Difficulties in obtaining debt amidst weak operational performance has acted as a significant barrier to entry for many investors. As a result, year-to-date (Q3 2020) European hotel investment volumes decreased by -56.3% year on year, reaching €7.2 billion. In addition, 43.8% of this was accounted for by deals made pre-Covid (January–February). Nonetheless, the longer-term benefits of hotel investment have supported ongoing investor interest levels, resulting in a number of key deals completing since lockdown.

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 this year, in some cases.

The UK remains the most liquid hotel investment market in 2020, largely upheld by a handful of prime London assets. Germany, however, has recorded a far less pronounced year-on-year decline of -34.1% according to RCA, totalling €1.43 billion. This is in line with both a comparatively strong economic and operational recovery.

Investment experiences a retrenchment to prime cities

Akin to previous downturns, hotel investment has experienced a flight-to-quality, sustaining interest for prime city centre trophy assets with a degree of capital preservation. This has cemented the position of cities such as London, Paris and Berlin as top investment markets this year, despite the acknowledged slower recovery outlook across cities. A spate of deals since lockdown involving key trophy assets reinforces this trend, including The Ritz to Qatari buyers in March and Signa Group acquiring the Bauer Palazzo Venice in May.

Covivio’s recent €573 million acquisition of eight prime hotel assets across key tourist markets such as Rome and Prague also underlines this trend, with a number of assets due to be renovated for further value-add opportunities. Selective value-add and development projects continue to attract funding, pointing to ongoing confidence over the longer term.

This year we’ve witnessed a number of hotel groups increase interest in sale and leaseback agreements, in a bid to improve balance sheets. This includes Dalata’s sale of the Clayton Charlemont to Deka in April for €65 million, with the Irish operator retaining proceeds as cash during periods of uncertainty during Covid-19. As demand uncertainty continues over the short term, we could see more operators opt to progress with sale and leaseback deals.

What’s been the impact on pricing?

A lack of transactional evidence creates complications in evaluating pricing, however current sentiment suggests Covid-19 has triggered a yield reversal, with most markets experiencing outward yield movement compared to pre-Covid levels (see chart below).

In line with investors seeking secure long-term income options in the face of a recession, prime yields on leased assets remain sharpest, averaging 4.46%. Thereafter, the average yield spread to vacant possession/franchise and management contracts has widened to 114bps and 157bps respectively.

The general outward movement of yields is unlocking attractive opportunities for well-positioned buyers. Multiple investors have recently closed on new funds aimed at targeting attractive pricing within the challenged hospitality sector. Amongst others, Azora and Schroders both finalised funds worth €680m and €425m respectively, eyeing opportunities across key European markets, emphasising the sustained longer-term confidence in hotels.

While the yield shift may appear minimal for now, we can expect further widening in yield spread between those markets able to control the virus and allow cautious return in travel flows compared to those obstructed by further lockdowns, quarantine measures and economic pressures.