This 5th European cities hotel forecast analyses the main trends and future performance outlook for the hotel sector in key gateway European cities and destinations in 2016 and 2017.
Despite global economic worries,last year saw an exceptionally strong travel backdrop which led to record hotel trading and double digit Revenue per available room (RevPAR) growth across eight of the cities in this survey. We expect this trend to have staying power, with most cities in this survey forecast to see positive revenue growth in 2016 and 2017, albeit growth is expected to be weaker than in 2015.
We expect trading fundamentals to continue to improve across virtually all the cities in 2016 and 2017, but after an exceptional 2015, the growth(for most) will be weaker than 2015. Most will still see a continued increase in ADR particularly. With occupancies already high in many cities, most will see growth coming from ADR. The staying power of this growth trend in these cities is impressive.
In 2016 Rome takes pole position (+19.2% RevPAR growth), as the Jubilee or Holy Year is expected to attract huge numbers of pilgrims. Next comes Dublin (+9.1%), Prague (+6.6%), Madrid (+5.8%) and Lisbon (+5.7%).
At the other end of the table, another Italian city, Milan, saw a large boost in 2015 from EXPO 15, and as a consequence sees a very negative comparative this year. Paris suffered from two terrorist attacks in 2015 and Brussels suffered from a security lockdown. Despite the attacks, both Brussels and Paris have relatively stable tourism sectors and we expect a recovery back to average trends by 2017.
In 2017, Dublin takes up the baton, leading the cities in RevPAR growth (+8.2%), followed by Lisbon (+6.9%), Porto (+5.8%), Barcelona (+5.5%), Prague (+4.9%) and Milan (+4.1%).
Which cities will be the most expensive, the fullest and will have the highest RevPAR?
PwC’s research and forecasts show that growth remains the dominant theme in 2016 and 2017 - albeit weaker than in 2015.
Hoteliers we speak to corroborate this and are increasingly confident that 2016 will see trading improve further, although many voice concerns around the stormy economic and geopolitical backdrop, local supply issues and pressure from shared apartments and accommodation models such as AirBnb. Of course it’s not just about growth rates and the absolute levels of trading are also a key piece of the jigsaw. Each city has its own supply and demand characteristics and could be at a different stage on the hotel cycle. All these factors and more need to be taken into consideration in any comparisons.
The highest occupancies
In 2016, the highest occupancies are forecast to be in three cities, London (despite high supply additions and only a marginal increase forecast), Dublin (with little new supply opening) and Edinburgh (with a high pipeline). Amsterdam and Rome (up from 17 last year to 5th position in 2016) are not far off. Berlin, Paris and Prague follow. These are not quite the same results as in 2015. For example, Paris has slipped but is expected to move back up again in 2017 as trading recovers from the impact of terrorist attacks. Absolute occupancy levels have crept upwards for many cities. Frankfurt could break through the 70% occupancy threshold in 2017. Higher occupancies reflect a structural shift towards more branded budget hotels in some countries as well as access to online distribution channels combined with greater propensity to travel.
The highest ADRs (€)
In 2016 the most expensive city in the survey is Paris which has dislodged Geneva to second place. Next, Zurich, followed by London, Rome, Amsterdam, Barcelona and Frankfurt which has seen strong growth.
In 2017, most cities, except Geneva and Zurich, see further ADR growth, albeit quite marginal for Brussels or Moscow. Zurich’s forecast ADR growth is 0.5% but the level in euros is lower than 2016 due to exchange rate assumptions. In CHF terms, from CHF 239.8 in 2016, it goes up to CHF 241 in 2017. In 2017 all the top rankings remain the same as 2016 but there are some changes further down as the chart shows with Dublin and Lisbon moving up the chart and Berlin and Edinburgh moving down. There is a huge disparity, in euro terms, between those at the top and the bottom of the chart.
The highest RevPARs (€)
In 2016 Paris is still expected to keep its top position, despite only marginal ADR and occupancy gains. Geneva also stays put in second place in 2016, despite a rates fall and in 2017 London beats it to second place. In 2016 Rome moves to 5th place with a gain of just under €20.
Eurozone GDP is expected to continue to expand by around 1.6% in 2016 and 1.7% in 2017, its fastest growth rate since 2011. Many visitors to Europe come from further afield and the improving economic situation in the US should lead to increased numbers of tourists in the future. But, the global outlook remains mixed and the changing balance of global growth, low oil prices and geopolitical risks will determine the global economic outlook for 2016.
Growth in the travel and hospitality sector is expected to continue to outpace the wider economy and further growth is forecast for 2016 in business and leisure markets. Various special events that will help attract visitors to Europe this year include the announcement by Pope Francis of a special Jubilee in Rome, lasting from December 2015 to November 2016, when 25 million visitors and pilgrims are expected to visit Rome; the UEFA Euro 2016 sees France as the host nation with the football tournament held at 10 host cities (including Paris) between June and July; 2016 sees Milan’s San Siro Stadium host the UEFA Champions Final. But perhaps stealing the limelight from Europe, summer 2016 sees Brazil host the Olympic and Paralympic Games.
