Summary: Our annual European hotels market survey gathers the views of some of the most influential industry professionals, providing valuable insights and predictions for the hotels industry over the year ahead. In spite of the current political uncertainties and economic volatility looming on the horizon, it appears our respondents’ outlook for the industry over the next year remains fairly positive. Below we provide the full rundown of our findings.

The Top 10 Highlights

1. 63% predicted “some growth” in RevPAR in Europe. There was optimism from respondents although the enthusiasm of previous years has slipped, with none backing ‘strong growth’, as ‘flat’ RevPAR claimed the second most popular choice. Comments included concerns over the likely impact of Brexit on trading and, within the UK, fears over costs increasing as a result of the rise in the National Living Wage and changes to business rates. There was, however, confidence that, so far, the first quarter was delivering ahead on last year and given the continued trend to shorter booking windows there had been no indication as yet that the pace would change.

2. Dublin was picked as the most likely city to see the highest RevPAR growth, with 54% of respondents favouring the Irish capital, followed by Amsterdam and Barcelona. Ireland was one of the first countries to act to stabilise its banking system following the 2008 crisis and is now reaping the rewards. Supply into the city has yet to catch up with demand, meaning a strong few years remain ahead and, with the UK set to leave the EU, Dublin’s favourable location in Europe was likely to further bolster its fortunes.

Amsterdam too has benefitted from a lack of supply coming into the market, with brands and developers seeking to rectify that in the coming year. Flags due to come online this year in the city include Marriott International’s Moxy, Park Inn by Radisson and Kimpton - the first outside the US for InterContinental Hotels Group. Next year will see openings for Crowne Plaza, Nhow and Rosewood.

Restrained supply has also helped performance in Barcelona, a state which is set to continue. At the time of going to press, officials in Barcelona had passed a new law restricting further development of hotels in the city. The Special Urban Plan for Tourist Accommodation will limit licences for tourist apartments and hotel rooms in the central area. City authorities hope the move will stop the transfer of residential accommodation into tourist rentals, with the Barcelona Hotel Association having called for better policing of unregistered accommodation.

Paris came in fourth on weak comparables from last year, as the French capital showed signs of recovery after the terrorist attacks at the end of 2015. Investors have continued to show faith in the city, with the end of last year seeing Henderson Park acquire the Le Méridien Etoile in Paris - the largest hotel in the French capital, with over 1,000 rooms - from Mount Kellet Capital Management and Cedar Capital for EUR365m.

Respondents looked to leisure travel to drive growth in the cities, followed by increased business travel and the expected growth in economic performance. Their opinions have been echoed by the UNWTO, which, reported that global international tourist arrivals grew by 3.9% to reach a total of 1.24 billion in 2016, with a 2% increase in Europe.

3. London dominated the transactions market last year and 82% of respondents saw this continuing into 2017, followed, at a distance, by Dublin and Paris. Strong inward investment was named by 68% of those who took the survey as driving this trend, followed by more equity and/or debt available for investment into these cities.

The UK capital is expected to see RevPAR flat to down in 2017, according to STR, an improvement on earlier predictions, which had painted a gloomier view as a result of the uncertainty around Brexit. The current outlook is business as usual, with a fillip from the fall of sterling. London continues to absorb supply, with STR reporting 15,321 keys in the pipeline for London at the start of this year, with only Russia, Germany and the regional UK having more.

Respondents looked to London’s many trophy assets and a transparent market as central to attracting investors and that has proven the case over the past year, with deals including the £300m sale of the DoubleTree by Hilton – Tower of London, the debt on the Grosvenor House and the £350m acquisition of the former War Office by the Hinduja Group and Obrascon Huarte Lain for redevelopment as a hotel.

The only potential fly in the ointment for London has been speculation that London Mayor Sadiq Khan was considering a bed tax to raise revenue as travel into the city booms. Described as “a folly” by the British Hospitality Association, recent history suggests that London’s hotels are capable of throwing off any threats they may face.

4. High net worth individuals are expected to be the most active equity investors in the European hotel market this year, with 63% of respondents backing them, followed by interest from private equity.

Many of the brokerage houses reported a dip in transactions volume last year, driven by a lack of portfolios coming onto the market in comparison with recent years. In terms of the number of deals done, the numbers were flat on the year as smaller lot sizes proliferated. These single assets were particularly attractive to the high net worth investors and, with platforms built up over the past few years continuing to be rationalised, there should be much for them to choose from in 2017.

