also completed.
American and European investors contributed over 70 per cent of the total volume and yields generally remained stable. Forecasts for the next 12-months project RevPAR growth of 3.8 per cent in London and Cushman & Wakefield expects further deal flow to be driven in part by refinancing pressures, inward movement in interest rates, and greater pricing clarity.
“Hospitality continues to prove itself a robust performer, with strong top line growth and easing cost pressures, and this in turn continues to attract investor interest,” says Ed Fitch, Head of Hospitality UK & Ireland at Cushman & Wakefield. “There is a great depth of capital waiting to get into the hospitality sector which Cushman & Wakefield expects to sustain deal momentum throughout the year and into 2025.”
Market predictions: Stubborn inflation has slowed the introduction of cuts but many expect another 25bps drop in September, plus one more before year end.
The US: Investors look beyond debt costs
American investors have remained positive about the state of the hotel market for 2024, with a CBRE survey showing half those surveyed planning to increase their hotel investments. The strongest hotel market fundamentals this year are expected in larger city markets like New York and Washington D.C., although political uncertainty until November may deter some investors.
The odds of the Federal Reserve lowering rates at the upcoming September meeting have increased significantly, with a growing expectation of rate cuts among real estate investors after weakening inflation, while according to CBRE by the end of the next two-year period, approximately $51.8 billion in hotel securitised debt is expected to have matured. That should increase asset acquisition opportunities.
According to the 2024 Lodging Industry Investment Council’s Top Ten Survey results, interest rate cuts for acquisition debt, property-improvement-plan mandates from brands during changes of hotel ownership, availability of suitable acquisition assets in the targeted internal rate of return and mortgage refinancing challenges pose the biggest threats to US hotel investment this year.
Approximately 64 per cent of survey respondents believed cap rates would be stable or increase slightly over the next 12 months, while about 75 per cent thought the total dollar volume of US hotel transactions will increase year over year in 2024 compared with 2023.
Nearly four in five said that unfavourable debt refinancing terms had not affected their decision to sell a property over the last year, with sentiment on debt availability almost uniformly positive. Hotels in the upper-upscale and upscale segments were the most coveted by investors at 44 per cent and 19 per cent, respectively.
Market predictions: The Fed has been widely criticised by commentators for falling behind the economic curve and the likelihood is that a 25bps will come when it next meets mid-September. The market has priced in two more 25bps cuts before the end of 2024.
Europe: First rate cut a false dawn?
Although Europe was the first market to see a rate cut, since then the ECB has played it safe but another imminent cut of 25bps is widely anticipated in September, followed by another drop at the end of the year.
International hotel groups have been active, taking advantage of the ongoing high interest rate climate. Earlier this year, Spain overtook the UK as hotel investors’ favourite destination following a series of large hospitality deals in the south European country, according to a survey by CBRE. The UK dropped to second place, with Italy, France and Greece also among the top five destinations for deploying capital this year.
“Spain is flourishing due to record tourism numbers and robust operational performance from the hotel operators,” said CBRE head of hotels for Europe Kenneth Hatton. “Investors see the opportunity in Spain, both coastal and urban.”
More than two-thirds of the 60 investors surveyed planned to allocate more capital to deals in the hospitality sector because of strong trading performances and the expectation that lending conditions will improve when interest rates finally decrease.
Last year total Spanish investments amounted to €4.1 billion, up 30 per cent on the previous year, as Singaporean sovereign wealth fund GIC acquired a 35 per cent stake in Spain’s Hotel Investment Partners from Blackstone Group and Abu Dhabi Investment Authority acquired 17 hotels from the Equity Inmuebles fund.
Marriott said that it would be adding new hotels within Europe, with up to 100 opened by 2026, led by expansion of the Moxy brand and a focus on France as a key market.
“To accelerate growth, the Marriott group has given a great deal of thought to how it can adapt to the specific characteristics of Europe. This is now bearing fruit,” said Alexandra Goguet, vice-president of development for France and Benelux at Marriott International. “In the EMEA, a lot of work had already been done to adapt the concepts.”
Similarly, InterContinental Hotel said it would also be adding 100 hotels, for its part concentrated on Germany, doubling its presence in the country. European hostel chain A&O is set to invest approximately $500 million to grow throughout Europe, in locations such as London, Paris, Rome, Madrid, Lisbon, Berlin, Munich, Prague and Amsterdam. Meanwhile Pygmalion Capital is also looking to expand with a potential €150 million, two portfolio transaction in southern Europe.
Market predictions: A Reuters poll in August saw economist predict cuts in September and December bringing the headline rate from 3.75 per cent now to 3.25 per cent by year end.