In 2015 demand for rooms (rooms sold) increased by around 3.1% while supply growth (rooms available) saw only a 0.8% gain and this imbalance is expected to continue, although pipelines are picking up in 2016. European cities with the largest pipelines include London, Istanbul, Moscow and Berlin.
While some cities, such as Dublin, report a continued shortage of hotel rooms which could constrain growth by limiting visitor volumes; others such as Amsterdam are concerned about influencing the diversity and quality of new development, rather than quantity of new rooms. Barcelona has introduced a moratorium on new development. In contrast, London expects to see above average new supply additions in 2016, double the number of rooms that opened in 2015.
For most cities the fast growth in the serviced apartment sector and shared space models like Airbnb adds to the competition facing hotels, as well creating challenges for those seeking to regulate them.
The recent fall in oil prices is one of the biggest in recent decades, matched only by the price collapses in the 1980’s and in the aftermath of the 2008 global financial crisis. Following a decade of rising prices, by mid-January 2015 oil prices were around a third of their peak level in June 2014. Despite some recovery since then, prices have remained at historic lows.
The drop in prices has varied effects. It is unquestionably negative for the economic performance of oil exporting nations. However, for net importers (like most EU countries) it is likely to have a positive economic effect.
Consumers will spend less on transport and energy costs, giving households more to spend on other things (such as travel and leisure). In addition, heavy energy-using businesses will see a reduction in costs, boosting profits and, to the extent that these are passed on in lower prices, also boosting demand.
The airline industry, which is critical for tourism and hotel demand, is one such sector, since jet fuel accounts for around a third of airlines’ costs. The price of jet fuel has fallen in line with the oil price to just over a third of its peak in mid-2014.
Moody’s estimates that in 2015 airlines spent £35bn less on fuel than in 2014. In competitive markets, we would expect to see airlines pass these savings on to customers in the form of lower air fares. Within the US, air fares fell by 15% in 20153, the biggest decline since data was first published in 1987.
Globally however, the story is more muted. In 2015, air ticket prices on average fell by around 5% (adjusted for exchange rate changes)4. Within the EU, prices for air passenger transport were just 4% lower in December 2015 compared to 2014.5So, European consumers appear to be getting a raw deal in comparison to their US counterparts. We can think of three main reasons why consumers have seen only modest price reductions to date.
Firstly, the ability of airlines to reduce passenger fares is not as straightforward as simply considering the current market price of jet fuel or oil. Airlines prefer certainty in order to manage their costs so the majority hedge by forward buying their 2015 fuel at a price well above recent market rates. Although this seems an expensive policy in the current environment, equally the airlines benefited from hedges whilst prices were rising.
Secondly, fuel charges are not the only component of air fares. Beyond the basic fare, the cost of a ticket also comprises various taxes, fees and other airline costs such as wages. Therefore, a 60% fall in the price of jet fuel will not translate to an equivalent reduction in air fares while airlines’ other costs remain constant. This calculation is made more complex by the fact that many airlines still retain some form of ‘fuel surcharge’, an additional fee originally imposed during a period when hedging was insufficient to offset increasingly higher costs. As a result, it is difficult to predict the precise impact that lower fuel prices will have on air fares.
Thirdly, the fuel savings for non-US carriers have been offset by the dramatic appreciation of the dollar since mid-2014 (since jet fuel is priced in dollars). As a result, the impact of lower fuel costs on airlines’ profitability, and therefore their ability to pass savings on to travellers, is more modest than the fall in fuel prices suggest.
So does this mean EU consumers should expect to see further falls in ticket prices next year? IATA has suggested that the final hedges locking airlines into higher prices will unwind by mid-2016, which could provide an opportunity for more airlines to pass on greater savings than those seen to date.
The behaviour of airlines during the last big fall in oil prices may also be informative. During the financial crisis, the price of oil fell by around 70% from its June 2008 peak, but it was a year before the price of air fares (year on year) fell in the EU, and when they did the 70% fall in oil prices only translated to a 6.5% fall in EU air fares.
This suggests that there may not be much more price reductions to come for the EU’s consumers. However, as Figure 1 shows, in 2009 prices only remained at $40 for three months and quickly bounced back to $70 in the summer. This time oil has remained at around or below the $40 mark for over a year – giving room for optimism that consumers can expect further falls in air fares in 2016.
Do you know the risks you are taking? What should you do about cyber security, data theft and privacy? What does the Modern Slavery Act mean for businesses?
Do you know the risks you are taking?
There has always been an explicit driver for risk management but responding to risks in today’s complex and changing market requires a new focus.