Activity in the first quarter suggests that, as the Brexit picture becomes clearer in the UK, many will be looking to capitalise on the window of stability and make their exits now, leading to some unexpected portfolios being marketed.

5. 51% of those who took the survey felt that hotels had outperformed ‘traditional’ commercial property over the past five years, pointing to continued support for the sector as an investment class, with only 14% feeling that they had underperformed. For one respondent, strong asset management and upside potential meant that hotels had fared better than other types of real estate, countering the downsides caused by geopolitical events.

While there was enthusiasm for hotels, residential property and offices pipped them to the post in terms of how the different asset classes were rated. Looking ahead in the UK, there has been some speculation that, should global businesses seek to move to mainland Europe, demand for office space by investors may fall, with hotels filling in the gaps as the country remains attractive to overseas visitors.

6. 63% of respondents named banks as the most active debt providers in Europe in 2017, up from the 51% who picked a resurgence in bank lending in last year’s survey. Active banks in recent months have included Aareal Bank, which backed Pandox’s purchase of seven hotel properties in Europe – four in Germany, two in Austria and one in the Netherlands – from Invesco Real Estate for EUR415m.

Low interest rates have combined with banks being forced to shore up their balance sheets to mean that traditional lenders are now active and back in favour and the word around the conference season has been that, for those with strong relationships at least, there is even money available for development.

With the spectre of inflation on the horizon this year, it is not clear how long lending will remain comparatively cheap and respondents’ second-favourite pick, the debt funds, could yet find themselves with opportunities in 2017.

7. Western Europe was expected to be the focus of global investment in 2017, named by 70% of respondents, despite elections in France and the Netherlands this year creating some uncertainty. The region remains a key destination for leisure travellers, in particular from China, where the rise of the independent traveller is expected to surpass tour groups and bring fresh opportunity to the territory.

The EU remains one of the pre-eminent trading blocs and a target for commercial travellers, making it a must-have for any hotel operator looking to establish themselves as a global force, as the investments from China’s HNA Group and Jin Jiang International into Rezidor Hotel Group, NH Hotels Group and AccorHotels have illustrated.

The penetration of brands in Western Europe continues to lag behind North America and recent consolidation in the sector, most notably Marriott International’s purchase of Starwood Hotels & Resorts, is expected to drive a switch to the global flags as the independent sector fights to compete for distribution.

Respondents picked North America as their second-favoured destination for global investment. Supply has been below demand in the region in recent years, feeding strong performance and, although this has shifted in recent months with the pipeline building, expectations of infrastructure investment by President Trump have encouraged hopes that demand for rooms will also see an uptick.

8. Respondents were almost evenly split on whether they believed that there would be more restructuring of debt or more refinancing in 2017 or whether it would stay the same, indicating that there was still work to be done rationalising holdings.

This was good news for those hoping to invest in the sector, amidst wider expectations that transactions volumes would drop off this year. Responses were more equivocal on the subject of distress, with 56% voting against a significant increase in loan sales and enforcement actions by banks in the European hotel market in 2017. The worst may well be behind us, with the economies in Spain and Italy coming under heavy scrutiny by the rest of Europe and a positive sense that the era of pretend and extend was now coming to an end.

9. Respondents were divided over whether the increased interest in Airbnb by legislators was likely to make disruptors less of a threat to the hotel market, with 39% voting that it would and 37% that it would not. The remainder were undecided.

The sharing platform saw interest in it build further in 2016, as rumours swirled that it was heading for an IPO, having achieved a valuation which may be as high as USD30bn, backed by investors including Google. Driving listing rumours was an increase in efforts by the company to resolve its legal difficulties in a number of jurisdictions around the world, including New York, where it has now settled with the authorities.

Airbnb has made its way deeper into the so-called travel funnel, launching Trips, a product which offers bespoke tours as well as revealing plans to add both restaurant and flight bookings. The company, which offers cheaper distribution than the online travel agents, has also deepened its relationships with hotels, signing up groups including the 500-strong Châteaux & Hôtels Collection to list on its site.

The survey’s respondents appear correct to think that Airbnb may not, as some have thought, be legislated out of existence. A study by Hotelschool The Hague found that, following the introduction of a ban on renting out whole apartments in Berlin on 1 May last year, there was no decrease in supply, but a price increase to compensate for the fine.

10. Last year was the year of scale for the hotel sector and 35% of those who took the survey were looking to franchising as the most important model for the growth of hotel brands in 2017 as the battle for domination looks to continue. Franchising was followed closely by expansion through third party or white label management with a franchise.