We are seeing five key trends in the market.
All businesses must take risk!
Successful risk taking, comes from understanding the exposure and implementing effective mitigation strategies.
Four of the most significant risks we currently see facing the hotels sector facing the hotel sector are ‘Big data’, modern slavery, cyber security and data privacy.
Hotel business models are being challenged by the emergence of well-established as well as new online entrants, disrupting the traditional patterns of planning and reservations.
Data is a key resource for responding to threats and making the most of the opportunities. In particular, the ability to analyse the vast amount of information that hotels have access to about their customers, can be used to improve business decision-making as well as customer experience.
However, hotels often lack the right customer data, in the right format, with the ability to analyse it. Even where data does exist, the systems required to enable effective analysis are not available.
The answer to these challenges starts with a better understanding of the data required to optimise business decisions and performance:
Corporate Social Responsibility (CSR) is increasingly used to achieve competitive advantage with many organisations choosing to report voluntarily, providing insight, ensuring transparency and demonstrating how they operate ethically and sustainably.
As new legislation is introduced, such as the Modern Slavery Act, businesses are likely to be subjected to increased scrutiny by their stakeholders.
Management must confirm that slavery and human trafficking is not taking place in their operations and their supply chain or else they risk reputational damage or civil proceedings in the High Court.
All obligated businesses need to publish a ‘slavery and human trafficking’ statement which includes:
How often do you read or hear news stories about cyber security and data privacy issues? Is it something that you pick up on once or twice a month, or maybe more frequently?
1 Awareness levels about cyber security and data privacy issues are rising
The simple truth is that cyber security and data privacy problems can be big news and newsworthiness drives awareness levels. The public, law makers, regulators and judges are all sighted on the risks. These people provide “adverse scrutiny” to entities when things go wrong and they are fully aware of the fact that some of the world’s biggest, richest and more powerful entities have been humbled by poor approaches to security and privacy.
Awareness levels are only going one way and we are rapidly approaching a tipping point, when entities realise that they have no choice: they have to do much more to tackle the security and cyber risks they face and to live up to the expectations that society places in them. If the full roll call of entities that have been humbled in the news is considered, the conclusion seems to be obvious: security and privacy issues are not being accorded the priority they deserve.
2 Hotels are already in the spotlight due to high profile breaches
2015 was a really bad year for the hotel industry. It emerged to prominence as a massive risk area, due to a series of high profile breaches affecting payment cards. Just before Christmas 2015 the Federal Trade Commission in the United States concluded long running proceedings against a hotel. This case has established a need for the development of comprehensive information security programmes, annual security audit cycles and post-incident investigations in the hotel sector. Looking at this from the customer’s side, security experts are now advising travellers to be on heightened alert when using hotels.
Hotels have been propelled to the forefront of the mind and it is inevitable that this will play out in further legal and regulatory problems over time.
3 Trust, confidence and brand put at risk
Legal and regulatory problems bring their own special range of issues. Locking horns with regulators, litigants and judges is the last thing that business needs. Judicial and Regulator design of business models has to be avoided at all costs. In landmark EU litigation in 2014, the way global web search operates in Europe was redesigned by the European Court of Justice, in a case that has delivered into law the so-called “right to be forgotten”. The security of mobile phone operating systems has just been re-designed by a District Court in Los Angeles, massively inflaming the passions of the technology sector and security experts alike. But legal and regulatory problems are just one arc of the consequences of bad security and privacy. Businesses need to think about trust, confidence and brand health and reputation.
These points are commonly understood, but some business people point to share prices, saying that prices don’t dip much, or for long, after big security and privacy problems. That may be the case at the moment, but the absence of share price volatility does not mean that value is not being eroded. Moreover, if share prices do not dip, that points to another problem, namely defects in market behaviour.
That is a dangerous place to go, because the classic response to market imperfection is the expansion of regulation: regulation is seen as the antidote to market imperfection.
Businesses that trumpet the share price issue, merely bring-on the risk of more red tape and bureaucracy, as well as serious penalties and sanctions risk.
Trust, confidence and brand health may operate in a different timeframe to share prices. The absence of share price volatility does not mean that trust, confidence and brand health are not being eroded. If that is true, then the logic points, perhaps, to a convergence in the future of value erosion. Entities that are damaging their trust, confidence and brand health today may pay in share price in the future. In other words, suffering security and privacy failure might be like a cancer, where the harm is hidden from view until it is too late. This returns the focus to legal risk.
4 The legal risks are significant
The EU will soon adopt the General Data Protection Regulation (GDPR).
This is a landmark piece of legislation that will radically change our perceptions on how personal data should be handled in business. The GDPR will also have global effect. This is not just law-making for the inside of Europe’s borders.
The purpose of the GDPR is to put people back in control of their personal information and to improve how entities look after personal information while it is in their custody.