The need for flags in the map is ever-pressing to please owners and shareholders and even brands at the luxury end of the market, once an anathema to franchising, are now being offered to trusted owners. The primary role of the brands is increasingly seen as providing a route to market, which has led to a proliferation of flags in the past year as operators seek to appeal to the myriad tastes of both consumers and owners.

Flags launched in the past six months include Best Western adding three brands under its new SureStay flag, using a white label franchise model, which provides access to the company’s distribution channels with fewer of the rigours of its other brands.

Providing an extra layer of reassurance to the owner is the rise of the third party management group, which is increasingly brand agnostic, choosing brands on a site-by-site basis. The third parties are rapidly assuming the role of experts in the management space while the big brands are being relegated to providing the flag over the door. This trend has been gathering momentum in the UK over the last five years and is now moving into Europe, putting the brands under pressure to perform and meaning greater rigour in contracts.

Current Trends

Thinking outside the ballot box

Political uncertainty was the clear winner in terms of challenges faced by those polled, followed by the impact of Brexit and the potential break-up of the EU, illustrating that, as Greek statesman Pericles said: “Just because you do not take an interest in politics doesn't mean politics won't take an interest in you”.

Having a hotelier in the White House was not expected to do any particular favours for the sector, and the outlook of our respondents was largely benign, with 51% of those who took the survey saying that they did not believe President Trump would have a negative impact on the European hotel market. The only concrete impact at the time of going to press was a strengthening dollar and enthused stock market, both of which will make their presence felt over the course of 2017 should Trump deliver the expected tax cuts and infrastructure investment.

The same proportion believed that Brexit would have a negative impact on the UK hotel market, where so far the fall of sterling by 15% has been the only tangible to work with. This is expected to drive a rise in staycations, with the fortunes of the already-buoyant regional hotels rising accordingly. The beginning of the year saw a number of deals done with the domestic market in mind, including the sales of caravan park groups Park Resorts and Parkdean. Speculation suggests that regional portfolios which had been expected to wait out the storm will also now come onto the market, despite outbound tourism holding steady.

Prime Minister Theresa May has told the country to expect a ‘hard’ Brexit, with the impact on immigration, aviation traffic rights and other topics close to hospitality as yet unknown. Barclays is expecting to see the pound strengthen to around EUR1.30 by the end of the year in the light of uncertainty in mainland Europe, where polls in the Netherlands and France may be subject to what has been described as a ‘populist vote’.

For the hotel sector, the slings and arrows of outrageous fortune are nothing new. Inbound tourists looking for bargains are expected to keep London RevPAR from previously-anticipated falls, according to STR, and both London and the city of Bath have been inspired to consider a bed tax to reap the rewards.

Enter the dragon

China is expected to be the country called home by the most active investors into the European hotel market this year, according to 77% of respondents. This has already been borne out by HNA Group’s move on Rezidor Hotel Group as a consequence of its acquisition of Carlson Hotels Group. HNA Group is well on its way to becoming a significant player in Europe, with the Carlson deal provoking a schism at NH Hotel Group in Spain, where the company is a majority shareholder. The expectation remains that HNA will merge NH with Rezidor, creating a group with strengths not only in Europe, but Latin America, Africa, Russia and the CIS.

HNA Group is not the only Chinese investor looking to build a platform in Europe. Jin Jiang International has been building a stake in AccorHotels, which the French group’s chairman & CEO Sébastien Bazin, has so far described as “friendly”. Jin Jiang already owns Louvre Hotels Group, which has been expanding under its ownership and is mooted to form the basis of a platform in Europe. AccorHotels has done a number of deals over the past year which the sector has viewed as defensive in the light of Jin Jiang’s unknown intentions, including buying holdings in 25hours Hotels and Banyan Tree.

The anticipated price drop in the UK following the EU Referendum saw a number of Asian investors enter the market looking for a Brexit bargain. The first deal done following the vote was the sale of the Travelodge London Kings Cross Royal Scot to Hong Kong-listed Magnificent Real Estate for GBP70.3m. The group said that the purchase price matched the valuation post-vote, with Magnificent chairman William Cheng Kai-man commenting that he was “confident that Britain can do things their way and be as successful as they were in the last two centuries”.

Chinese investors have not limited themselves to the operators, with online travel agent Ctrip buying Scotland-based airline price comparison site Skyscanner for £1.4bn. The move is not the first brush with Europe for Ctrip - the group has a stake in China Lodging, which has an agreement with AccorHotels. Qi Ji counts Bazin as a fellow board member at the group, which could yet work in his favour in his dealings with Jin Jiang International.