European hotel deal activity peaked in 2015 at nearly €21bn with a 28% increase in transaction volume year-on-year. The UK accounted for c.60% of the total transaction volume in 2015. Outside of the UK, prime markets continued to show investor demand including Germany and Spain. We forecast continued activity in 2016, albeit at slightly more subdued levels.
European hotel deal activity peaked in 2015 to the highest level recorded at €20.8bn, a 28% increase in transaction volume year-on-year.
The significant increase in transactions is a result of continued improvement in trading fundamentals, the availability of debt and the hotel sector becoming a more mainstream investment attracting a wider pool of investors.
The correlation between positive RevPAR growth and deal volume continues, with RevPAR growing +10.5% in 2015 as deal volume reached record levels at c.€20.8bn.
Where is the investment?
Overall, UK transactions accounted for c.60% of total European transactions, as UK hotel trading fundamentals continue to show good growth and London is seen as a safe haven by many international investors. However, many European markets (e.g. Spain and the Balearics) have seen a significant increase in investment as investors are willing to take on greater risk profiles in return for potential trading growth and capital appreciation.
The 2015 single asset transaction market was UK-dominant, with a lower total value in 2015 due to the limited supply of trophy assets compared to 2014, which saw a number of major Paris assets transact.Portfolio transactions account for c.64% of overall transactions in 2015, with the UK portfolio market being the most active (70% of total portfolio transactions).
The second half of 2015 saw an increase in European portfolio activity including the Hilton hotel portfolio, the BAY REIT creation by Hispania and Barcélo, and the sale and leaseback of Leonardo Hotels in Germany.
2015 investment summary: Investor trends
Middle East and Asian activity in the hotel investment market has continued in 2015, with demand for trophy assets in traditional core markets such as London and Paris, however with limited supply these investors are looking to other prime European cities including Madrid, Milan and Rome.
North American Private Equity remains very active in the sector, especially in relation to large portfolios which offer repositioning/value enhancing opportunities. In Europe, domestic investors are also active acquiring additional assets to expand on existing portfolios.
Deals outlook 2016: Asset light or asset right?
In recent years we have seen most hotel companies take an “asset light” strategy, selling off their real estate in favour of leases, management contracts or franchise agreements, as operators look at ways to reduce fixed costs and release equity to focus on brand expansion and investment in existing stock. This trend has continued in the market in 2015 with Leonardo hotels’ sale and leaseback with Pandox and the creation of the BAY REIT by Barcélo and Hispania.
In contrast over the past 18 months, we have started to see some restructuring by both hotel owners and hotel operating companies to a more “asset right” strategy. HotelInvest, the investment arm of Accor Hotels is estimated to have spent c.€1bn in 2015 buying back the freehold on their previously leased hotels, enabling them to re-structure to franchise agreements; dispose of non-core assets, re-gear existing leases and re-brand/upgrade their portfolios.
Similarly we have seen some hotel owners reduce their fixed costs by exiting management contracts in favour of franchise agreements; a recent example being on the recent sale in three tranches of the UK-based LRG Group of 61 Holiday Inn and Crowne Plaza hotels.
Hilton Worldwide Holdings Inc. has recently announced that they are to spin off its lodging properties and timeshare business into a separate publicly traded company. Approximately 70 of the company’s 146 owned and leased properties, mainly in the US, will be spun off into a REIT, albeit overseas leased hotels will remain with Hilton. We await to see if any other hotel companies will look to create REIT’s in the future.
Emergence of mega hotel companies
It was announced in Q4 2015 that Marriott International is to acquire Starwood Hotels and Resorts Worldwide, creating the world’s largest hotel company, with c.1.1 million rooms in more than 5,500 hotels across 100 countries.
Also in Q4 2015, Accor SA agreed to acquire FRHI Holdings comprising the Fairmont, Raffles and Swissotel brands, providing an opportunity for Accor SA to strengthen their Asian and American reach. It remains to be seen whether there will be any more mega-mergers of the likes of IHG and/or Hyatt Hotels.
What to expect in 2016
Portfolio transactions are forecast to continue to dominate the market, both domestic and pan-European, as hotel companies and investors look to continue to benefit from value enhancing possibilities. Portfolios currently in the market include B&B, Interhotels, Astir Palace Vouliagmeni SA in Greece, the London and Birmingham Hilton Metropole hotels and the Shiva collection of London hotels. We anticipate limited major single asset transactions as the supply of trophy assets continues to remain scarce.
There are currently two major prime assets in the market, the Rosewood Hotel in London and the Meridien Etoile in Paris. Some loan/distressed sales are forecast to be active across Europe, however we are not anticipating a large number of distressed assets being bought to the market in 2016.
Overall, we forecast there to be continued activity in the hotel investment market in 2016 albeit at slightly more subdued levels to the record levels achieved in 2015.
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